A total of
Although MLP funds represented only 34% of the
A strong appetite for CEF paper has pushed credit spreads of private placements to record lows. Senior notes have priced at 125 to 150 basis points over Treasuries on average, while preferred stock priced at 175 to 225 basis points. Fitch observed better pricing for issues by larger funds, those with longer track records, and from asset classes outside the MLP sector, likely due to scarcity. Investors also took concessions when pricing issues during the interest rate spike of fall 2013 as they expected a subsequent rate correction.
Most placements have been fixed-rate, allowing funds to lock in low borrowing costs in step with high demand from insurance companies for fixed-rate assets. In some cases, managers issued floating-rate debt, based on their views about certain parts of the yield curve. Fitch believes that in all cases, CEFs benefit from diversifying their selection of lenders and reducing rollover risk associated with short-term bank lines.
Fitch rated most privately placed notes at 'AAA' and preferred stock at 'AA' after reviewing fund portfolio quality and diversification, sufficiency of asset of coverage, structural protections in case of asset coverage declines, and the investment and operational capabilities of the manager. In total, Fitch rates approximately
For additional information, please see our latest update on the CEF leverage market titled "Use of Leverage in U.S. Closed-End Funds (Slidedeck Apr-2014)" published
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Use of Leverage in U.S. Closed-End Funds (Slidedeck Apr-2014)
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Source: Fitch Ratings
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