NEW YORK--()--Fitch Ratings assigns 'AAA' long-term ratings to Fixed Rate Municipal Term Preferred (FMTP) shares issued by MainStay DefinedTerm Municipal Opportunities Fund (MMD), a closed-end fund managed by New York Life Investment Management LLC (NYLIM) and subadvised by MacKay Shields LLC (MacKay Shields):
--$35,000,000 of FMTP, Series A, due Oct. 15, 2015;
--$35,000,000 of FMTP, Series B, due March 15, 2016.
KEY RATING DRIVERS
The 'AAA' long-term ratings primarily reflect:
--Sufficient asset coverage provided to the FMTP shares as calculated per the fund's 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 fund's operations;
--The capabilities of NYLIM as investment advisor and MacKay Shields as subadvisor.
As of Aug. 31, 2012, the fund's pro forma asset coverage ratio for total outstanding preferred shares, as calculated in accordance with the Investment Company Act of 1940, was in excess of the minimum asset coverage of 225% required by the fund's governing documents (Preferred Shares Asset Coverage Test).
As of the same date, the fund's pro forma effective leverage ratio was below the 45% maximum leverage ratio allowed by the fund's governing documents (Effective Leverage Test).
In the event of asset coverage declines, the fund's governing documents will require the fund to reduce leverage in order to restore compliance with the test(s) breaching the required threshold(s).
Fitch performed various stress tests on the fund to assess the strength of the structural protections available to the FMTP 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 fund's leverage and portfolio composition migrated to the outer limits of the fund's operating and investment guidelines.
Only under remote circumstances, such as increasing the fund's issuer concentration while simultaneously migrating the portfolio to 75% 'BBB', 10+ years to maturity bonds and 25% high yield bonds, did the asset coverage available to the FMTP 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 fund's permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' rating.
The fund is a closed-end management investment company regulated under the Investment Company Act of 1940. The fund currently invests primarily in investment grade quality municipal bonds.
NYLIM, a subsidiary of New York Life Insurance Company, is the fund's investment advisor, responsible for the fund's overall investment strategy and its implementation. MacKay Shields, also a subsidiary of New York Life Insurance Company, is the fund's subadvisor and oversees the day-to-day operations of the fund. NYLIM and its affiliates had approximately $340 billion of assets under management as of June 30, 2012.
The ratings assigned to the FMTP shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the fund, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
The fund has the ability to assume economic leverage through derivative transactions which may not be captured by the fund's Preferred Shares Asset Coverage test or Effective Leverage Ratio. The fund currently utilizes derivatives for hedging purposes. Material speculative derivative exposure in the future could have potential negative rating implications if it adversely affects asset coverage available to rated FMTP 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, NYLIM and MacKay Shields.
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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:
2012 Outlook: Closed-End Fund Leverage
Municipal CEFs Refinance Pre-Crisis ARPS
Rating Closed-End Fund Debt and Preferred Stock