Fitch Rates Duff & Phelps Global Utility Income Fund Shares 'AA'
--$20,000,000 of series A MRPS, due 2020;
--$40,000,000 of series B MRPS, due 2022;
--$40,000,000 of series C MRPS, due 2025.
KEY RATING DRIVERS
The rating assignment primarily reflects:
--Sufficient asset coverage provided to the MRPS shares as calculated per the fund's over-collateralization (OC) tests;
--The structural protections afforded by mandatory collateral maintenance 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 Duff & Phelps Investment Management Co. (Duff & Phelps) as investment advisor.
THE FUND
The Duff & Phelps Global Utility Income Fund Inc. (NYSE: DPG) is a non-diversified, closed-end investment company initially offered to the public in July 2011. The DPG investment objective is to seek total return, resulting primarily from (i) a high level of current income, with an emphasis on providing tax-advantaged dividend income, and (ii) growth in current income, and secondarily from capital appreciation.
Duff & Phelps seeks to achieve the Fund's investment objectives by investing primarily in equities of domestic and foreign utilities. DPG's investment strategies seek to take advantage of the income and growth characteristics of equities in utility industries.
Under normal market conditions, the Fund will invest at least 80% of its total assets in dividend-paying equity securities of companies in the utility industry, which is defined to include the following sectors: electric, gas, water, telecommunications, and midstream energy. Under normal market conditions, the Fund will invest no more than 60% of its total assets in any one of those five sectors. No more than 20% of the Fund's total assets will be invested in securities of midstream energy companies that are not regulated by a governmental agency. In addition, under normal circumstances, the Fund will invest no more than 10% of its total assets in securities of any single issuer.
The percentage of the Fund's assets invested in issuers located outside the United States will vary over time but under normal market conditions will constitute no less than 40% and no more than 75% of the Fund's total assets. No more than 15% of the Fund's total assets will be invested in issuers located in 'emerging market' countries. Under normal market conditions, the Fund will invest at least 80% of its total assets in issuers located in at least three countries, including the United States.
ASSET COVERAGE
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 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, and evaluated as such by Fitch to arrive at the assigned rating levels.
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.
At closing, the fund's asset coverage ratio for total leverage, including the MRPS, as calculated in accordance with the Investment Company Act of 1940 (the 1940 Act), was in excess of 225%. Also at closing, the fund's asset coverage ratio for total debt, as calculated in accordance with the 1940 Act, was in excess of 300%. These are the minimum asset coverage ratios required by the 1940 Act and the fund's governing documents.
In the event of breaches to any of the above thresholds, the fund is required to restore compliance per structural protections described below.
STRUCTURAL PROTECTIONS
Should the MRPS asset coverage tests 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 manager is required to cure the breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC Test breaches), or by reducing leverage in a sufficient amount (for both the Fitch OC Tests and 1940 Act asset coverage test breaches) within a pre-specified time period (a maximum of 45 business days).
RATING SENSITIVITIES
The ratings assigned to the preferred shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the funds, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch. The funds have the ability to assume economic leverage through derivative transactions which may not be captured by the fund's Preferred Shares Asset Coverage test.
THE ADVISER
Duff & Phelps is responsible for the implementation and execution of the investment strategy on a day-to-day basis. Duff & Phelps is an SEC registered and regulated investment advisor with $9.9 billion in assets under management as of June 30, 2015. The open-end and closed-end investment companies managed by Duff & Phelps provide investment opportunities in global infrastructure, global real estate and municipal and corporate bonds.
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