Fitch Affirms Western Asset/Legg Mason Loan Fund ARPS at 'AAA'
--\$17.5 million of series A perpetual ARPS, \$25,000 per share, 700 shares;
--\$17.5 million of series B perpetual ARPS, \$25,000 per share, 700 shares.
KEY RATING DRIVERS
The affirmation follows Fitch's annual review of the fund. The 'AAA' rating is based on the following:
--Asset coverage provided to the ARPS as calculated per the fund's governing documents;
--Structural protections afforded by mandatory cure and deleveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the fund's operations;
--The capabilities of LMPFA as the investment manager.
Fitch's ratings assigned to the ARPS speak only to timely repayment of interest and principal in accordance with the governing documents and not to potential liquidity in the secondary market.
TLI is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the 1940 Act). The fund's investment objective is to maximize current income consistent with prudent efforts to preserve capital.
In pursuing its investment objective, TLI was invested mainly in first lien leveraged loans (that are not covenant light) and high-yield corporate bonds (both secured and unsecured) as of Jan. 31, 2015. The fund was also highly diversified by industry and issuer.
As of Jan. 31, 2015, TLI's leverage was approximately \$60 million, or 33% of total assets of \$180 million. Leverage consisted of \$25 million drawn on a bank credit facility and \$35 million in rated ARPS.
At the time of the rating affirmation, the fund's asset coverage ratio for rated ARPS, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC tests) per the 'AAA' rating guidelines outlined in Fitch's applicable 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. During the year, the fund has filed an amendment to its bylaws that updated the definition of its asset coverage test and related provisions to reference Fitch's updated rating criteria. This has brought the fund's calculation of asset coverage in line with Fitch's current view at the 'AAA' level.
Also at the time of the rating affirmation, the funds' asset coverage ratio for total leverage (including ARPS), as calculated in accordance with the Investment Company Act of 1940 (1940 Act), was in excess of 200%. For TLI, the fund's asset coverage ratio for senior debt was in excess of 300%, as per the 1940 Act. Both are minimum asset coverage tests required by the 1940 Act and the funds' governing documents.
ARPS STRUCTURAL PROTECTIONS
Should the asset coverage tests decline below their minimum threshold amounts (as tested on the last business day of each month), the governing documents require the funds to alter the composition of their portfolio toward assets with lower discount factors (for Fitch OC tests), or to reduce leverage in a sufficient amount (for both the Fitch OC tests and the 1940 Act test) to restore compliance within a pre-specified period (a maximum of 58 business days for the Fitch OC tests and a longer period for the 1940 Act tests).
LMPFA provides the day-to-day management of TLI's portfolio. Legg Mason Inc. acts as the manager of the fund, providing management and administrative services. LMPFA is a wholly owned subsidiary of Legg Mason Inc. As of Jan. 31, 2015, Legg Mason had approximately \$709 billion in AUM.
The rating assigned to the ARPS may be sensitive to material changes in the leverage composition, credit quality of portfolio assets or market risk profile of the funds. A material adverse deviation from Fitch guidelines for any key rating driver could cause the ratings to be lowered by Fitch.