Business & Finance
Business and Finance
Business and Finance
Fri, October 15, 2010
Thu, October 14, 2010 Fitch Downgrades $72MM Preferred Shares of Western Asset Premier Bond Fund to 'A'
NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has downgraded to 'A' from 'AAA' the rating assigned to the following auction market preferred shares (AMPS) issued by Western Asset Premier Bond Fund (NYSE: WEA), a closed-end fund (CEF) backed primarily by corporate and structured finance securities and managed by Western Asset Management Company:
--$36,000,000 of AMPS, Series M, consisting of 1,440 shares, with a liquidation preference of $25,000 per share;
--$36,000,000 of AMPS, Series W, consisting of 1,440 shares, with a liquidation preference of $25,000 per share.
The downgrade reflects existing structural protections afforded to the rated AMPS relative to Fitch's updated rating criteria for debt and preferred stock issued by closed-end funds. While the fund currently maintains asset coverage levels that would be viewed as consistent with a 'AAA' rating, the fund's existing mandatory de-leveraging provisions in the event of a decline in the value of the portfolio could result in scenarios where asset coverage falls below a 'AAA' or 'AA' level of asset coverage prior to triggering the redemption of AMPS. Furthermore, given the funds investment guidelines, the portfolio's composition could also materially change prior to triggering the redemption of AMPS.
On Aug. 17, 2009, Fitch updated its rating criteria for debt and preferred stock issued by CEFs. The updated criteria described changes to Fitch's calculation of asset coverage, including an updated assessment of market value risk of portfolio assets, portfolio diversification, and treatment of senior structural and economic leverage.
The fund has elected not to make changes to the existing structural protections consistent with Fitch's updated rating criteria. Fitch evaluated the fund's existing market value haircuts, structural protections and investment guidelines relative to Fitch's criteria at various rating levels. Fitch deems the fund's existing structural protections and investment guidelines to be consistent with an 'A' rating. The rating of 'A' reflects certain assumptions of how the portfolio could be positioned in the future. For example, in keeping with portfolio investment guidelines, it is possible the portfolio could migrate toward more risky assets or undertake material exposures via derivatives. Fitch's review also included the legal and regulatory parameters that govern the fund's operations and the capabilities of Western Asset Management Company as investment advisor.
Per the fund's operating documents, the sufficiency of asset coverage available to AMPS is measured on the basis of the 1940 Act Asset Coverage Test and the Basic Maintenance Amount Coverage Tests. As of Oct. 1, 2010, the fund's 1940 Act Asset Coverage Test, which measures the market value of assets relative to AMPS was in excess of 200%, which is the minimum asset coverage required by the fund's governing documents. As of the same date, the fund's Basic Maintenance Amount Coverage Tests, which measure the discounted market value of assets relative to AMPS, were in excess of 100%, which are also minimum asset coverage ratios required by the fund's governing documents. Should either of the asset coverage tests decline below their minimum threshold amounts and not be cured within the pre-specified timeframe, the governing documents require the fund to deleverage in order to restore compliance with the applicable asset coverage test(s). As of Oct. 1, 2010 the fund's leverage was $72 million, or 30.1% of total assets. Leverage consisted entirely of rated AMPS.
Western Asset Premier Bond Fund is a diversified, closed-end management investment company that commenced investment operations on March 28, 2002. The fund's investment objective is to provide current income and capital appreciation by investing primarily in a diversified portfolio of investment grade bonds. The fund pursues its objective, under normal market conditions, by investing at least 80% of its assets in bonds including corporate bonds, U.S. government and agency securities and mortgage-related securities. Furthermore, under normal market conditions, the fund invests at least 65% of its assets in investment grade quality securities, at the time of purchase. The fund may also invest up to 10% of its assets in securities that are denominated in currencies other than the U.S. dollar. As of Oct. 1, 2010, the portfolio was comprised of 9.9% cash and other securities, 9.8% asset-backed securities, 35.7% mortgage-backed securities, 24.0% investment grade corporate bonds, 15.6% high yield corporate bonds, 3.6% inflation-linked securities, 1.4% government securities.
Western Asset Management Company is the fund's investment adviser, responsible for the fund's overall investment strategy and its implementation. Western Asset Management Company is a wholly owned subsidiary of Legg Mason. Founded in 1898, Legg Mason and its affiliates had approximately $645 billion of assets under management as of June 30, 2010.
The ratings may be sensitive to material changes in the credit quality or market risk profile of the fund's portfolio or changes to the size and type of the fund's leverage. A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating to be lowered by Fitch. For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by U.S. CEFs, please review the criteria referenced below, which can be found on Fitch's website.
In addition, to the asset discount factors found in the criteria report 'Closed-End Fund Debt and Preferred Stock Rating Criteria', published August 2009, Fitch used the following discount factors to review the asset coverage of WEA under various rating stresses:
'AAA' discount factors:
--ABS student loans 'AAA' FFELP non-ARS, < 10 years: 1.35;
--ABS student loans 'AAA' FFELP non-ARS, 10+ years: 1.45;
--Non-agency RMBS, other ABS (including non-FFELP student loans), other CMBS, and CLOs rated 'AAA': 1.80;
--Non-agency RMBS, other ABS (including non-FFELP student loans), other CMBS, and CLOs rated 'AA-A': 2.50.
'AA' discount factors:
--ABS student loans 'AAA' FFELP non-ARS, < 10 years: 1.25;
--ABS student loans 'AAA' FFELP non-ARS, 10+ years: 1.35;
--Non-agency RMBS, other ABS (including non-FFELP student loans), other CMBS, and CLOs rated 'AAA': 1.60;
--Non-agency RMBS, other ABS (including non-FFELP student loans), other CMBS, and CLOs rated 'AA-A': 2.00.
'A' discount factors:
--ABS student loans 'AAA' FFELP non-ARS, < 10 years: 1.20;
--ABS student loans 'AAA' FFELP non-ARS, 10+ years: 1.25;
--Non-agency RMBS, other ABS (including non-FFELP student loans), other CMBS, and CLOs rated 'AAA': 1.40;
--Non-agency RMBS, other ABS (including non-FFELP student loans), other CMBS, and CLOs rated 'AA-A': 1.60.
'BBB' discount factors:
--ABS student loans 'AAA' FFELP non-ARS, < 10 years: 1.15;
--ABS student loans 'AAA' FFELP non-ARS, 10+ years: 1.20;
--Non-agency RMBS, other ABS (including non-FFELP student loans), other CMBS, and CLOs rated 'AAA': 1.30;
--Non-agency RMBS, other ABS (including non-FFELP student loans), other CMBS, and CLOs rated 'AA-A': 1.45.
Where there are conflicts between the above discount factors and those in Fitch's published closed-end fund criteria, the above discount factors supersede. Fitch has also designated separate sectors to structured finance assets, which are: Residential Mortgage-Backed Securities, Commercial Mortgage-Backed Securities, Consumer Asset-Backed Securities, Commercial Asset-Backed Securities, and Collateralized Debt Obligations/Other. These discount factors and sectors will be used to review closed-end funds which have portfolios of structured finance securities that are well diversified by vintage and sector.
Additional information is available at '[ www.fitchratings.com ]'.
The sources of information used to assess this rating were the public domain and Western Asset Management Company.
Applicable Criteria:
--'Closed-End Fund Debt and Preferred Stock Rating Criteria (Aug. 17, 2009);
--'Closed-End Funds: Fitch Clarifies Criteria for Make-Whole Amounts and Other Prepayment Obligations (March 18, 2010).
Applicable Criteria and Related Research:
Closed-End Funds: Fitch Clarifies Criteria for Make-Whole Amounts and Other Prepayment Obligations
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504986 ]
Closed-End Fund Debt and Preferred Stock Rating Criteria
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462492 ]
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