NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the '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)
--$198,750,000 of Series 2018 MTPS.
Deutsche Strategic Municipal Income Trust (KSM)
--$70,000,000 of Series 2018 MTPS.
KEY RATING DRIVERS
The Long-Term 'AAA' 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 March 31, 2016, KTF had total assets of approximately $747 million and leverage of approximately $308 million, or 41% of assets. Leverage consisted of approximately $109 million of tender option bond floaters, $198.8 million of Fitch-rated MTPS.
As of the same date, KSM had total assets of approximately $222 million and leverage of approximately $86 million, or 39% of assets. Leverage consisted of approximately $16 million of tender option bond floaters, $70 million of Fitch-rated MTPS.
ASSET COVERAGE
As of March 31, 2016, 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 12 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 Fitch performed, 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 a 'AAA' rating.
THE ADVISOR
DIMA is part of Deutsche Asset 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 Management is the asset management division of Deutsche Bank AG. As of March 31, 2016, Deutsche Asset Management, which provides a full range of investment advisory services to retail and institutional clients, including private wealth clients, had assets under management of approximately $842 billion.
RATING 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 fund, 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
To receive Fitch's forthcoming research on closed-end funds please go to: http://pages.fitchemail.fitchratings.com/FAMCEFBlankOptin/
Applicable Criteria
Rating Closed-End Fund Debt and Preferred Stock (pub. 16 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871119
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004414
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004414
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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