NEW YORK--()--Currently, taxable closed-end funds (CEFs) leverage predominately using short-term bank funding, according to a new report by Fitch Ratings. About $26 billion, or 74% of total structural leverage in the sector, rolls over in less than one-year maturities.
Short-term funding currently offers attractive borrowing costs that enhance returns for CEF common shareholders. However, short-term debt also exposes funds to greater interest rate and funding rollover risk.
Recently CEF managers seem more interested in terming out a portion of their leverage to set borrowing costs at current low levels and reduce short-term rollover risk. Market feedback suggests that some funds are looking to move 50%-75% of their capital structure to three- to seven-year terms while retaining the remainder in existing short-term bank leverage for flexibility, cash management, and yield-curve diversification.
Fitch believes that actively managing both sides of the balance sheet is important for CEFs. CEF managers are increasingly diversifying sources and terms of funding while balancing rollover risk with the cost of leverage under various interest rate scenarios.
The full report, 'Taxable Closed-End Funds Reliant on Short-Term Debt Reap Low-Cost Funding at the Expense of Rollover Risk', is available at 'www.fitchratings.com'.
To receive Fitch's forthcoming research on closed-end funds please go to: http://forms.fitchratings.com/forms/FAMCEFOptinform
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Taxable Closed-End Funds Reliant on Short-Term Debt Reap Low-Cost Funding at the Expense of Rollover Risk