Fitch Affirms 'AAA' Preferred Ratings of AllianzGI Convertible & Income Fund II
--\$54.8 million Series A perpetual ARPS, \$25,000 per share, 2,192 shares;
--\$54.8 million Series B perpetual ARPS, \$25,000 per share, 2,192 shares;
--\$54.8 million Series C perpetual ARPS, \$25,000 per share, 2,192 shares;
--\$54.8 million Series D perpetual ARPS, \$25,000 per share, 2,192 shares; and
--\$54.8 million Series E perpetual ARPS, \$25,000 per share, 2,192 shares.
KEY RATING DRIVERS
The affirmation follows Fitch's annual review of the fund. The 'AAA' ratings are based on the following:
--Sufficient asset coverage provided to the ARPS as calculated per the fund's governing documents;
--The structural protections afforded by mandatory cure and de-leveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the fund's operations;
--The capabilities of AGIUS.
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.
As of Jan. 31, 2015, the portfolio consisted mainly of high-yield corporate and straight convertible securities with U.S. domicile issuers. A portion of the assets was also invested in synthetic convertible securities referencing U.S. domicile issuers.
The fund was highly diversified by industry and issuer. The fund is a diversified, closed-end management investment company, registered under the Investment Company Act of 1940, as amended.
As of Jan. 31, 2015 the fund had total assets of approximately \$822 million, current liabilities of \$7 million and leverage of \$274 million (34% of total net assets). Leverage consisted entirely of rated ARPS.
At the time of the 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 was in excess of 100%. This is the minimum asset coverage guideline 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. Fitch OC Tests also capture the fund's use of synthetic convertible securities based on the credit rating of the issuer and put provider, the provisions on put protection and stock delta, and whether underlying stock is trading at an equity-sensitive, typical, or busted conversion premium, similar to a straight convertible position.
Also at the time of the affirmation, the fund's asset coverage ratio for rated ARPS, as calculated in accordance with the 1940 Act, was in excess of 200%, which is the minimum asset coverage required by the 1940 Act and the fund's 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 week), the governing documents require the fund to alter the composition of its 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 38 business days for the Fitch OC Tests and a longer period for the 1940 Act test).
AGIUS acts as the sub-adviser to the fund. As of Dec. 31, 2014, AGIUS had \$96 billion in assets under management. Allianz Global Investors Fund Management, LLC (AGIFM) acts as the investment manager to the fund. AGIUS and AGIFM are indirect, wholly owned subsidiary of Allianz Asset Management of America, L.P.
The ratings may be sensitive to material changes in the credit quality or market risk profiles of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause Fitch to downgrade the rating.