Fitch Ratings has affirmed the 'AAA' rating assigned to auction-rate preferred shares (ARPS) issued by a closed-end loan fund managed by Legg Mason Partners Fund Advisor, LLC (LMPFA) and two closed-end municipal funds managed by Western Asset Management Company (Western Asset):
LMP Corporate Loan Fund Inc. (NYSE: TLI)
--$35,000,000 of ARPS consisting of Series A and B, each with a liquidation preference of $25,000 per share.
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.
KEY RATING DRIVERS
The affirmation follows Fitch's annual review of the funds. The 'AAA' rating is based on the following:
--Asset coverage provided to preferred shares by the funds' portfolio;
--Structural protections afforded by mandatory cure and deleveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the funds' operations;
--The capabilities of Western Asset as investment manager for SBI and MMU; and
--The capabilities of LMPFA as the new investment manager for TLI, which took over management of the fund from Citigroup Alternative Investments LLC effective Dec 1, 2012.
TLI is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the 1940 Act). TLI's investment objective is to maximize current income consistent with prudent efforts to preserve capital.
In pursuing its investment objective, TLI was invested mainly in first lien leveraged loans (that are not covenant light) and high-yield corporate bonds (both secured and unsecured) as of Jan. 31, 2013. The fund was also highly diversified by industry and issuer.
SBI is registered as a diversified, closed end management investment company under the 1940 Act. SBI's investment objective is to provide common shareholders a high level of current income exempt from regular federal income taxes consistent with prudent investing. Whereas, MMU is registered as a non-diversified, closed-end management investment company under the 1940 Act. MMU seeks to maximize current income exempt from federal income tax as is consistent with preservation of principal.
In pursuing their investment objectives, SBI and MMU invested mainly in investment grade municipal securities. MMU employed higher leverage and invested in longer maturity assets than SBI as of Jan. 31, 2013. Both portfolios were well diversified by single-sector, -obligor and -state exposures.
As of Jan. 31, 2013, TLI's leverage was approximately $65.5 million, or 34% of total net assets of $193.5 million. Leverage consisted of a $30.5 million draw on a bank credit facility and $35 million in rated ARPS.
As of the same date, SBI's leverage was approximately $50 million, or 25% of total net assets of $200 million. Leverage consisted predominantly of rated ARPS, with an immaterial amount also invested in an inverse floater of a tender option bond. MMU's leverage was approximately $250 million, or 29% of total net assets of $876 million. Leverage consisted entirely of rated ARPS.
At the time of the rating affirmation, the funds' asset coverage ratio for rated ARPS, 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%. These are the minimum asset coverage guidelines required by the funds' governing documents and evaluated as such by Fitch.
Also at the time of the rating affirmation, the funds' asset coverage ratio for rated ARPS, as calculated in accordance with the 1940 Act, was in excess of 200%, which is the minimum asset coverage required by the 1940 Act and the funds' governing documents.
Should the asset coverage tests decline below their minimum threshold amounts (as tested on the last business day of each month), the governing documents require the funds to alter the composition of their portfolio toward assets with lower discount factors (for Fitch OC Tests), or to reduce leverage in a sufficient amount (for both the Fitch OC Tests and the 1940 Act test) to restore compliance within a pre-specified period (a maximum of 58 business days for the Fitch OC Tests and a longer period for the 1940 Act test).
LMPFA provides the day-to-day management of TLI's portfolio. Western Asset acts as the sub-adviser to the SBI and MMU funds, providing day-to-day management of each fund's portfolio. LMPFA acts as the manager to all three funds, providing management and administrative services. Western Asset and LMPFA are wholly owned subsidiaries of Legg Mason Inc. As of Dec. 31, 2012, Western Asset had approximately $462 billion in assets under management (AUM), and LMPFA had approximately $181 billion in AUM.
The rating assigned to the ARPS may be sensitive to material changes in the leverage composition, credit quality of portfolio assets or market risk profile of the funds. 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 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, Western Asset and Legg Mason.
Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Prefered Stock', Aug 15, 2012
Applicable Criteria and Related Research
Rating Closed-End Fund Debt and Preferred Stock
Yuriy Layvand, CFA, +1-212-908-9191
Fitch Ratings, Inc.
One State Street,
New York, NY 10004
Gwen Fink-Stone, +1-212-908-1128
Peter Patrino, +1-312-368-3266
Brian Bertsch, New York, +1-212-908-0549
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