Fitch Affirms Legg Mason BW Global Income Opportunities Fund's Ratings
Fitch affirms the following:
--\\$40,000,000 of 3.29% Series A MRPS, due Feb. 18, 2020, at 'AA';
--\\$10,000,000 of 3.58% Series B MRPS, due Feb. 18, 2022, at 'AA'.
KEY RATING DRIVERS
The rating affirmations 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 LMPFA and Brandywine.
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.
Total assets of the fund have declined from \\$595 million on Feb. 28, 2015 (the month that the MRPS were issued) to \\$473 million on Dec. 31, 2015. During the one year period ended Dec. 31, 2015, the fund posted an average annual total return based on market price of -20.8%. The losses were driven in large part by negative returns on sovereign bonds issued by the governments of Brazil, South Africa and Indonesia.
The fund had total structural leverage of \\$182.3 million as of Oct. 31, 2015, consisting of \\$50 million of Fitch-rated MRPS and \\$132.3 million of a senior margin facility with Pershing LLC. The fund's effective leverage ratio, which was 31% on Feb. 28, 2015 (the date of the previous rating update), had increased to 36% by Oct. 31, 2015 and 39% by Dec. 31, 2015. Although total leverage outstanding has not increased since the issuance of the MRPS, the effective leverage ratio has increased as a result of the decline in NAV.
As disclosed in the fund's 2015 annual report, BWG utilizes unhedged derivatives to a significant degree. Unhedged derivatives, in addition to the structural leverage noted above, are treated as leverage in the calculation of the Fitch OC total and net overcollateralization tests (Fitch OC Tests) described in the Asset Coverage section below. Included in these unhedged derivative exposures are foreign currency forward long positions and a long position in U.S. Treasury bond futures. The fund also makes substantial use of foreign currency forward short positions for hedging purposes.
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
Per the fund's governing documents, should the MRPS Asset Coverage Test (as tested on the last day of each month) and Fitch OC Test (as tested weekly) decline below their minimum threshold amounts 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).
In a prior period, minimum asset coverage fell below the 100% minimum asset coverage guideline for the 'AA' rating level, largely due to declines in the fund's NAV. Subsequently, the fund has returned coverage to levels that are in line with Fitch's 'AA' criteria guidelines.
LMPFA is a wholly owned subsidiary of LM, a global asset manager with assets under management of \\$671.5 billion as of Dec. 31, 2015.
Brandywine is a wholly owned but independently operated subsidiary of LM with \\$69 billion of assets under management (AUM) and 247 employees as of Dec. 31, 2015. Brandywine's AUM is concentrated in fixed income (\\$53 billion of total AUM), but encompasses diversified equity, large-cap equity, absolute value, and multi-asset class strategies as well.
Fitch views LM and Brandywine's investment advisory capabilities, resource commitment, operational controls, corporate governance, and compliance procedures as consistent with the rating assigned to the fund.
The ratings assigned to the Series A and B MRPS may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the fund, as described above. Temporary deviations from Fitch's criteria guidelines need not automatically result in a rating change, provided the fund manager is able to address them with credible near-term remedial actions. However a material adverse deviation from Fitch guidelines for any key rating driver may lead to the rating being placed on Rating Watch Negative or downgraded.
The Fund assumes economic leverage through unhedged derivative transactions which may not be captured by regulatory asset coverage tests. Any material changes to the fund's derivative exposures could have potential negative rating implications if they adversely affect asset coverage available to the rated MRPS.