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Fitch Affirms Western Asset Premier Bond Fund's $72MM AMPS at 'A'

^{Published on 2011-09-07 17:40:58 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the 'A' rating assigned to the following auction market preferred shares (AMPS) issued by Western Asset Premier Bond Fund (NYSE:WEA), a closed-end fund invested primarily in corporate and structured finance securities and managed by Western Asset Management:

--$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.

KEY RATING DRIVERS

The main drivers for the rating actions are the asset coverage available to the AMPS, the structural protections afforded by mandatory collateral maintenance and deleveraging provisions in the event of asset coverage declines, the legal and regulatory parameters that govern the fund's operations, and the capabilities of Western Asset Management as investment sub-adviser. The fund's credit parameters are consistent with Fitch's closed-end fund rating criteria at the 'A' level.

FUND SUMMARY

The fund is a diversified, closed-end management investment company regulated by the Investment Company Act of 1940. The fund commenced investment operations on March 28, 2002. The fund's primary investment objective is to provide current income and capital appreciation by investing in a diversified portfolio of investment grade bonds.

Under normal market conditions, the fund expects to invest substantially all (but in any event at least 80%) of its total managed assets in bonds and at least 65% of its total managed assets in bonds that at the time of investment are of investment grade quality. The fund may invest up to 35% of its total managed assets in bonds of below investment grade quality. The fund targets an average credit quality rating of 'BBB' and an average effective duration between 3.5 and 7 years. The fund may invest in securities or instruments other than bonds (including preferred stock) and may invest up to 10% of its total managed assets in instruments denominated in currencies other than the U.S. dollar.

As of June 30, 2011, the portfolio was comprised of approximately 38% mortgage-backed securities, 22% investment grade corporate bonds, 13% asset-backed securities, 11% high-yield corporate bonds, 5% cash and short-term investments, 4% bank loans, and 7% other securities. Average duration and weighted average life of the portfolio were 2.9 years and 6.2 years, respectively. Approximately 5% of the portfolio was denominated in currencies other than the U.S. dollar, with the primary one being the Brazilian Real.

STRUCTURAL PROTECTIONS

The fund's structural protections and investment guidelines are evaluated in the context of how they compare with Fitch's criteria at various rating levels. Fitch has reviewed the fund's existing structural protections and investment guidelines and deemed them to be consistent with an 'A' rating. Fitch's review also included the legal and regulatory parameters that govern the fund's operations and the capabilities of Western Asset Management as investment sub-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 Aug. 29, 2011, the fund's 1940 Act Asset Coverage Test, which measures the market value of assets relative to AMPS, was in excess of 300%; the fund's governing documents require a minimum 1940 Act Asset Coverage Test of 200%. 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 or otherwise cure the violation through portfolio adjustment in a sufficient amount to restore compliance with the applicable asset coverage test(s). As of Aug. 29, 2011, the fund's leverage was approximately $76.9 million, or 32% of total assets. Leverage consisted of $72 million of rated AMPS and approximately $4.9 million of reverse repurchase agreements.

WEA currently has sufficient asset coverage to pass the 'AA' Fitch overcollateralization (OC) tests, as calculated per Fitch's rating criteria. However, the fund has the latitude under its investment guidelines to alter portfolio and leverage composition such that in the future, the 'AA' Fitch OC tests may fail without triggerring deleveraging or cure provisions per the fund's existing structural protections. The rating of 'A' reflects certain conservative assumptions of how the portfolio could be positioned in the future. Notwithstanding, should the portfolio materially migrate towards more risky assets, become more concentrated, or undertake material exposures with derivative instruments, these could negatively impact Fitch's rating on the AMPS.

THE ADVISOR

Western Asset Management acts as the adviser to the fund and is responsible for the fund's overall investment strategy and its implementation. Western Asset is a wholly owned subsidiary of Legg Mason Inc. As of June 30, 2011, Legg Mason Inc. had approximately $663 billion of assets under management.

RATINGS SENSITIVITY

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. closed-end funds, 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, Western Asset Management and Legg Mason.

Applicable Criteria and Related Research:

--'Rating Closed-End Fund Debt and Preferred Stock', Aug. 16, 2011.

Applicable Criteria and Related Research:

Rating Closed-End Fund Debt and Preferred Stock

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648840 ]

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