Fitch Affirms Ratings of Preferred Shares Issued by 4 Eaton Vance CEFs
-EFR, \\$131,300,000 of AMPS series A, B, C and D, each with a liquidation preference of \\$25,000 per share at 'AAA';
-EVV, \\$266,625,000 of AMPS series A, B, C, D and E each with a liquidation preference of \\$25,000 per share at 'AAA';
-EFT, \\$80,000,000 of series C-1 VRTP shares at 'AA';
-EFF, \\$36,000,000 of series C-1 VRTP shares at 'AA'.
KEY RATING DRIVERS
The affirmations follow Fitch's annual reviews of EFR, EVV, EFT and EFF and reflect:
- Sufficient asset coverage relative to Fitch's published criteria;
- The structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines;
- The legal and regulatory parameters that govern the funds' operations;
- The capabilities of Eaton Vance Management as the investment advisor.
Fitch's ratings on AMPS 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 PROFILES
EFR is a diversified, closed-end management investment company registered under the Investment Company Act of 1940 (1940 Act) that commenced operations in November 2003. The fund has the investment objective of providing a high level of current income, with a secondary objective of seeking capital preservation. Under normal circumstances, the fund will seek to invest at least 80% of portfolio assets in senior loans. The fund may also invest in second-lien loans and high-yield bonds.
EVV is a non-diversified, closed-end management investment company, registered under the 1940 Act. The fund commenced operations in May 2003 with the investment objective of seeking a high level of current income with a secondary objective of seeking capital appreciation. The fund invests primarily in two investment categories, U.S. government agency mortgage-backed securities and investments rated below investment grade including senior loans and bonds.
EFT is a diversified, closed-end management investment company registered under the 1940 Act and commenced operations in June 2004. The fund has the investment objective of providing a high level of current income, with a secondary objective of seeking capital preservation to the extent consistent with its primary goal of high current income. Under normal market conditions, the fund will invest at least 80% of assets in senior loans. The fund may also invest in second-lien loans and high-yield bonds.
EFF is a diversified, closed-end management investment company. The fund's investment objective is providing total return, with an emphasis on income. Under normal market conditions, the fund will invest at least 80% of its total assets in senior loans of domestic and foreign borrowers that are denominated in U.S. dollars and foreign currencies.
As of Jan. 31, 2016, the funds invested in foreign currency denominated securities and utilized forward foreign currency exchange contracts to hedge the potential exchange rate risk associated with such investments. Fitch notes that for unhedged positions, exchange rate risk is included as part of Fitch's assessment of the sufficiency of asset coverage available to rated AMPS and VRTP shares. EVV also used derivatives such as interest rate futures to manage exposure to interest rate risk and credit default swaps to gain certain credit exposures.
LEVERAGE
As of Jan. 29, 2016, EFR had total assets of approximately \\$791 million and leverage of \\$308 million or 39% of assets. Leverage consisted of approximately \\$177 million from a bank credit facility and \\$131 million of rated AMPS.
As of the same date, EVV had total assets of approximately \\$2.8 billion and leverage of \\$932 million or 34% of assets. Leverage consisted of \\$665 million from a bank credit facility and approximately \\$267 million from rated AMPS.
As of the same date, the EFT had total assets of approximately \\$883 million and leverage of \\$330 million or 37% of assets. Leverage consisted of approximately \\$250 million from a bank credit facility and \\$80 million of rated VRTP Shares.
As of the same date, EFF had total assets of approximately \\$185 million and leverage of \\$71 million or 38% of assets. Leverage consisted of \\$35 million from a bank credit facility and \\$36 million of rated VRTP Shares.
ASSET COVERAGE
As of Jan. 29, 2016, EFR and EVV's coverage ratios for the AMPS, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC tests) per the 'AAA' rating guidelines outlined in Fitch's closed-end fund criteria, were in excess of 100%. This is the minimum asset coverage guideline required by the funds' governing documents and evaluated as such by Fitch.
The funds' asset coverage ratios for the AMPS, as calculated in accordance with the 1940 Act, were in excess of 200%, which is the minimum asset coverage required by the 1940 Act at the time of issuance and the funds' governing documents.
EFT and EFF's asset coverage ratios for the VRTP Shares, as calculated in accordance with the 1940 Act, were in excess of the minimum asset coverage threshold of 225% currently set by the terms of the preferred shares (minimum asset coverage test).
The funds' governing documents also require the funds to maintain effective leverage ratios (ELRs; the calculation of which includes both preferred shares and forms of senior leverage) below 45% (or 46% if the increase in the ratio is due exclusively to asset market value volatility). The funds' ELRs are currently below 45%.
STRUCTURAL PROTECTIONS
Compliance with the asset coverage and ELR requirements are tested daily. Failure to cure an asset coverage breach by the asset coverage cure date results in an asset coverage mandatory redemption. Failure to cure an ELR breach by the ELR cure date results in an ELR mandatory redemption.
In the event of an asset coverage breach, subsequent to the asset coverage cure date each fund shall redeem a sufficient number of preferred shares to restore asset coverage compliance. The exposure period to market risk for the preferred shares in the event of a mandatory redemption due to an asset coverage breach is 28 days, consistent with Fitch's 60-day criteria guideline.
In the event of an ELR breach, subsequent to the ELR cure date each fund shall (a) deposit sufficient funds with the redemption and paying agent for the redemption of a sufficient number of preferred shares to restore ELR compliance, or (b) engage in trades of portfolio assets that would satisfy the ELR requirement. The exposure period to market risk for the preferred shares in the event of a mandatory redemption due to an ELR breach is no longer than 28 days, consistent with Fitch's 60-day criteria guideline.
STRESS TESTS
Fitch performed various stress tests on the funds to assess the strength of the structural protections of the VRTP shares. The funds' asset coverage and effective leverage tests were compared to the rating stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where the funds' leverage and portfolio composition migrated to the outer limits of the funds' operating and investment guidelines.
For example, current portfolio composition was stressed by increasing the funds' issuer concentration, while simultaneously migrating the portfolio to loans of lower credit quality. The results of the stress tests indicate the structural protections of the VRTP shares are in line with Fitch's rating criteria at an 'AA' rating level. In certain remote circumstances the asset coverage available to the VRTP shares fell below the 'AA' threshold, but in any case did not fall below 'BBB'.
THE ADVISOR
Eaton Vance Management, a subsidiary of Eaton Vance Corp., acts as the investment adviser to the funds. As of Dec. 31, 2015, Eaton Vance Corp. and affiliates managed approximately \\$308 billion of assets.
RATING SENSITIVITIES
The ratings may be sensitive to material changes in the credit quality or market risk profiles of the funds. A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating to be lowered by Fitch. For additional information about Fitch closed-end fund ratings guidelines, please review the criteria referenced below, which can be found on Fitch's website.
Комментарии