Asset management groups rushed to reassure investors last week as the collapse of Lehman Brothers investment bank stoked fresh doubts over the safety of their investments.
In the wake of the collapse, two F&C money market funds had their ratings withdrawn by Fitch Ratings because of their exposure to Lehman Brothers senior unsecured instruments. The F&C Money Markets fund and F&C Sterling Enhanced Cash fund had 1.8% and 1.3% exposure respectively to the instruments as the bonds were downgraded from the A rating they had held until September 12 to CCC.
Commenting on the downgrades, Jason Hollands, head of communications at F&C, says the firm is surprised at Fitch’s actions.
“We’re pretty disappointed that they’ve downgraded the funds,” he says. “These notes were eligible for the funds on Friday [September 12] and we’ve been talking to Fitch about exiting these bonds as soon as possible. We feel the downgrade was a little harsh.”
Hollands says people are working out a reasonable redeemable value for the Lehmans instruments but it could take as long as a couple of months to exit the positions.
BlackRock was also affected by the banking turmoil as it lost its former lead counterparty for derivative swaps in the UK Absolute Alpha fund after the collapse of Lehmans.
Lehman Brothers, one of four counterparties available to the fund for the swaps, was part of the fund’s structure since launch. As recently as August the investment bank still held a prominent role in the fund.
Since Lehmans filed for bankruptcy on September 14, however, that arrangement has ended, says Tony Stenning, managing director of UK retail at BlackRock.
“The relationship is obviously now defunct, but we still have three counterparties in the fund,” he says. “The last position that they would have had in the fund would have been last week.”
The role of lead counterparty has now been handed to Deutsche Bank, with Merrill Lynch and Morgan Stanley also able to be used. Stenning says because of this the move should have a negligible impact on the workings of the fund itself.
Darius McDermott, managing director of Chelsea Financial Services, says: “The fact that there’s one less bank for them to deal with is bad for competition as they negotiate fees and charges. As long as they haven’t lost money, however, it shouldn’t be a problem.”
Among other firms making reassuring noises, Thames River and Keydata, the structured products provider, both sought to distance themselves from the fallout.
Thames River outlined a review of its counterparty risk arrangements and emphasised they had no direct exposure to Lehmans.