Standard & Poor's Ratings Services recently removed the single-A rating cap on mutual fund fee securitizations, giving the transactions access to the full range of bond ratings available through the rating agency.

The cap was put in place because of uncertainty as to whether a mutual fund's board of directors would stop the payment of fees on a retroactive basis. Mutual funds cover distribution-related expenses by charging investors 12-b1 fees and contingent deferred sales loads (CDSLs).

However, S&P officials determined that while such a scenario could occur, that risk would not adversely impact the securities. Nevertheless, a fund's board of directors would likely have no reason to cancel the fees, the report said.

That S&P decided to lift its ratings cap is perhaps linked to the increasing number of transactions that have earned ratings higher than single-A. What's more, rival Moody's Investors Service, which also has been rating mutual-fund transactions for years, has no ratings cap.

"We have never had a ratings cap," said Alex Dill, managing director at Moody's. "We would look at each transaction presented to us and look in terms of cash flow and collateral."

In the history of mutual funds with B-share plans, only one fee reduction has occurred. Had the fees been securitized, the fee reduction would have had no adverse impact on the cash flow from the fee collections, sources said.

Even if fee reductions are rare, the learning curve is steep on these transactions. Experts say that mutual fund fee securitizations require a great deal of credit analysis, and as an asset class needs more understanding before new entrants fully understand these transactions' unique characteristics.

"It's a relatively small market with a small group of very sophisticated investors and originators, so it's a pretty close community and a very involved asset class," said Dill.

What's more, there are certain risks influencing the rating of mutual fund fee securitizations. Chief among them is the impact of market risk on the fund's asset value.

A decline in the fund's market value due to systematic events may ultimately have an adverse effect on the projected cash flows needed to repay the security holders, the report said.

Volatile conditions may also increase the likelihood of defaults bonds. Unsystematic risk and high correlation between market risk and redemptions may potentially disrupt the flow of receivables, the report said.

Although the emerging asset class continues to grow, it will likely remain a private domain for some time. "It's still a Rule 144A of truly private asset class and has a ways to go before it becomes an SEC registered security," Dill added.

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