NEW YORK--(BUSINESS WIRE)--The funding strategies of larger closed-end funds (CEFs) investing in master limited partnerships (MLP) may serve as a model for other taxable CEFs, according to a Fitch Ratings report.
MLP CEFs pursue a diversified funding strategy, utilizing bank borrowings for short-term cash needs (9% of leverage on average), balanced with longer-term issuance of senior notes (62% of leverage) and preferred stock (24% of leverage). The full report 'MLP Closed-End Funds: A Capital Structure Case Study' is complementary and may be downloaded at the link below.
Fitch notes that other taxable CEFs are gradually adopting a similar funding strategy, in order to take advantage of higher leverage capacity available with preferred stock (50% maximum vs. 33% with debt), lengthen their liabilities to better match portfolio durations, diversify across investor types, and access longer-term fixed financing to hedge against rising rates.
Fitch rates approximately $9.3 billion of notes and preferred shares issued by US leveraged taxable CEFs, currently in the 'AAA', 'AA' and 'A' categories.
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Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'MLP Closed-End Funds: A Capital Structure Case Study' (Dec. 2013);
--'Capital Link Webcast Slides' (Sept. 2013);
--'Closed-End Funds Weather Rate Rise' (Aug. 2013);
--'Basel III to Affect Taxable Closed-End Funds' (June 2013);
--'Taxable Closed-End Funds Dashboard' (June 2013);
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug 2013).
Applicable Criteria and Related Research: MLP Closed-End Funds: A Capital Structure Case Study
Capital Link Webcast Slides
Closed-End Funds Weather Rate Rise (Loan Funds Sail through Volatility, Bond Funds Diverge)
Basel III to Affect Taxable Closed-End Funds (Impact Muted by Short Tenor and High Quality of Taxable CEF Bank Loans)
Taxable Closed-End Funds Dashboard
Rating Closed-End Fund Debt and Preferred Stock