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BlackRock Cash Fund Suspends Some Redemptions, Downgraded to Junk

One reason for fixed income manager BlackRock’s chief Larry Fink to seek the assignment of acting as manager to the recently scuttled SIV rescue plan may have been to generate some good PR. Today’s Wall Street Journal tells us why that might have been of interest. A BlackRock enhanced cash fund has fallen by more than half in value this quarter, due to withdrawals and losses, and has suspended certain cash redemptions. Amusingly, Moody’s has downgraded the fund to Ba, a junk rating, while Standard & Poor’s maintains a triple A.

This isn’t a particularly large fund (it was a bit over $21 billion when the troubles began) and some other enhanced cash funds, such as ones operated by Bank of America and General Electric, are in the process of winding up. Nevertheless, this is an embarrassment for a firm that presents itself as a canny player.

From the Wall Street Journal:

An institutional cash fund from BlackRock Inc. has been downgraded to “junk” status by Moody’s Investors Service after the fund suspended certain daily fund redemptions — one of the latest signs of an investment fund getting hit because of tight conditions in short-term debt markets.

The fund isn’t a money-market fund, but instead is a similar type of product — known as an “enhanced” cash fund — that seeks to offer higher yield to investors through a variety of shorter-term investments.

As many of the securities in the portfolio have become harder to trade, and more redemption requests have come in, BlackRock Cash Strategies Fund has been unable to honor all the redemptions in cash, according to a letter to investors. It has declined to about $1 billion from more than $2 billion at the end of the third quarter.

Many of the fund’s securities are supported by a capital-support agreement providing up to $70 million of protection against losses incurred and a standby letter of credit from Wachovia Corp.

For investors seeking to redeem their investment in the fund, BlackRock said it would deliver the securities to their custodian, place them in a no-fee separate account, or sell them on the investors’ behalf. For those who remain, BlackRock said it would provide cash back at its own discretion as it becomes available.

Moody’s downgraded the fund from a top Aaa rating, to a Ba, which is below investment grade. It also reduced the fund’s market-risk rating.

The fund’s net asset value per-share remains at its target $1, and Standard & Poor’s Ratings Services has maintained its AAA rating on the fund.

A BlackRock spokesman says all 22 clients in the fund have remained invested thus far. Moody’s noted on Friday that while the portfolio’s weighted average credit quality remains consistent with its previously high rating, it has withdrawn its credit and market-risk ratings at the manager’s request.

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3 comments

  1. doc

    As you recall, Blackrock was called in to Florida to help with the bond illiquidity problem last month, although IMHO, that was a conflict of interest, given that blackrock had been selling muni bonds in Florida, as had Lehman, who had been dumping junk bonds there also. Blackrock seems well connected and its obviously nice to see them get a taste of the backwater snakeoil they trade in!

    I like the disparity between S&P & Moody’s, very telling about that game of collusion!

  2. doc

    From The Soap Box (again):

    This story illustrates the domino connections between a bond provider, e.g, a Lehman who provides toxic junk to (for all practical purposes) a pension fund/treasurer rube from any state America who does not understand derivatives, who contracts to obtain this investment trash for the purposes of gaining yield enhancements for teachers that belong to unions, who offer pension trust funds that are mis-managed by fools that now depend on illiquid management (blackrock?) to run illiquid funds which are connected to illiquid CDO tranches that are connected to illiquid bogus collateral.

    I need to rework that, but as the illiquid dominos fall, the blackrocks of the world seem to be bailed out, while teachers in Florida wait for the other shoe to drop….

  3. doc

    Hope you dont miss this treat:

    In the past Chinese firms have struggled to get a foothold in U.S. companies amid national security fears in Washington that communist China would end up controlling key strategic assets. The highest profile example of this came in 2005, when state-run China National Offshore Oil Corporation’s failed to take over Californian oil firm Unocal after U.S. regulators voted down the deal. CIC raised some eyebrows in Washington in May when, four months prior to its official launch in September, it bought into U.S. private equity group Blackstone for three billion dollars.

    When CIC launched, many analysts predicted it would be careful not to invest in politically sensitive areas such as the energy sector, but Cavey said this may now not be the case. “Energy and resources are very likely areas for CIC to buy into,” he said, adding the entire world, and not just the U.S., must be prepared for China.

    “Whether it’s CIC or whether it’s companies, the amount of money coming out of China is going to increase greatly over the next five years. I’m not sure whether the rest of the world is ready for that,” he said.

    Copyright Agence France-Presse, 2007

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