Fitch Affirms Aberdeen Asia-Pacific Income Fund Notes at 'AAA' and MRPS at 'AA'
--\\$100,000,000 Series A Notes due June 12, 2020 at 'AAA';
--\\$100,000,000 Series B Notes due June 12, 2023 at 'AAA';
--\\$50,000,000 Series A MRPS, due June 27, 2023 at 'AA'.
Aberdeen Asia-Pacific Income Fund, Inc. is a closed-end investment company regulated by the Investment Company Act of 1940 (1940 Act) and managed by Aberdeen Asset Management Asia Limited, a wholly-owned subsidiary of Aberdeen Asset Management PLC (LON: ADN) rated 'A/F1' with a Stable Outlook by Fitch.
KEY RATING DRIVERS
The rating affirmations reflect:
--Sufficient asset coverage provided to the Notes and MRPS calculated per Fitch's asset coverage tests and published rating criteria at their respective rating levels;
--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 Aberdeen Asset Management Asia Limited as investment manager.
FUND PROFILE
Aberdeen Asia-Pacific Income Fund, Inc. was incorporated in Maryland on March 14, 1986 as a closed-end, non-diversified management investment company. The fund's principal investment objective is to seek current income. The fund may also achieve incidental capital appreciation. To achieve its investment objectives, the fund normally invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in Asian debt securities, Australian debt securities and New Zealand debt securities.
FUND LEVERAGE
As of April 30, 2015, the fund managed approximately \\$2.187 billion in net assets (net of current liabilities), including\\$600 million in leverage. The total leverage ratio was approximately 27%. The fund's capital structure consists of \\$200 million in Fitch-rated Notes, \\$50 million in Fitch-rated MRPS, \\$200 million of term loans, and \\$150 million in revolving bank credit facility.
As of the same date, the fund utilized \\$28.5 million in U.S. Treasury bond futures notional and \\$115 million in foreign currency futures notional for leverage purposes and efficient portfolio management. The fund also utilized approximately \\$150 million in interest rate swap notional and \\$600 million in foreign currency futures notional for hedging purposes.
ASSET COVERAGE
As of April 30, 2015, asset coverage ratios for the Notes and MRPS, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC tests) per the 'AAA' and 'AA' rating guidelines outlined in Fitch's closed-end fund criteria, were in excess of 100%, respectively. These are the minimum asset coverage guidelines required by the fund's governing documents.
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.
As of the same date, the fund's asset coverage ratios for the Notes and MRPS, as calculated in accordance with the 1940 Act were in excess of 300% (Senior 1940 Act Asset Coverage test) and 225% (Total 1940 Act Asset Coverage test) which are the minimum asset coverage tests required by the Note purchase agreement and MRPS purchase agreement, respectively.
Fitch notes a restricted payment clause in the Note purchase agreement precludes the fund from paying any dividend if, immediately before or after giving effect thereto, there is or would be a breach of the Senior 1940 Act Asset Coverage test. Furthermore, the MRPS purchase agreement does not afford a penalty rate for cumulative unpaid dividends.
Suspension of MRPS dividends upon a breach of the Notes' Senior 1940 Act Asset Coverage test would not have an impact on Fitch's 'AA' rating for the MRPS because the MRPS are cumulative in nature, disclosed to the purchasers as such, and any accrued but unpaid cumulative dividends would be captured in Fitch's OC test calculation. As of April 30, 2015, the fund's pro forma Senior 1940 Act Asset Coverage test was approximately 395%, allowing approximately a 22% market value cushion before a potential breach.
NOTES STRUCTURAL PROTECTIONS
Should the Senior 1940 Act Asset Coverage test or the Fitch OC test decline below their minimum threshold amounts (as tested monthly), under the terms of the Notes the fund is required to deliver notice to the Note purchasers within five days of becoming aware of such fact. The fund manager is then 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 test and Senior 1940 Act Asset Coverage test breaches) within a pre-specified time period (a maximum of 70 calendar days, approximately 51 business days).
Failure to cure an asset coverage breach as described above is an event of default under the terms of the Notes, following which, a majority vote from Note purchasers may declare all the Notes then outstanding to be immediately due and payable.
The fund may also not declare or pay any dividend, distribution or similar payment in respect of, or redeem any of, its shares if immediately before or after giving effect to such action, there is or would be a breach of the Senior 1940 Act Asset Coverage test or the Fitch OC test except, in the case of a breach of the Fitch OC tests, to the extent required in order for the Fund to qualify as a regulated investment company or to otherwise minimize or eliminate federal or state income taxes payable by the fund. Fitch views this as an added incentive to cure and de-leverage in a timely manner, regardless of acceleration by the Notes purchasers.
MRPS STRUCTURAL PROTECTIONS
Should the Total 1940 Act Asset Coverage test or the Fitch OC Test for the MRPS' decline below their minimum threshold amounts (as tested monthly), 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 Tests breaches), or by reducing leverage in a sufficient amount (for both the Fitch OC Tests and Total 1940 Act Asset Coverage test breaches) within a pre-specified time period (a maximum of 100 calendar days, approximately 73 business days).
THE FUND'S MANAGER AND ADVISERS
The fund's investment manager is Aberdeen Asset Management Asia Limited, the fund's investment adviser is Aberdeen Asset Management Limited and the fund's sub-adviser is Aberdeen Asset Managers Limited. Each is a wholly-owned subsidiary of Aberdeen Asset Management PLC. Aberdeen Asset Management PLC is a global investment management group, managing assets for both institutions and private individuals from offices around the world. Aberdeen had assets under management of \\$491 billion as of March 31, 2015. Aberdeen is publicly traded on the London Stock Exchange (FTSE 100 since 1991).
RATING SENSITIVITIES
The rating is based on the terms of the Notes and MRPS stipulating mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines. Should the fund fail to cure an asset coverage breach, or the Note purchasers not declare the notes due and payable upon an event of default due to an asset coverage breach, this may lengthen exposure to market value risk and cause the ratings to be lowered by Fitch.
The ratings may also be sensitive to material changes in the credit quality or market risk profile of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause the ratings to be lowered by Fitch.
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