NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AAA' rating assigned to the following notes issued by Franklin Universal Trust (NYSE: FT), a leveraged multi-sector closed-end fund advised by Franklin Advisers, Inc. (Franklin):
--$60,000,000 of 2.87% senior notes, due Aug. 28, 2018.
KEY RATING DRIVERS
The 'AAA' rating affirmation reflects:
--Sufficient asset coverage provided to the notes as calculated per the fund's overcollateralization (OC) tests;
--The structural protections afforded by mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the fund's operations;
--The capabilities of Franklin as fund adviser.
Franklin Universal Trust is a diversified, closed-end management investment company, registered under the Investment Company Act of 1940, as amended, that commenced investment operations in September 1988. The fund's primary investment objective is high current income consistent with preservation of capital. The fund's secondary investment objective is growth of income through dividend increases and capital appreciation.
Under normal circumstances, the fund invests primarily in two asset classes: high yield bonds and utility stocks. The fund also invests to a lesser extent in foreign equity securities and sovereign debt, in each case U.S. dollar denominated. At the time of the rating affirmation, the portfolio was comprised of 66% high yield corporate securities, 32% common equity securities, and 2% cash and short-term investments.
As of July 31, 2014, the fund's total assets were $264 million and total leverage was 23%, consisting solely of $60 million of rated notes.
The fund's asset coverage ratio, as calculated in accordance with the Fitch total and net OC tests (Fitch OC Tests) per the 'AAA' rating guidelines outlined in Fitch's applicable criteria, were in excess of 100%. This is the minimum asset coverage guideline required by the fund's governing documents and evaluated as such by Fitch.
The test calculates standardized asset coverage by applying haircuts to portfolio holdings based on perceived riskiness and diversification of the assets and measuring its ability to cover both on and off-balance sheet liabilities, if any, at the assigned 'AAA' stress level.
The fund's asset coverage ratios for the notes, as calculated in accordance with the Investment Company Act of 1940 (1940 Act), were in excess of 300%, which is the minimum asset coverage required by the 1940 Act at the time of issuance and the fund's governing documents.
Should the asset coverage tests decline below their minimum threshold amounts (as tested on the last business day of each month), under the terms of the notes the fund is required to deliver notice to the note purchasers within five business days. The fund manager is then expected to cure the breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC Tests breaches), or by reducing leverage in a sufficient amount (for both the Fitch OC Tests and the 1940 Act test breaches) within a pre-specified time period.
Failure to cure an asset coverage breach as described above is an event of default under the terms of the notes. The fund must then deliver a notice within five business days of such failure to the note purchasers. The holders of more than 50% (in aggregate) of principal may then declare all the notes outstanding to be immediately due and payable.
THE FUND'S ADVISER
Franklin Advisers, Inc., a subsidiary of Franklin Resources, Inc. (NYSE:BEN) acts as the investment adviser to the fund. As of July 31, 2014, Franklin Resources, Inc. managed approximately $908 billion in assets.
The rating assigned to the preferred 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 the rating to be lowered by Fitch.
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'.
The sources of information used to assess this rating were the public domain and Franklin.
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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