NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AAA' long-term ratings assigned to the following Municipal Auction Rate Cumulative Preferred shares (ARPS) and Variable Rate MuniFund Term Preferred Shares (VMTP shares) issued by five closed-end funds managed by MFS Investment Management:
MFS California Municipal Fund (CCA)
--$24,425,000 of VMTP shares, series 2016/9, due Sept. 30, 2016.
MFS High Income Municipal Trust (CXE)
--$5,625,000 of ARPS, series T and W;
--$91,875,000 of VMTP shares, series 2016/9, due Sept. 30, 2016.
MFS Municipal Income Trust (MFM)
--$7,275,000 of ARPS, series T and TH;
--$106,475,000 of VMTP shares, series 2016/9, due Sept. 30, 2016.
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 deleveraging 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.
As of April 30, 2014, each fund's asset coverage ratios for the preferred shares, as calculated in accordance with the Investment Company Act of 1940, was in excess of the minimum threshold - 225% for CXE MFM, CMU and CXH, and 210% for CCA - required by the VMTP governing documents (Preferred Shares Asset Coverage Test).
As of the same date, each fund's effective leverage ratios were below the maximum - 45% for CXE, MFM, CMU and CXH, and 47% for CCA - allowed by the VMTP governing documents (Effective Leverage Test).
As of the same date, each fund's 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.
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 $433.1 billion of assets under management as of May 31, 2014.
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 sources of information used to assess this rating were the public domain and Nuveen Fund Advisors.
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Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 14, 2013);
--'US Closed-End Funds Pick Up Steam in Private Placements' (June 2014);
--'Fitch Provides Update on the Leverage Market of U.S. Closed-End Funds' (May 2014);
--'2014 Outlook: U.S. Closed-End Fund Leverage' (January 2014);
--'MLP Closed-End Funds: A Capital Structure Case Study' (December 2013).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
2014 Outlook: U.S. Closed-End Fund Leverage
MLP Closed-End Funds: A Capital Structure Case Study