News Column

Fitch: US Closed-End Funds Pick Up Steam in Private Placements

June 2, 2014

NEW YORK--(BUSINESS WIRE)-- Term debt issuance by US closed-end funds (CEFs) grew to represent nearly 4% of the overall private placements market in the US during 2013 and Fitch Ratings expects deal flow to increase further as funds outside the master limited partnership (MLP) sector increase issuance.

A total of $1.6 billion of notes and $281 million of preferred stock were privately placed by CEFs during 2013. So far in 2014, issuance totals $170 million (notes) and $357 million (preferred stock). By comparison, private placements in the U.S. totaled $51.3 billion in 2013 and $16.9 billion so far this year, according to Bank of America Merrill Lynch.

Although MLP funds represented only 34% of the $50 billion in leverage outstanding in taxable CEFs, they accounted for nearly 82% of total private placements. Issuance by funds outside the MLP sector has been gradually increasing. In 2012, 2013, and so far in 2014, non-MLP funds accounted for 7%, 25%, and 52% of private placement issuance, respectively.

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 $30 billion of debt issued by more than 180 taxable and municipal CEFs.

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 May 1, 2014, and "Fitch: Taxable CEFs Rely on Select Few Banks for Funding" published on Jan 11, 2013. Both are available at www.fitchratings.com.

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.

Applicable Criteria and Related Research:

Use of Leverage in U.S. Closed-End Funds (Slidedeck Apr-2014)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747937

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Media Relations

Brian Bertsch, New York

Tel: +1 212-908-0549

Email: brian.bertsch@fitchratings.com

or

Yuriy Layvand, CFA

Director

Fund and Asset Management

+1 212 908-9191

or

Ian Rasmussen

Senior Director

Fund and Asset Management

+1-212-908-0232

or

Kellie Geressy-Nilsen

Senior Director

FitchWire

+1 212 908-9123

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004


Source: Fitch Ratings


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