OREANDA-NEWS. Fitch Ratings has affirmed two bond funds managed by ECM Asset Management Limited (ECM), an affiliate of Wells Fargo Asset Management (WFAM), as follows:

Diversified European Credit S. A. (DEC) and European Credit Luxembourg S. A. (ECL)

Fund Credit Quality Ratings affirmed at 'BBB-f'

Fund Market Risk Sensitivity Ratings affirmed at 'S4'

KEY RATING DRIVERS

The key rating driver of the affirmation of the Fund Credit Quality Ratings is the current and prospective weighted average credit quality of each funds' portfolio, which is consistent with Fitch's credit quality guidelines for funds rated in the 'BBBf' rating category.

The Fund Market Risk Sensitivity Ratings of the funds are underpinned by the systematic interest rate and currency hedging and negligible leverage levels of the funds.

WEIGHTED AVERAGE CREDIT QUALITY

The weighted average rating factors (WARFs) of DEC and ECL (and 6.0 and 5.5, respectively) are consistent with a Fund Credit Quality Rating in the 'BBBf' rating category. Fitch's rating criteria considers the current rating profile of each fund, in addition to the fund's investment guidelines.

The funds' portfolios are currently concentrated in securities in the 'BBB' and 'A' rating categories. The presence of the negative modifier ('-') resulting in the 'BBB-f' ratings reflect the funds' investment guidelines, which allow for a portion of investments to be made in the speculative-grade category.

PORTFOLIO SENSITIVITY TO MARKET RISKS

ECM systematically hedges interest rate risk of the DEC and ECL portfolios, which effectively minimises interest rate risk (duration was 0.25 years and 0.61 years for DEC and ECL, respectively as end August 2016).

Spread risk has slightly diminished in the portfolios over the past year, as measured by a spread duration of around five years in both funds.

Leverage has remained negligible in the funds over the past three years, with the ratio of total borrowing to net asset value (NAV) averaging 0.15x for DEC and 0.06x for ECL. Leverage can nevertheless be increased (to a maximum of 1.5x and 1.25x NAV for DEC for ECL; respectively). The asset manager does not intend to increase leverage for the foreseeable future.

Fitch has calibrated the Fund Market Risk Sensitivity to reflect the average leverage of the funds over the past three years, which Fitch considers representative of the current and prospective leverage. Fitch sees this new approach as more realistic than the calibration to the maximum permissible leverage levels that we used in previous rating reviews.

On the basis of current spread duration and hedged interest rates risk and average leverage, DEC's and ECL's market risk profile is consistent with a 'S4' Fund Market Risk Sensitivity Rating.

FUND PROFILES

The funds are Luxembourg-domiciled medium-term note issuing programmes (Societes Anonymes). The funds invest primarily in European investment-grade credits. The funds are highly diversified and are hedged against interest rate and currency risk. The funds can take short positions and can use leverage, which is typically generated through repurchase agreements.

Total net assets under management were approximately EUR48m in DEC and EUR289m in ECL as of end-August 2016. Brown Brothers Harriman & Co (A+/Stable/F1) became the custodian and administrator of the funds in July 2015.

INVESTMENT ADVISOR

Founded in 1999, ECM is owned by Wells Fargo & Co (AA-/Stable/F1+), and is authorised and regulated by the FCA. ECM is an affiliated investment advisor of WFAM, the trade name used by the asset management businesses of Wells Fargo & Co. WFAM had USD484bn assets under management as at end-June 2016.

RATING SENSITIVITIES AND SURVEILLANCE

'BBBf' Fund Credit Quality Ratings indicate good underlying credit quality. The assets are expected to maintain a WARF in line with a 'BBBf.' Funds rated 'S4' are expected to have "moderate" or "moderate-to-high" sensitivity to market risk.

The ratings may be sensitive to material changes in the funds' credit quality or market risk profile. A material adverse deviation from Fitch's guidelines for any key rating driver could cause Fitch to downgrade the ratings. We would expect a material change to the investment advisor's interest rate risk hedging policy or a substantial increase in leverage to negatively affect the Market Risk Sensitivity Ratings. A material increase in spread duration for these funds from the current levels, combined with credit deterioration, may also result in downgrades to the Market Risk Sensitivity Ratings. A material decline in the funds' credit quality or excessive barbelling may lead to a downgrade of the Fund Credit Rating. The WARF-implied Fund Credit Quality rating of the two funds would nevertheless remain in the 'BBBf' range under Fitch's standard WARF stress tests.