NEW YORK--()--Fitch Ratings assigns 'AAA' long-term ratings to Municipal Auction Rate Cumulative Preferred Shares (ARPS) and Variable Rate Municipal Term Preferred (VMTP) Shares issued by two closed-end funds managed by MFS Investment Management:
MFS High Yield Municipal Trust (CMU)
--$3,900,000 of ARPS, series F.
--$71,100,000 of VMTP shares, series 2016/9, due Sept. 30, 2016.
MFS Investment Grade Municipal Trust (CXH)
--$825,000 of ARPS, series M.
--$47,925,000 of VMTP shares, series 2016/9, due Sept. 30, 2016.
KEY RATING DRIVERS
The 'AAA' long-term ratings primarily reflect:
--Sufficient asset coverage provided to the preferred shares as calculated per the funds' over-collateralization (OC) tests.
--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.
--The capabilities of MFS Investment Management as investment advisor.
The funds conducted a tender offer to redeem outstanding ARPS at 95% of the ARPS liquidation preference. 94.8% of CMU's $75,000,000 of ARPS, and 98.3% of CXH's $48,750,000 of ARPS were tendered, and will be redeemed using proceeds from the issuance of VMTP shares.
The funds' asset coverage ratios for the preferred shares, as calculated in accordance with the Investment Company Act of 1940, were in excess of the minimum threshold of 225% required by the VMTP governing documents (Preferred Shares Asset Coverage Test).
The funds' effective leverage ratios were below the 45% maximum allowed by the VMTP governing documents (Effective Leverage Test).
The funds' asset coverage ratios, as calculated in accordance with the Fitch total and net OC tests per the 'AAA' rating guidelines outlined in Fitch's criteria, were in excess of 100%, which is the minimum threshold required by the ARPS governing documents.
Should the funds' asset coverage tests decline below their minimum threshold amounts, the governing documents' mandatory redemption provisions will require the fund to cure the tests or redeem the affected liabilities in a sufficient amount to restore compliance with the applicable test(s).
Fitch performed various stress tests on the funds to assess the strength of the structural protections available to the VMTP Shares compared to the rating stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where the funds' leverage and portfolio composition migrated to the outer limits of the funds' operating and investment guidelines.
Only under remote circumstances did the asset coverage available to the VMTP Shares fall below the 'AAA' threshold, and instead passed at an 'AA' rating level.
Given the highly unlikely nature of the stress scenarios, and the minimal rating impact, Fitch views the funds' permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' rating.
The funds are closed-end management investment companies regulated by the Investment Company Act of 1940. The funds are currently invested primarily in investment grade quality municipal bonds.
MFS Investment Management, a subsidiary of Sun Life Financial Inc., is the funds' investment advisor, responsible for the funds' overall investment strategies and their implementation. MFS Investment Management had approximately $293 billion of assets under management as of Aug. 31, 2012.
The ratings assigned to the ARPS and VMTP shares may be sensitive to material changes in the leverage composition, portfolio credit quality, portfolio diversification or market risk of the funds. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
The funds have the ability to assume economic leverage through derivative transactions which may not be captured by the funds' Preferred Shares Asset Coverage tests or Effective Leverage Ratios. Material derivative exposure on a speculative basis in the future could have potential negative rating implications if it adversely affects asset coverage available to rated preferred shares.
For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end fund, 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 MFS Investment Management.
To receive Fitch's forthcoming research on closed-end funds please go to:
Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 15, 2012);
--'Municipal CEFs Refinance Pre-Crisis ARPS' (May 3, 2012);
--'2012 Outlook: Closed-End Fund Leverage' (Dec. 19, 2011).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
Municipal CEFs Refinance Pre-Crisis ARPS
2012 Outlook: Closed-End Fund Leverage