Fitch Rates New Legg Mason BW Income Fund Pfd 'AA'
--\$40,000,000 of 3.29% Series A MRPS, due Feb. 18, 2020 'AA';
--\$10,000,000 of 3.58% Series B MRPS, due Feb. 18, 2022 'AA'.
KEY RATING DRIVERS
The rating assignments reflect:
-- Sufficient asset coverage as calculated per the Fitch Overcollateralization (OC) Tests at the 'AA' level, as required by the MRPS's governing documents;
-- The structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines;
-- The legal and regulatory parameters that govern the fund's operations;
-- The capabilities of Investment Manager and Subadviser.
The fund is a non-diversified, closed-end management investment company seeking to provide current income and, secondarily, capital appreciation. The fund invests at least 80% of its assets in global fixed-income securities, including sovereign debt of developed and emerging market countries, U.S. and non-U.S. corporate debt, mortgage-backed securities, currency exposure, and others.
As of Jan. 31, 2015, the fund's pro forma total assets were \$598 million and leverage totaled \$182.3 million. Leverage consisted of \$50 million of Fitch-rated MRPS and \$132.3 million of a senior margin facility with Pershing LLC. Leverage ratio was approximately 30%.
The fund's asset coverage ratio, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC tests) per the 'AA' rating guidelines for the MRPS, outlined in Fitch's closed-end fund criteria, were in excess of 100%. 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.
The fund's pro forma asset coverage ratio for total leverage, including the MRPS, as calculated in accordance with the Investment Company Act of 1940 also at current market values, was in excess of 225%. These are the minimum asset coverage ratios required by the fund's governing documents.
MRPS STRUCTURAL PROTECTIONS
Should the MRPS Asset Coverage Test and Fitch OC Test decline below their minimum threshold amounts (as tested weekly) the fund is required to deliver notice to the MRPS purchasers within five days of becoming aware of such fact.
The fund's managers are 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 Asset Coverage Test breaches) within a pre-specified time period (a maximum of 40 calendar days).
Subadviser and Investment Manager are both wholly owned subsidiaries of Legg Mason, Inc., a global asset management firm with \$709.1 billion in assets under management as of Dec. 31, 2014. Subadviser is a wholly owned but independently operated subsidiary of Legg Mason, Inc. with \$60 billion assets under management (AUM) and 219 employees. Subadviser's AUM is concentrated in fixed income (\$46 billion of total AUM), but encompasses diversified equity, large-cap equity, absolute value, and multi-asset class strategies as well.
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.
For additional information about Fitch closed-end fund ratings guidelines, please review the criteria referenced below, which can be found on Fitch's website.