OREANDA-NEWS. Fitch Ratings has finalized and published new global rating criteria for rating closed-end fund (CEF) debt and preferred stock and other market-value structures.

Fitch published proposed changes to its CEF debt and preferred stock criteria on July 30, 2015 in the report 'Exposure Draft: Rating Closed-End Fund Debt and Preferred Stock'. The criteria are also used to rate other market-value structures apart from CEFs. Fitch received no comments during this period. No changes were made to the proposed criteria following the market consultation period ending on Aug. 31, 2015.

CRITERIA CHANGES
The only change to criteria is related to issuer concentration guidelines for state-level general obligation (GO) exposure. If a U.S. state-level GO is downgraded below investment grade, obligor exposure will be capped at no more than 10% for calculating the Fitch OC Tests, instead of 20%, which now is applicable only to investment-grade state-level GOs.

The previous state-level GO concentration framework was intended to promote an appropriate amount of portfolio diversification without creating an incentive for portfolios to diversify away from what traditionally is the most creditworthy and liquid municipal issuer in a given state. It is Fitch's view that this benefit substantially decreases when a state-level GO is downgraded to below investment grade ('BB+' or lower) and, therefore, will no longer apply.

RATING CRITERIA CONSOLIDATION
Fitch also consolidated the following sector and sub-sector criteria reports which were previously published separately. The criteria reports are listed below:

--'Rating Closed-End Fund Debt and Preferred Stock, Sept. 4, 2014;
--'Rating Market Value Structures', Sept. 4, 2014;
--Rating Puerto Rico Closed-End Fund Debt and Preferred Stock', Sept. 4, 2014;
--'Rating Debt and Preferred Securities Issued by Non-U.S. Closed-End Funds', March 18, 2014.

The core rating methodologies from these separate criteria reports remain intact. The new criteria will be applied to any existing or new ratings for any CEF debt or preferred stock rating committee reviews held from this point forward.

At this time, no ratings changes are expected. While Puerto Rico CEFs have the potential to be negatively impacted given higher exposures to PR issuers, the funds are currently actively de-levering and reducing the exposure of rated notes to PR issuers. Fitch will review all ratings of securities issued by Puerto Rico CEFs under the revised criteria by Oct. 15, 2015.

KEY RATING DRIVERS
Fitch's total and net overcollateralization (OC) tests outlined in the criteria measure the ability of a CEF (or related other value structure) to redeem debt and preferred stock through liquidation of portfolio assets during stressed market conditions. The tests also reflect the amount of portfolio diversification, the degree of subordination risk for rated leverage, and the full leverage profile of the fund (including economic leverage from the use of derivatives).

Other Key Rating Drivers:
--Fund limits to leverage stemming from regulatory asset coverage or other leverage/asset coverage tests;
--The presence of dynamic deleveraging/defeasance triggers;
--The amount of risk-adjusted OC available to rated debt and preferred stock;
--The liquidity, historical volatility and diversification of portfolio assets;
--The capabilities of the investment manager to successfully manage fund investment and leverage strategies;
--Legal/regulatory parameters that govern fund operations.