GIOA Conference 2012 Moody’s Approach to Rating Government Investment Pools: CNAV and Bond Funds Marty Duffy VP-Managed Investments Group March 21, 2012 Local Government Investment Pool Ratings

Money Market Mutual Funds Moody’s Rated LGIPs Illinois Metropolitan Investment Fund (IMET)1-3 year fund JP Morgan Michigan Governmental Money Market Fund Puerto Rico Government Investment Trust Fund Riverside Pooled Fund Investment Portfolio San Bernardino County Investment Pool 2

Money Market Mutual Funds Local Government Pools are Challenged Pool structure and purpose are key to assessing risk profile Assets  Credit conditions may degrade asset quality  Geo-political and regulatory conditions impact market techicals, summer “flight to quality”  Concentration  Tension between quest for yield and interest rate environment  Asset allocation and duration positioning “Liabilities”  Shareholder base and seasonality of redemptions and subscriptions  Forecasting cashflows can be challenging when the municipal economic base comes under stress 3

Money Market Mutual Funds Bond fund methodology and symbols  Updated approach effective March 30, 2012  New rating symbols and definitions to distinguish bond fund ratings from long-term debt ratings  Credit quality of fund’s underlying assets  To use portfolio weighted average life (WAL) as duration benchmark for measuring portfolio’s expected credit loss profile. (Previous benchmark selection a function of fund’s “stated objectives”)  Qualitative considerations may affect rating in exceptional cases, such as severe weakness of fund manager or sponsor or material and persistent deviation from the fund’s strategy  Liquidity, operational, interest rate, currency and other market risks specifically excluded from the rating 4

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Bond fund (bf) rating definitions RatingDefinition Aaa-bf Bond Funds rated Aaa-bf generally hold assets judged to be of the highest credit quality Aa-bf Bond Funds rated Aa-bf generally hold assets judged to be of high credit quality. A-bf Bond Funds rated A-bf generally hold assets considered upper-medium credit grade Baa-bf Bond Funds rated Baa-bf generally hold assets considered medium credit grade Ba-bf Bond Funds rated Ba-bf generally hold assets judged to have speculative elements B-bf Bond Funds rated B-bf generally hold assets considered to be speculative Caa-bf Bond Funds rated Caa-bf generally hold assets judged to be of poor standing Ca-bf Bond Funds rated Ca-bf generally hold assets that are highly speculative and that are likely in, or very near, default, with some prospect of recovery of principal and interest C-bf Bond Funds rated C-bf generally hold assets that are in default, with little prospect for recovery of principal or interest 6

Money Market Mutual Funds Money Market Funds: Revised methodology and framework 7

Money Market Mutual Funds Money market fund (mf) rating definitions RatingDefinition Aaa-mf Money market funds rated Aaa-mf have very strong ability to meet the dual objectives of providing liquidity and preserving capital. Aa-mf Money market funds rated Aa-mf have strong ability to meet the dual objectives of providing liquidity and preserving capital. A-mf Money market funds rated A-mf have moderate ability to meet the dual objectives of providing liquidity and preserving capital. Baa-mf Money market funds rated Baa-mf have marginal ability to meet the dual objectives of providing liquidity and preserving capital. B-mf Money market funds rated B-mf are unable to meet the objective of providing liquidity and have marginal ability to meet the objectives of preserving capital. C-mf Money market funds rated C-mf are unable to either objective of providing liquidity or preserving capital. 8

Money Market Mutual Funds US money market fund ratings 9

Money Market Mutual Funds Portfolio credit quality  Expected loss approach used to arrive at portfolio average weighted credit quality  Probability of default  Severity of loss/recoveries  Stratifying short-term ratings on the basis of Moody’s long-term ratings  Model inputs in the event explicit long-term ratings not assigned 10 Σ expected losses ≤ 12-month benchmark/Aaa/Aa/A

Money Market Mutual Funds Portfolio stability profile FactorWeight1234 Asset profile WAM Top 3 Obligors 20% <60 days <15% <90 days <30% <120 days <50% >120 days >50% Liquidity Overnight liquidity/Largest 3 investors Overnight liquidity/Fund AUM 40% >90% >20% >75% >10% >25% >5% <25% <5% Exposure to market risk 40%>0.995>0.990>0.985< Score

Money Market Mutual Funds Other considerations  Sponsor quality  Expectation that funds rated in the top rating category (Aaa- mf) will be sponsored by firms having an investment grade or equivalent credit profile  Manager attributes  Credit process, investment process, control environment, operations and corporate governance  Legal documentation  Example: Repurchase agreements 12

Money Market Mutual Funds Repurchase agreements Traditional Repos Traditional repos have overnight maturities and are fully collateralized by cash items or U.S. government securities, including individual agency debentures and agency mortgage-backed securities. Also included in this category are Aaa- rated sovereign and supranational securities, such as those issued by the International Monetary Fund (IMF) and the European Bank for Reconstruction and Development (EBRD). Traditional repos are eligible for treatment as direct investments in the underlying collateral, both for purposes of diversification and credit quality assessments. Non-traditional Repos Collateralized by securities other than cash items or government securities or have maturities greater than overnight. They are eligible for treatment as Investments with exposure to the repo counterparty, both for purposes of diversification and credit quality assessments, provided the repos are transacted with primary broker-dealers whose parent companies carry an investment grade rating consistent with a corresponding Prime-1 short-term rating or for which there is an acceptable assessment of creditworthiness 13 Additional factors: Collateral types, maturities, levels of overcollateralization that, with limited exceptions, are generally expected to start at 102%, valuation practices, legal documentation and jurisdiction as well as the counterparty’s credit ratings or creditworthiness.

Money Market Mutual Funds Example : Deriving portfolio stability profile scores FactorWeight1234 Asset profile WAM Top 3 Obligors 20% 46 days 15% Liquidity Overnight liquidity/Largest 3 investors Overnight liquidity/Fund AUM 40% 30% 35% Exposure to market risk NAV Stress 40% Overall Fund Stability Profile 100%X (1.2) Score Observation: Combination of Aa1 average weighted credit quality and portfolio stability score of 1 corresponds to Aaa-mf rating, all other things being equal.

Money Market Mutual Funds Range of scores: Prime funds as of January 31, 2012 QuartileWAM (days) Obligor Concentration Overnight LiquidityNAV Stress Credit Quality First Quartile 2812%50%0.9964Aa1 Second Quartile 3913%40%0.9953Aa1 Third Quartile 4515%31%0.9938Aa1 Fourth Quartile 5720%21%0.9917Aa2 Average 3614%42% Based on data applicable to 44 US prime funds

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Contact information: Daniel Serrao (212) Henry Shilling (212) MartyDuffy (212) Christopher Piron (212)

Money Market Mutual Funds Related Research: Moodys.com Methodology Updates: Moody’s Revised Money Market Fund Rating Methodology and Symbols, March 2011 (131303) Moody’s Revised Bond Fund Rating Methodology and Symbols (138664) Industry Outlooks: Money Market Funds 2012 Outlook and 2011 Review (140461) Bond Funds: 2012 Outlook and 2011 Review, March 2012 (139782) Announcements and Special Comments “Money Market Funds Face the Consequences of European Financial Stress,” 7 February “Adjusting European Sovereign Ratings to Better Capture Credit Susceptibility to Downside Risks,” 13 February “Moody’s Reviews Ratings for European Banks,” February 15, “Challenges for Firms with Global Capital Markets Operations: Moody’s Rating Reviews and Rationale,” 15 February ““Moody’s Places 7 US ABCP Programs and 4 ABCP LOC Programs on Review for Possible Downgrade, “16 February 2012 and “Moody’s reviews for downgrade Prime-1 (sf) ratings of 13 European ABCP programmes,” 16 February “Reviews for Downgrade: Long Term Ratings Based Solely on Support from Banks Placed Under Review on February 15,2012,” 21 February Pressure Remains On Euro Sovereigns In Absence of Decisive Initiatives, December 2011 (138060) Rising Severity of Euro Area Sovereign Crisis Threatens Credit Standing of All EU Sovereigns, November 2011 (137652) Euro Area Debt Crisis Weakens Bank Credit Profiles, January 2012 (137981) European Banks: How Moody's Analytic Approach Reflects Evolving Challenges, January 2012 (139207) Why Global Bank Ratings Are Likely to Decline in 2012, January 2012 (139205) Money Market Funds Face Consquences of European Financial Stress, February 17, 2012 (139516) Money Market Funds Continue to Shrink Exposure to European Banks, December 2011 (137105) Money Market Funds Navigate Risks From Europe’s Credit Concerns, July 2011 (129828) 18

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