“Without a structural change in the market, these funds are too concentrated to achieve the highest possible South African National Scale rating, which applies to local market rand-denominated entities despite the high (national scale) credit quality of the issuers in most portfolios,” it said in a statement.
According to Fitch, South African MMFs would not qualify as ‘money market funds’ under applicable US or European regulation.
As a result, the funds applied in the Global Bond Fund criteria.
Fitch Ratings said it expected the effect of African Bank Investments Limited on the South African money market fund sector to be limited.
Fifteen of the 43 money market funds active in the country had exposure to the troubled African Bank, which accounted for 1.3 percent of the industry’s total assets of R270 billion at the end of August this year, it said.
This was according to the Financial Services Board (FSB).
Some MMFs had absorbed the cost of the write-down from the bail-in of African Bank through available income, as approved by the FSB.
In other cases, the write-down cost exceeded the income that could be applied against it, resulting in a capital loss.
Fitch downgraded those MMFs that suffered a capital loss as a result of African Bank exposure.
“We placed all the funds with African Bank exposure that we rate on Rating Watch Negative.
“This reflected uncertainty about the timing of the restructuring and the timing of cash flows on African Bank instruments.”
It said outflows from MMFs with African Bank exposure were less severe than expected.
In the US and Europe, any suggestion of credit weakness historically has led to material outflows.
“At an industry level, the outflows from funds with African Bank exposure were broadly offset by inflows to other funds, notably corporate MMFs, which typically invest solely in South Africa’s major banks.”
It believed the combination of continued retail investor outflows, driven by low real interest rates, and events at African Bank, would lead to the South African MMF investor base becoming more corporate.
“We forecast a continued increase in South African corporate cash on balance sheets.”
The Reserve Bank placed African Bank Investments Limited (Abil)under curatorship in August.
Governor Gill Marcus said among Abil’s woes was that in a six-month period to March 2014, it posted a headline loss of R3.1 billion.
African Bank’s shares plummeted after it warned of massive losses.
It needed about R8.5 billion in new capital.
African Bank serves 3.2 million people.