News Column

Fitch Rates & Affirms Preferred Shares of DNP Select Income Fund

July 9, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings assigns an 'AAA' rating to the following new series of mandatory redeemable preferred stock (MRPS) issued by DNP Select Income Fund Inc. (NYSE Amex: DNP), a non-diversified closed-end fund managed by Duff & Phelps Investment Management Co. (DPIM):

--$33,000,000 of series D MRPS, due 2021.

The sale of series D MRPS closed on July 9, 2014 and net proceeds of approximately $33 million from the offering will be used to reduce the fund's bank facility.

In addition, Fitch affirms the following:

--$132,000,000 of series A MRPS, due 2019, at 'AAA';

--$60,000,000 of series B MRPS, due 2021, at 'AAA';

--$75,000,000 of series C MRPS, due 2024, at 'AAA'.

KEY RATING DRIVERS

The 'AAA' series D rating assignment and the affirmations reflect:

--Sufficient pro forma asset coverage provided to MRPS and notes as calculated per the fund's asset coverage tests;

--The structural protections afforded by mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines;

--The legal and regulatory parameters that govern the fund's operations;

--The capabilities of DPIM as fund adviser.

FUND PROFILE

The fund's objectives are current income and long-term growth of income with capital appreciation as a secondary objective. The fund seeks to achieve its investment objectives by investing primarily in a diversified portfolio of equity and fixed income securities of companies in the public utilities industry. The fund's investment strategies have been developed to take advantage of the income and growth characteristics and historical performances of securities of companies in the public utilities industry. Under normal conditions, more than 65% of the fund's total assets will be invested in securities of public utility companies engaged in the production, transmission or distribution of electric energy, gas or telephone services.

FUND LEVERAGE

As of June 30, 2014, fund's total assets were $3.9 billion and total leverage was $1 billion, or 26% of assets. The leverage consisted of $733 million drawn from a senior credit facility and $267 million in Fitch-rated mandatory redeemable preferred stock. Following issuance of the series D MRPS on July 9, 2014, leverage will remain unchanged as DNP will be reducing the credit facility balance dollar for dollar.

ASSET COVERAGE

At closing, the fund's pro forma asset coverage ratios, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC tests) per the 'AAA' rating guidelines for the MRPS, outlined in Fitch's closed-end fund criteria, were in excess of 100%. These are the minimum asset coverage guidelines required by the fund's governing documents, and evaluated as such by Fitch to arrive at the assigned rating levels.

The Fitch OC tests calculate standardized asset coverage by applying haircuts to portfolio holdings based on riskiness and diversification of the assets and measuring their ability to cover both on- and off-balance-sheet liabilities at the stress level that corresponds to the assigned rating.

At closing, the fund's asset coverage ratio for total leverage, including the MRPS, as calculated in accordance with the Investment Company Act of 1940 (the 1940 Act), was in excess of 225%. Also at closing, the fund's asset coverage ratio for total debt, as calculated in accordance with the 1940 Act, was in excess of 300%. These are the minimum asset coverage ratios required by the 1940 Act and the fund's governing documents.

STRUCTURAL PROTECTIONS

Should the MRPS asset coverage tests decline below their minimum threshold amounts (as tested weekly) the fund is required to deliver notice to the MRPS purchasers within five days of becoming aware of such fact.

The fund manager is required to cure the breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC Test breaches), or by reducing leverage in a sufficient amount (for both the Fitch OC Tests and 1940 Act asset coverage test breaches) within a pre-specified time period (a maximum of 45 business days).

THE FUND'S ADVISER

DPIM is responsible for the implementation and execution of the investment strategy on a day-to-day basis. DPIM is an SEC registered and regulated investment advisor with $9.3 billion in assets under management as of Sept. 30, 2013. DPIM acts as investment adviser to three other closed-end investment companies and five open-end investment companies registered under the 1940 Act.

RATINGS SENSITIVITIES

The rating assigned to the preferred shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the fund, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating to be lowered by Fitch.

For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end funds, please review the criteria referenced below, which can be found on Fitch's web site at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

The sources of information used to assess this rating were the public domain and DPIM.

Opt-in to receive Fitch's forthcoming research on closed-end funds:

http://pages.fitchemail.fitchratings.com/FAMCEFBlankOptin/

Applicable Criteria and Related Research:

--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 14, 2013);

--'MLP Closed-End Funds: A Capital Structure Case Study' (Dec. 2, 2013);

--'2014 Outlook: U.S. Closed-End Fund Leverage' (Jan 14, 2014);

--'Use of Leverage in U.S. Closed-End Funds (Slidedeck Apr-2014)' (May 1, 2014);

--'Fitch: US Closed-End Funds Pick Up Steam in Private Placements' (June 2, 2014).

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

2014 Outlook: U.S. Closed-End Fund Leverage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=730159

MLP Closed-End Funds: A Capital Structure Case Study

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723839

Rating Closed-End Fund Debt and Preferred Stock

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716220

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=838797

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

Primary Analyst

Russ Thomas

Director

+1-312-368-3189

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL, 60602

or

Secondary Analyst

Yuriy Layvand

+1-212-908-9191

or

Committee Chairperson

Ian Rasmussen

+1-212-908-0232

or

Media Relations

Brian Bertsch, New York, +1-212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Business Wire


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters