Fitch Ratings has affirmed the 'AAA' rating assigned to the following note issued by Nexpoint Credit Strategies Fund (NYSE: NHF), a leveraged multi-strategy credit closed-end fund advised by Nexpoint Advisors, LP (Nexpoint):
--$120,000,000 of floating-rate series A secured notes due April 16, 2015.
KEY RATING DRIVERS
The affirmation follows Fitch's review of NHF and reflects:
--Sufficient asset coverage relative to Fitch's published 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 fund's operations;
--The capabilities of Nexpoint Advisors, LP as the investment advisor.
Fitch's ratings on the notes speak only to timely repayment of interest and principal in accordance with the governing documents and not to potential liquidity in the secondary market.
In addition to the outstanding notes, NHF has a $125 million revolving credit facility with State Street Bank and Trust Company. The notes are secured pari passu with the credit facility. The State Street facility expires on Nov. 30, 2013 and is renewable on a yearly basis, subject to certain conditions.
As of Jan. 4, 2013, the fund's 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. These tests serve as minimum asset coverage covenants required by the fund's governing documents.
Additionally, the fund's asset coverage ratio for debt, as calculated in accordance with the Investment Company Act of 1940 ('40 Act), was in excess of 300%, which is also a minimum asset coverage required by the fund's governing documents.
The notes' asset coverage relative to the assigned rating and the '40 Act tests did erode over the previous three months. This resulted from large drawdowns on the credit facility that increased leverage and proceeds were invested in asset types that reduced asset coverage as calculated consistent with Fitch's 'AAA' rating criteria. Additionally, Fitch has observed some apparent deficiencies in NHF's operational controls that resulted in delayed or erroneous reporting of asset coverage to Fitch. NHF has taken steps to address these apparent deficiencies and NHF plans to reduce leverage over the coming weeks by retiring some of the credit facility. Fitch will continue to closely monitor overall leverage, the level of asset coverage cushion available for the rated notes and the timeliness and accuracy of NHF's reporting. Negative rating action may be warranted if the fund fails to achieve stated leverage/asset coverage targets and/or reporting to Fitch fails to be provided in a timely, accurate manner.
Nexpoint Credit Strategies Fund fund is a non-diversified, closed-end management investment company, registered under the Investment Company Act of 1940, as amended, that commenced investment operations in June 2006. The fund's primary investment objectives are to provide both current income and capital appreciation. The fund pursues its objectives by investing primarily in secured and unsecured floating- and fixed-rate loans, bonds and other debt obligations, debt obligations of stressed, distressed and bankrupt issuers, structured products, including but not limited to, mortgage-backed and other asset-backed securities, collateralized debt obligations and pharmaceutical royalty payment bonds.
As of Jan. 4, 2013, NHF's portfolio was composed primarily of equities (32%), leveraged loans (30%), high yield corporate bonds (24%), common equity securities (19%), and CLO mezzanine securities (12%). From an industry diversification perspective, HCF's largest concentration was in broadcasting, media & cable, at approximately 16% of total fund assets. Also as of Jan 4, 2013 the market value of total portfolio assets under management was approximately $692.4 million.
Nexpoint Advisors, L.P. (Nexpoint) is the fund's investment adviser, responsible for implementing and administering NHF's investment strategy. As of June 15, 2012, Nexpoint managed approximately $606 million.
Further asset coverage declines from additional increases in leverage or declines in portfolio market value may result in Fitch downgrading the ratings assigned to the senior notes. Decreases portfolio credit quality or market risk of the fund, may also result in negative rating action. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end funds, please review the criteria referenced below, which can be found on Fitch's web site at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
The sources of information used to assess this rating were the public domain and Nexpoint.
Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 15, 2012).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
Russ Thomas, +1-312-368-3189
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Viktoria Baklanova, PhD, CFA, +1-212-908-9162
Peter Patrino, +1-312-368-3266
Brian Bertsch, +1-212-908-0549
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