Business & Finance
Business and Finance
Business and Finance
Fri, March 18, 2011
Thu, March 17, 2011 Fitch Affirms Preferred Share Ratings of 2 Western Asset Closed End Funds at 'AAA'
NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the 'AAA' ratings assigned to the auction-rate preferred shares (ARPS) issued by the following two municipal closed-end funds sub-advised by Western Asset Management Company (Western Asset):
Western Asset Intermediate Muni Fund Inc. (NYSE AMEX: SBI)
--$50,000,000 of ARPS consisting of series M with a liquidation preference of $25,000 per share.
Western Asset Managed Municipals Fund Inc. (NYSE: MMU)
--$250,000,000 of ARPS consisting of series M, T, W, Th and F, each with a liquidation preference of $25,000 per share.
The affirmations follow Fitch's annual reviews of the funds. The 'AAA' ratings are based on sufficient asset coverage provided to the ARPS by the funds' underlying portfolios of assets relative to Fitch criteria, the structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines, the legal and regulatory parameters that govern the funds' operations and the capabilities of Western Asset as the sub-advisor. 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, 2011, SBI had assets of approximately $182 million and ARPS leverage of $50 million, or 27% of assets. Fitch's criteria also considers the fund's use of economic leverage in the form of secondary market inverse floaters of tender option bonds, which amounted to $350,000 in par of referenced bond value. As of the same date, MMU had assets of approximately $746 million and leverage of $255 million, or 34% of assets. Leverage consisted of approximately $5 million in current liabilities and $250 million of rated ARPS.
As of the same date, the funds' asset coverage ratios, 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, were in excess of 100%, which is the minimum asset coverage amount deemed consistent with an 'AAA' rating. The funds' governing documents require that asset coverage for the ARPS, as calculated in accordance with the Fitch OC tests, be maintained in excess of 100%. As such, should the asset coverage decline below 100%, the governing documents require the funds to alter the composition of their portfolio toward assets with lower discount factors, or to reduce leverage in a sufficient amount to restore compliance within a 58 business day period. Although the length of the exposure period was in excess of the 45 business days used to derive discount factors in Fitch's published rating criteria, Fitch calculated that historically observed worst case losses for municipal securities over a 60 business day period resulted in comparable discount factors to those observed over a 45 business day period. As such, no additional adjustment to the discount factors was made in order to account for the extended exposure period.
Additionally, as of the same date, the funds' asset coverage ratios for total outstanding ARPS, as calculated in accordance with Western Asset's interpretation of the Investment Company Act of 1940, were in excess of 200%, which is also a minimum asset coverage required by the funds' governing documents.
As of Jan. 31, 2011, the portfolios consisted mainly of investment grade municipal securities. The MMU fund employed higher leverage and invested in longer maturity assets than the SBI fund, consistent with the fund's investment objectives. Both portfolios were well diversified from a sector, obligor and state levels, and thus no additional haircuts were applied for the purposes of calculating the Fitch OC tests.
The funds are diversified, closed-end management investment companies, registered under the Investment Company Act of 1940, as amended. Western Asset acts as the sub-adviser to the funds, performing all investment management. Legg Mason Partners Fund Advisor, LLC (Legg Mason) acts as the advisor to the fund, performing all legal, operations and compliance and distribution functions. Western Asset and Legg Mason are a wholly owned subsidiary of Legg Mason Inc. As of Jan. 31, 2011, Legg Mason Inc. had approximately $672 billion of assets under management.
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 the ratings to be lowered by Fitch. For additional information about Fitch closed-end fund ratings guidelines, please review the criteria referenced below, which can be found on Fitch's website.
Additional information is available at '[ www.fitchratings.com ]'.
The sources of information used to assess this rating were the public domain and Legg Mason.
Applicable Criteria and Related Research:
--'Closed-End Fund Debt and Preferred Stock Rating Criteria' (Aug. 17, 2009);
--'Fitch Launches 'CEF Updates' for Closed-End Fund's (Nov. 8, 2010);
--'Closed-End Fund: Evolving Use of Leverage and Derivatives' (Sept. 27, 2010);
--'Closed-End Fund: Redemptions Provide Some Liquidity to Illiquid ARPS Market' (Aug. 31, 2010);
--'Closed-End Fund: 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 Funds: Redemptions Provide Some Liquidity to Illiquid ARPS Market
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=552106 ]
Closed-End Funds: Evolving Use of Leverage and Derivatives
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=559525 ]
Closed-End Fund Debt and Preferred Stock Rating Criteria
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462492 ]
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '[ WWW.FITCHRATINGS.COM ]'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
