Fitch Confirms MainStay Muni Fund FMTP Shares After Maturity Extension
MMD is a closed-end fund managed by New York Life Investment Management LLC (NYLIM) and sub-advised by MacKay Shields LLC (MacKay Shields).
The confirmations are as follows:
--\\$35,000,000 of FMTP, Series A, due May 31, 2018 confirmed at 'AAA';
--\\$35,000,000 of FMTP, Series B, due Nov. 30, 2018 confirmed at 'AAA'.
KEY RATING DRIVERS
The rating confirmations primarily reflect:
--The maturity extension does not negatively impact coverage available to the Series A or Series B preferred shares;
--Sufficient asset coverage provided to the FMTP as calculated per the fund's overcollateralization (OC) tests;
--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 NYLIM as investment manager and MacKay Shields as sub-advisor.
MMD is a closed-end management investment company regulated under the Investment Company Act of 1940. The fund currently invests primarily in investment-grade quality municipal bonds. As of June 30, 2015, the fund managed approximately \\$791 million in assets.
NYLIM, a subsidiary of New York Life Insurance Company, is the fund's investment manager, responsible for the fund's overall investment strategy and its implementation. MacKay Shields, also a subsidiary of New York Life Insurance Company, is the fund's sub-advisor and oversees the day-to-day operations of the fund. NYLIM and its affiliates had approximately \\$512 billion of assets under management as of April 30, 2015.
As of June 30, 2015, total leverage consisted of approximately \\$203.6 million in the form of tender option bonds and \\$70 million of Fitch-rated FMTP. The total leverage ratio was approximately 34.6%. Between June 30 2014 and June 30, 2015, leverage ranged between 35.7% (July 31, 2014) and 34.1% (Jan. 30, 2015).
As of June 30, 2015, the fund's asset coverage ratio for total outstanding preferred shares, as calculated in accordance with the Investment Company Act of 1940, was in excess of the minimum asset coverage of 225% required by the fund's governing documents (Asset Coverage Test).
As of the same date, the fund's effective leverage ratio was below the 45% maximum leverage ratio allowed by the fund's governing documents (Effective Leverage Test).
Compliance with the Asset Coverage Test and Effective Leverage Test thresholds is tested periodically. A breach of the Asset Coverage threshold requires the fund to redeem sufficient FMTP to restore compliance. A breach of the Effective Leverage threshold requires the fund to redeem a sufficient number of FMTP or reduce the amount of tender option bonds (TOBs) in order to restore compliance.
For the Asset Coverage and Effective Leverage Ratio tests, the total market value exposure periods (i.e. the pre-specified time period allotted for valuation, cure and redemption in the event of a breach) are within the 60 business day Fitch criteria guidelines.
Fitch performed various stress tests on the fund to assess the strength of the structural protections available to the FMTP compared to the stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where the fund's leverage and portfolio composition migrated to the outer limits of the fund's operating and investment guidelines.
Only under remote circumstances, such as increasing the fund's issuer concentration, while simultaneously migrating the portfolio to a mix of 75% long-term 'BBB' bonds and 25% high yield bonds, did the asset coverage available to the preferred shares fall below the 'AAA' long-term rating level, and instead passed at an 'AA' long-term rating level.
Given the relative conservatism of the stress scenarios, and the minimal rating impact, Fitch views the fund's permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' long-term rating.
The rating assigned to the FMTP may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the fund, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating to be lowered by Fitch.
The fund has the ability to assume economic leverage through derivative transactions which may not be captured by the fund's Minimum Asset Coverage test or Effective Leverage Ratio. The fund does not currently engage in derivative activities and does not envision engaging in material amounts of such activity in the future. In fact, such activity is limited by the fund's investment guidelines and could run counter to the fund's investment objectives of achieving tax-exempt income. Material derivative exposure in the future could have potential negative rating implications if it adversely affects asset coverage available to rated preferred shares.