CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AAA' ratings on the Variable Rate Municipal Term Preferred Shares (VMTP Shares) and auction market preferred shares (AMPS) issued by Federated Premier Municipal Income Fund (NYSE:FMN) and Federated Premier Intermediate Municipal Income Fund (NYSE:FPT) as follows:
--$35,525,000 of VMTP Shares with a liquidation preference of $25,000 per share at 'AAA';
--$18,150,000 of AMPS, series A, with a liquidation preference of $25,000 per share at 'AAA'.
--$46,175,000 of VMTP Shares, with a liquidation preference of $25,000 per share at 'AAA';
--$14,900,000 of AMPS, series A, with a liquidation preference of $25,000 per share at 'AAA'.
VMTP ADDITIONAL SHARE ISSUANCE
The funds' advisor, Federated Investment Management Company (Federated), has issued additional VMTP shares for both funds. In conjunction with the additional VMTP share issuance, Federated has also extended the December 2014 maturity on the VMTPs issued by each fund to June 19, 2017. The new issuance will replace another form of leverage within the funds- tender option bonds (TOBs) which have been sold and accordingly the total amount of leverage in each fund remains unchanged.
KEY RATING DRIVERS
The 'AAA' long-term ratings primarily reflect:
--Sufficient asset coverage provided to the AMPS and VMTP shares as calculated per each fund's overcollateralization (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 each fund's operations;
--The capabilities of Federated as investment advisor.
As of May 31, 2014, each fund's asset coverage ratios 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 each fund's governing documents.
As of the same date, each fund's effective leverage ratio was below the 45% (46% if due solely to fluctuations in the market value of a fund's portfolio securities) maximum leverage ratio allowed by each fund's governing documents for the preferred shares.
VMTP STRUCTURAL PROTECTIONS
Compliance with these asset coverage and effective leverage ratio requirements are tested daily. Failure to cure an asset coverage breach within 7 business days (the Asset Coverage Cure Date) results in an Asset Coverage Mandatory Redemption. Failure to cure an effective leverage ratio breach within 10 business days (the Effective Leverage Ratio Cure Date) results in an Effective Leverage Ratio Mandatory Redemption.
Fitch performed various stress tests on the funds to assess the strength of the structural protections available to the rated preferred shares compared to the stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where each fund's leverage and portfolio composition migrated to the outer limits of each fund's operating and investment guidelines.
Only under certain circumstances, such as increasing each fund's issuer concentration while simultaneously migrating the portfolios to a mix of 80% long-term 'BBB' bonds and 20% high yield bonds, 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 each fund's permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' rating.
Federated Premier Municipal Income Fund is a diversified, closed-end management investment company that commenced investment operations in 2002. The fund invests primarily in investment-grade securities that pay interest exempt from federal income tax, including AMT. Normally, substantially all of the fund's assets (at least 90%) are invested in tax-exempt securities.
Federated Premier Intermediate Municipal Income Fund is a diversified, closed-end management investment company that commenced investment operations in 2002. The fund invests primarily in intermediate-term, investment-grade securities that pay interest exempt from federal income tax, including AMT. Substantially all of the fund's assets (at least 90%) are invested in tax-exempt securities.
From a credit quality perspective, the funds' investment parameters mandate that at the time of purchase, at least 80% of total assets will be invested in securities of investment-grade credit quality, no more than 20% of total assets will be invested in securities rated below investment-grade, and no investments will be made in securities rated below a 'B' rating, or deemed as such by the funds' internal credit ratings.
Federated serves as the fund's investment advisor, and is a direct wholly owned subsidiary of Federated Investors, Inc. As of March 31, 2014, Federated Investors, Inc. and affiliates had approximately $366 billion in assets under management.
The ratings assigned to the preferred shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of each fund, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
Each fund has the ability to assume economic leverage through derivative transactions which may not be captured by the funds' Preferred Shares Asset Coverage test or Effective Leverage Ratio. The funds do not currently engage in derivative activities for speculative purposes and do not envision engaging in material amounts of such activity in the future. Material derivative exposure 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 funds, 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 Federated.
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Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 14, 2013).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock