NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AAA' long-term ratings assigned to the Variable Rate MuniFund Term Preferred Shares (VMTP Shares) issued by the following three municipal closed end funds managed by Delaware Management Company (DMC), a series of Delaware Management Business Trust.
Delaware Investments National Municipal Income Fund (VFL)
--$30,000,000 of VMTP Shares, Series 2017, due April 1, 2017.
Delaware Investments Minnesota Municipal Income Fund II, Inc. (VMM)
--$75,000,000 of VMTP Shares, Series 2016, due Dec. 1, 2016.
Delaware Investments Colorado Municipal Income Fund, Inc. (VCF)
--$30,000,000 of VMTP Shares, Series 2016, due Dec. 1, 2016.
KEY RATING DRIVERS
The 'AAA' long-term ratings primarily reflect:
--Sufficient asset coverage provided to the 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 DMC as investment advisor.
The funds are closed-end investment management companies regulated by the Investment Company Act of 1940. VFL invests in municipal securities that are exempt from federal income taxes. VMM invests in municipal securities that are exempt from federal income taxes and Minnesota personal income tax. VCF invests in municipal securities that are exempt from federal income taxes and Colorado personal income tax. All three funds may invest up to 20% of assets in below investment grade and or unrated securities.
As of Sept. 30, 2014, VFL had approximately $97 million in assets, total leverage consisting of $30 million of VMTP shares and an effective leverage ratio of 30.9%. As of this same date, VMM had approximately $246 million in assets, total leverage consisting of $75 million of VMTP shares and an effective leverage ratio of 30.5%. Also as of this date, VCF had approximately $103 million in assets, total leverage consisting of $30 million of VMTP shares and an effective leverage ratio of 29.0%.
As of Sept. 30, 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 VMTP 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 thirty calendar 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.
On the business day following the Asset Coverage Cure Date or the Effective Leverage Ratio Cure Date, each fund shall cause a Notice of Redemption to be issued and shall deposit sufficient funds with the Redemption and Paying Agent for the redemption of a sufficient number of Preferred Shares to restore asset coverage and/or effective leverage ratio compliance. The Notice of Redemption shall not be provided more than 45 calendar days prior to the Redemption Date.
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.
THE FUNDS ADVISOR
DMC, a subsidiary of Macquarie Group Limited (rated 'A-/F2' by Fitch), is the funds' investment advisor responsible for each fund's overall investment strategy and implementation. DMC and its affiliates had more than $180 billion of assets under management as of June 30, 2014.
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 Nuveen Fund Advisors.
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Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Sept. 4, 2014);
--'Global Rating Criteria for Asset-Backed Commercial Paper' (Nov. 7, 2013);
--'Municipal Closed-End Funds More Exposed to Rising Interest Rates than Corporate CEFs' (Oct. 7, 2014).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
Global Rating Criteria for Asset-Backed Commercial Paper