Fitch Affirms Preferred Shares of Two Deutsche Closed-End Funds 'AAA'

NEW YORK--()--Fitch Ratings affirms the current 'AAA' ratings assigned to the following Floating Rate Municipal Term Preferred Shares (MTPS) issued by two closed-end funds managed by Deutsche Investment Management Americas Inc. (DIMA):

Deutsche Municipal Income Trust (KTF)
--$188,865,000 of Series 2015 MTPS.

Deutsche Strategic Municipal Income Trust (KSM)
--$60,475,000 of Series 2015 MTPS.

KEY RATING DRIVERS
The 'AAA' long-term ratings primarily reflect:
--Sufficient asset coverage provided to the MTPS as calculated per the funds' over-collateralization (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 the fund's operations;
--The capabilities of DIMA as investment manager and advisor.

FUND PROFILE
KTF and KSM were previously named DWS Municipal Income Trust and DWS Strategic Municipal Income Trust, respectively. All DWS funds were renamed to Deutsche funds on Aug. 11, 2014.

Both funds are closed-end management investment companies regulated by the Investment Company Act of 1940 (the 1940 Act). KSM can invest up to 50% of assets in municipal securities that at the time of purchase are rated below investment-grade quality or that are unrated but judged to be of comparable quality by the investment adviser. KTF will invest substantially all of its assets in investment grade municipal securities.

LEVERAGE
As of Jan. 31, 2015, KTF had total assets of approximately $750 million and leverage of approximately $291 million, or 39% of assets. Leverage consisted of approximately $92 million of tender option bond floaters, $189 million of Fitch-rated MTPS and $10 million of auction rate preferred shares.

As of the same date, KSM had total assets of approximately $220 million and leverage of approximately $77 million, or 35% of assets. Leverage consisted of approximately $7 million of tender option bond floaters, $60 million of Fitch-rated MTPS and $10 million of auction rate preferred shares.

ASSET COVERAGE
As of Jan 31, 2015, each fund's asset coverage ratio for total outstanding preferred shares, as calculated in accordance with the 1940 Act, was in excess of the minimum asset coverage of 225% required by the fund's governing documents (Asset Coverage Test).

As of the same date, each fund's effective leverage ratio was below the 45% maximum leverage ratio allowed (or 46% in case of portfolio market value decline) by the fund's governing documents (Effective Leverage Test).

STRUCTURAL PROTECTIONS
In the event of asset coverage declines, the funds' governing documents require the funds to reduce leverage in order to restore compliance with the test(s) within 32 business days for the Asset Coverage Test and 11 business days for the Effective Leverage Test.

DIMA will also manage the funds within Fitch's municipal issuer diversification guidelines as per Fitch closed-end fund criteria.

STRESS TESTS
Fitch performed various stress tests on the funds' portfolios and leverage composition to assess the rating impact of different stresses relative to the Fitch closed-end fund 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.

In all stress scenarios, KTF's MTPS structural protections together with investment guidelines passed at the 'AAA' rating level.

For KSM, only under remote scenarios, such as increasing the fund's state and sector investment concentration while simultaneously migrating the portfolio to a mix of 50% high yield and 50% 'BBB' rated long-term securities, did the asset coverage available to the MTPS fall below the 'AAA' threshold, and instead passed at a '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 ADVISOR
DIMA is part of Deutsche Asset & Wealth Management and is the investment advisor for the funds, responsible for the funds' overall investment strategy and implementation. DIMA is an indirect, wholly owned subsidiary of Deutsche Bank AG. Deutsche Asset & Wealth Management is the asset management division of Deutsche Bank AG. As of Dec. 31, 2014, Deutsche Asset & Wealth Management, which provides a full range of investment advisory services to retail and institutional clients, including private wealth clients, had total invested assets of approximately Eur1.04 trillion.

RATINGS SENSITIVITIES
The ratings assigned to the MTPS 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 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' Asset Coverage Test or Effective Leverage Test. 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 MTPS.

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 Deutsche Asset & Wealth Management.

Opt-in to receive Fitch's forthcoming research on closed-end funds:
http://pages.fitchemail.fitchratings.com/FAMCEFBlankOptin/

Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Sept. 4, 2014);
--'2015 Outlook: Closed-End Funds' (Dec. 10, 2014);
--'Fitch: Closed-End Funds Welcome Volcker TOBs Delay' (Feb. 12, 2015).

Applicable Criteria and Related Research:
2015 Outlook: Closed-End Funds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=824608
Rating Closed-End Fund Debt and Preferred Stock
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=765528

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980929
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Ian Rasmussen, +1-212-908-1232
Senior Director
Fitch Ratings, Inc.
33 Whitehall
New York, NY 10004
or
Secondary Analyst
Benjamin Han, +1-212-908-9177
Analyst
or
Committee Chairperson
Davie Rodriguez, CFA, +1-212-908-0386
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Ian Rasmussen, +1-212-908-1232
Senior Director
Fitch Ratings, Inc.
33 Whitehall
New York, NY 10004
or
Secondary Analyst
Benjamin Han, +1-212-908-9177
Analyst
or
Committee Chairperson
Davie Rodriguez, CFA, +1-212-908-0386
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com