agement review and portfolio strategy meeting to
review any changes made during the year.
Fund credit quality ratings criteria
A Standard & Poor’s credit quality rating is an
assessment of the overall credit quality of a fund’s
portfolio. Credit quality ratings, identified by the ‘f’
subscript, are assigned to bond funds and other
actively managed funds that exhibit variable NAVs.
The ratings reflect the level of protection against
losses from credit defaults and are based on an
analysis of the credit quality of the portfolio invest-ments and the likelihood of counterparty defaults
(see Variable Net Asset Value(NAV) Pool Credit
Quality Rating Definitions).
The credit quality rating captures the fund’s over-
all exposure to default risk and is based on a credit
matrix approach derived from Standard & Poor’s
historical default and ratings transition rates.
Standard & Poor’s credit quality criteria calls for
the assets of a managed fund, and its counterpar-
ties, to be consistent with the credit quality rating.
The assessment is based on the credit quality and/or
ratings of the investments held by the fund, as well
as the credit quality of the counterparties with
which the fund engages in market transactions,
such as swaps or repurchase agreements (repos).
To evaluate a fund’s overall level of protection
against losses associated with credit risk,
Standard & Poor’s applies the factors and scores
from the Credit Quality Matrix to the fund’s portfo-
lio holdings. These credit factors and credit quality
scores are derived from Standard & Poor’s historical
ratings stability and ratings transition studies. The
credit factor for each of the long-term ratings cate-
gories (e.g., ‘AAA’, ‘AA’, ‘BBB’) were derived from
the singular, discrete, worst-case one-year default
rate experience and the average one-year ratings
transition experienced during a 20-year period. The
resulting credit factor for each long-term rating cate-
gory assumes that the securities or holdings within
each rating category will exhibit the worst-case
default rates and the average ratings transition rates
over a one-year holding period. The credit quality
rating assigned to a fund or pool of managed assets
does not address a fund’s ability to meet ‘payment
obligations’. For further information and in-depth
analysis please refer to the most recent Standard &
Poor’s Fund Ratings Criteria publication.
In conjunction with this analysis, Standard &
Poor’s closely reviews the manager’s internal credit
analysis and security evaluation and surveillance
procedures. Securities rated by other nationally rec-
ognized statistical rating organizations (NRSRO’s),
but not rated by Standard & Poor’s, may be consid-
ered eligible if there is an analytic basis for consid-
ering these securities as having comparable credit
quality. Total exposure to non-Standard & Poor’s
rated securities in a rated bond fund should be
25% or less, with no more than 5% in any one
issuer and may be subject to certain criteria adjust-
ments. For further information and in-depth analy-
sis please refer to the most recent Standard &
Poor’s Fund Ratings Criteria publication.
Counterparty criteria
Standard & Poor’s has established minimum credit
quality guidelines for counterparties that engage in320 Standard & Poor’s Public Finance Criteria 2007Other CriteriaA Standard & Poor’s Bond Fund/Variable Net Asset Value (NAV) Pool credit quality
rating is an assessment of the overall credit quality of a fund’s portfolio. The rating
reflects the level of protection that the pool’s portfolio provides against losses
from credit defaults. Credit quality ratings, identified by the ‘f’ subscript, are
assigned to bond funds and other actively managed funds that exhibit variable net
asset values. These ratings are current assessments of the overall credit quality
of a fund’s portfolio. The ratings reflect the level of protection against losses
from credit defaults and are based on an analysis of the credit quality of the
portfolio investments and the likelihood of counterparty defaults. Symbols and
definitions follow:
AAAf
The fund’s portfolio holdings provide extremely strong protection against losses
from credit defaults.
AAf
The fund’s portfolio holdings provide very strong protection against losses from
credit defaults.
Af
The fund’s portfolio holdings provide strong protection against losses from credit
defaults.
BBBf
The fund’s portfolio holdings provide adequate protection against losses from
credit defaults.
BBf
The fund’s portfolio holdings provide uncertain protection against losses from
credit defaults.
Bf
The fund’s portfolio holdings exhibit vulnerability to losses from credit defaults.
CCCf
The fund’s portfolio holdings make it extremely vulnerable to losses from credit
defaults.
Plus or Minus
The ratings from ‘AAf’ to ‘CCCf’ may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.A credit quality rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it is not a comment on the market price, yield, or suitability for a particular
investor. The ratings are based on current information furnished by the fund or obtained
from other sources that Standard & Poor’s considers reliable. Standard & Poor’s does
not perform an audit in connection with any rating and may, on occasion, rely on unaudit-
ed information The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or based on other circumstances.Variable Net Asset Value (NAV) Pool Credit Quality Rating Definitions