NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned new ratings 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)
-- $198,750,000 of Series 2018 MTPS at 'AAA'
Deutsche Strategic Municipal Income Trust (KSM)
-- $70,000,000 of Series 2018 MTPS at 'AAA'
The funds will utilize the Series 2018 MTPS to fully redeem Series 2015 MTPS and remarketed and auction rate preferred shares. The proceeds of the Series 2018 MTPS will be deposited irrevocably in an escrow account. Accordingly, Fitch's ratings on the Series 2015 MTPS will not be affected while they remain outstanding. As soon as the Series 2015 are redeemed, Fitch will mark them paid in full.
KEY RATING DRIVERS
The 'AAA' rating reflects:
-- Sufficient asset coverage provided to the MTPS shares 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 funds' operations;
-- The capabilities of DIMA as investment manager and advisor.
As of April 30, 2015, the funds' asset coverage ratio 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 the funds' governing documents (Asset Coverage Test).
As of the same date, the funds' effective leverage ratio was below the 45% maximum leverage ratio allowed (or 46% in case of portfolio market value decline) by the funds' governing documents (Effective Leverage Test).
DIMA will also manage the funds within Fitch's issuer concentration guidelines as per Fitch closed-end fund criteria.
In the event of asset coverage declines, the funds' governing documents will require the fund to reduce leverage in order to restore compliance with the test(s) (approximately within 33 business days for the Asset Coverage Test and within 12 business days for the Effective Leverage Test).
Although the Asset Coverage and Effective Leverage tests for MTPS of both funds are currently consistent with Fitch's 'AAA' rating level, KSM fund investment guidelines allow it to migrate down the credit scale to hold as much as 50% in high yield municipal securities, while KTF investment guidelines require that almost all securities remain investment grade.
Fitch performed various stress tests on the funds' portfolio and leverage composition to assess rating impact of different stress scenarios relative to the Fitch closed-end fund criteria.
KTF remained at a 'AAA' level throughout these stressed cases. For KSM stress cases where the portfolio migrates to 50% long-term 'BBB' bonds and 50% high yield bonds the asset coverage available to the preferred shares falls 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.
Both funds are closed-end management investment companies regulated by the Investment Company Act of 1940. 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 securities.
DIMA is part of Deutsche Asset & Wealth Management and is the investment advisor for the funds, responsible for the funds' overall investment strategy and its 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 March 31, 2015, Deutsche Asset & Wealth Management had total invested assets of approximately EUR1.16 trillion.
The ratings 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 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 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 on www.fitchratings.com
The sources of information used to assess this rating were the public domain and DIMA.
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Applicable Criteria and Related Research:
-- 'Rating Closed-End Fund Debt and Preferred Stock (Sept. 4, 2014).