OREANDA-NEWS. December 14, 2015. The 2016 rating outlook for the U.S. closed-end fund (CEF) sector remains stable, reflecting strong covenants that protect against asset coverage declines, prudent leverage management, and modest leverage levels entering the year. Fitch's outlook covers both taxable and municipal CEFs, and related market value structures (MVS).

Volatility was the main driver of changes in leverage ratios as observed with MLP/energy CEFs and Puerto Rico CEFs in 2015. Fitch expects managers to actively manage capital structures and nominal leverage levels to comply with asset coverage restrictions and avoid forced deleveraging.

Rising rates in the coming months will increase borrowing costs for funds that rely on floating-rate debt. Taxable and municipal CEFs will enter 2016 with \\$42 billion and \\$22 billion in short-term leverage, respectively that they will need to roll over by year end. Rising rates will increase these refinancing costs, and Fitch expects innovative cost structures to be brought to market to balance investor and issuer preferences.

Basel III regulations continue to pressure margin and repo lending and some banks are expected to raise costs or exit lending to CEFs. Fitch observes that 167 taxable funds enter 2016 utilizing only bank borrowings, and an additional seven funds enter 2016 with more than 75% of their capital structure reliant on a single bank. Further diversification of lending relationships for CEFs would be viewed positively.

The full '2016 Outlook: Closed-End Funds' is available at 'www.fitchratings.com'. Outlook reports across various other Fitch sectors and regions are also available.

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