OREANDA-NEWS. Fitch Ratings has affirmed the ratings assigned to the auction-rate preferred shares (ARPS) issued by AllianzGI Convertible & Income Fund II (NYSE: NCZ) and the senior secured notes (notes) and mandatory redeemable preferred shares (MRPS) issued by AllianzGI Diversified Income & Convertible Fund (NYSE: ACV), two closed-end funds managed by Allianz Global Investors Fund Management LLC (AGIFM) and sub-advised by Allianz Global Investors U. S. LLC (AGIUS):

AllianzGI Convertible & Income Fund II

--$54.8 million Series A perpetual ARPS, $25,000 per share, 2,192 shares, at 'AAA';

--$54.8 million Series B perpetual ARPS, $25,000 per share, 2,192 shares, at 'AAA';

--$54.8 million Series C perpetual ARPS, $25,000 per share, 2,192 shares, at 'AAA';

--$54.8 million Series D perpetual ARPS, $25,000 per share, 2,192 shares, at 'AAA';

--$54.8 million Series E perpetual ARPS, $25,000 per share, 2,192 shares, at 'AAA'.

AllianzGI Diversified Income & Convertible Fund

--Series A senior secured notes, due Nov. 22, 2029, in amount of $50,000,000, at 'AAA';

--Series A MRPS, with a term redemption date of Oct. 2, 2025, of $30,000,000, at 'AA'.

KEY RATING DRIVERS

The affirmation follows Fitch's annual review of the fund and reflects:

--Sufficient asset coverage provided to the ARPS as calculated per the fund's governing documents;

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

--The structural protections afforded by mandatory cure 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 AGIFM and AGIUS as investment manager and sub-adviser, respectively.

Fitch's ratings assigned to the ARPS speak only to timely repayment of interest and principal in accordance with the governing documents and not to potential liquidity in the secondary market.

FUND PROFILE

As of July 31, 2016, NCZ consisted mainly of high-yield corporate and straight convertible securities with U. S. domicile issuers. The fund is a diversified, closed-end management investment company, registered under the Investment Company Act of 1940, as amended.

ACV's investment objective is to provide total return through a combination of current income and capital appreciation, while seeking to provide downside protection against capital loss. Under normal market conditions, the fund will seek to achieve its investment objective by investing in a combination of convertible securities, debt and other income-producing instruments and common stocks and other equity securities. The fund expects to normally employ a strategy of writing (selling) covered call options on the stocks held in the equity portion of the portfolio.

LEVERAGE

As of July 31, 2016, NCZ had total assets of approximately $704 million, current liabilities of $10 million and leverage of $274 million (39% of total net assets). Leverage consisted entirely of rated ARPS.

As of July 31, 2016, ACV had total assets of $323 million, current liabilities of $24 million, and leverage of $105 million (33% of total assets). Leverage consisted of $50 million in borrowings under the fund's short-term margin loan facility, $25 million in Fitch-rated Notes (pari-passu to the margin loan borrowings), and $30 million in Fitch-rated MRPS.

ASSET COVERAGE

At the time of the affirmation, NCZ's asset coverage ratio for rated ARPS, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC Tests) per the 'AAA' rating guidelines outlined in Fitch's applicable criteria was in excess of 100%. This is the minimum asset coverage guideline required by the fund's governing documents.

At the time of the affirmation, ACV's asset coverage ratio, as calculated in accordance with the Fitch total and Fitch OC tests per the 'AAA' rating guidelines for the notes and the 'AA' rating guidelines for the MRPS, outlined in Fitch's closed-end fund criteria, were in excess of 100%. This is the minimum asset coverage guideline required by the transaction documents governing the notes and MRPS.

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. Fitch OC Tests also capture the fund's use of synthetic convertible securities based on the credit rating of the issuer and put provider, the provisions on put protection and stock delta, and whether underlying stock is trading at an equity-sensitive, typical, or busted conversion premium, similar to a straight convertible position.

Also at the time of the affirmation, NCZ's asset coverage ratio for rated ARPS, as calculated in accordance with the 1940 Act, was in excess of 200%, which is the minimum asset coverage required by the 1940 Act and the fund's governing documents.

ACV's senior securities representing indebtedness and stock are subject asset coverage requirements of 300% and 200%, respectively, under the transaction documents governing the notes (the "Notes Documents Asset Coverage tests"), while the fund's senior securities representing stock are subject to an asset coverage requirement of 225% pursuant to the transaction documents governing the MRPS (the "MRPS Documents Asset Coverage test," and, together with the Notes Documents Asset Coverage tests, the "asset coverage tests").

ARPS STRUCTURAL PROTECTIONS

Should the asset coverage tests decline below their minimum threshold amounts (as tested on the last business day of each week), the governing documents require the fund to alter the composition of its portfolio toward assets with lower discount factors (for Fitch OC Tests), or to reduce leverage in a sufficient amount (for both the Fitch OC Tests and the 1940 Act test) to restore compliance within a pre-specified time period that is within Fitch's 60 business day criteria guideline.

NOTES STRUCTURAL PROTECTIONS

Should the asset coverage tests decline below their minimum threshold amounts (as tested on the last business day of each week, in the case of rating agency tests, or each month, in the case of the asset coverage tests), under the terms of the notes, ACV is required to deliver notice to the note purchasers within five business days. The fund's managers are then expected to cure the breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC tests breaches), or by reducing leverage in a sufficient amount (for both the Fitch OC tests and the 1940 Act test breaches) within a pre-specified time period that is within Fitch's 60 business day criteria guideline.

Failure to cure an asset coverage breach as described above is an event of default under the terms of the notes. The fund must then deliver a notice within five business days to the note purchasers and a vote of holders of at least 51% of the principal amount of the Notes may then declare all the notes then outstanding to be immediately due and payable.

The fund is also prohibited from declaring paying out a common stock dividend or other distribution on common shares unless, immediately after such transaction, the fund would satisfy the 300% asset coverage test. Fitch views this as an added incentive to cure and deleverage in a timely manner, regardless of acceleration by the notes' purchasers.

MRPS STRUCTURAL PROTECTIONS

Should the MRPS Asset Coverage test and Fitch OC test decline below their minimum threshold amounts (tested weekly, in the case of rating agency tests, or monthly, in the case of the asset coverage tests) the fund is required to deliver notice to the MRPS purchasers within five days of becoming aware of such fact.

The fund is required to cure the breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC tests breaches), or by reducing leverage in a sufficient amount (for both the Fitch OC tests and MRPS Documents Asset Coverage Test breaches) within a pre-specified time period that is within Fitch's 60 business day criteria guideline.

THE INVESTMENT MANAGER AND SUB-ADVISER

AGIFM, the fund's investment manager, is a wholly-owned indirect subsidiary of Allianz Asset Management of America L. P. As of Dec. 31, 2015, AGIUS, an AGIFM affiliate and the fund's sub-adviser, had $76.1 billion in assets under management.

RATING SENSITIVITIES

The rating is based on the terms stipulating mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines. In the case of the rated notes, should the fund fail to cure an asset coverage breach within the cure period and the note purchasers not declare the notes due and payable upon an event of default, this may lengthen exposure to market value risk and cause the ratings to be lowered by Fitch.

The ratings may be sensitive to material changes in the credit quality or market risk profiles of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause Fitch to downgrade the rating.

NCZ's governing documents, which define how the fund calculates asset coverage tests, reference the 2009 Fitch rating criteria for closed-end funds and the related discount factors for portfolio assets. Although the 2009 Fitch rating criteria for closed-end funds is not Fitch's most recent criteria, convertible discount factors at the 'AAA' rating level are the same between the referenced criteria and Fitch's current criteria. However, increased volatility that is higher than the stressed volatility used to evaluate the convertible sector in Fitch's CEF ratings criteria, or significant changes to market liquidity of convertibles may cause Fitch to re-evaluate criteria for the convertible asset class, which may in turn impact the ratings assigned to the MRPS.