NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'AAexp' long-term rating to the Term Preferred Shares (TPS) expected to be registered and issued by Nuveen Senior Income Fund (the Fund), under a $60 million registration statement effective Oct. 4, 2016.
The Fund is expected to use the proceeds of the TPS issuance to fully redeem its $45 million of outstanding Series C-4 Variable Rate Term Preferred Shares (VRTP Shares). Once the VRTP Shares are fully redeemed, the Fund may use TPS proceeds to increase leverage modestly and over time and to repay borrowings under the Fund's credit facility. The Fund is managed by Nuveen Fund Advisors, LLC (NFA) and subadvised by Symphony Asset Management, LLC (Symphony).
The Fund currently intends to distribute the shares primarily through an underwriting syndicate, although from time-to-time it may also distribute shares through additional privately negotiated transactions.
KEY RATING DRIVERS
The 'AAexp' long-term rating primarily reflects:
--Sufficient asset coverage provided to the TPS as calculated per the Fund's asset coverage test;
--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 NFA as investment advisor and Symphony as subadvisor.
FUND PROFILE
The Fund's investment objective is to achieve a high level of current income, consistent with preservation of capital. Under normal market circumstances, the Fund invests at least 80% of its managed assets in adjustable rate U.S. dollar-denominated, secured and unsecured senior loans. Unsecured loans will be investment grade quality at the time of investment. Total assets as of Aug. 31, 2016 were just under $409 million.
The Fund's guidelines also permit the short sale of borrowed securities to finance asset purchases. In addition, the Fund may invest up to 20% of its assets in senior loans made to borrowers organized or located outside the U.S. These senior loans must be U.S. dollar-denominated.
FUND LEVERAGE
As of Aug. 31, 2016, the Fund's total leverage consisted of approximately $45 million of VRTP Shares and $101 million outstanding under a credit facility. The Fund intends to redeem the VRTP shares, and following the redemption of all VRTP shares, increase effective leverage to about 37% from its current level of slightly less than 36%.
ASSET COVERAGE
As of Aug. 31, 2016, the Fund's asset coverage ratio for total outstanding preferred shares, as calculated in accordance with the Investment Company Act of 1940, is expected to remain in excess of the minimum asset coverage of 225% required by the governing documents of the TPS.
STRUCTURAL PROTECTIONS
Compliance with the asset coverage test threshold is tested daily. Failure to have asset coverage of 225% after the close of business on the asset coverage cure date requires the Fund to redeem sufficient TPS, reduce the amount outstanding under the bank line, and/or make corrective trades to restore compliance. The total market value exposure period (i.e. the pre-specified time period allotted for valuation, cure and redemption in the event of a breach) for the asset coverage test is within the 60 business day guideline noted in Fitch's criteria.
The governing documents of the TPS do not provide for an effective leverage ratio test; however, the document requirement for asset coverage of 225% effectively caps structural leverage at 44.4% (1/2.25). The asset coverage test does not cover economic leverage such as unhedged derivative exposures. However, based on discussion with management, Fitch does not expect material amounts of this activity to take place over the life of the TPS.
SUBORDINATION RISK
The Fund has entered into a credit agreement with several conduit lenders and Citibank, N.A. as a lender, liquidity provider and as agent for the lenders. The rights of lenders, such as Citibank, and any other creditors to receive principal and interest payments on borrowings under the agreement are senior to the rights of holders the TPS shares to receive payment of dividends and redemptions.
Under the credit agreement, the Fund may not be permitted to redeem TPS or make dividend payments unless at such time, the Fund meets certain senior debt asset coverage and borrowing base requirements and no event of default or other circumstance exists under the credit agreement that would limit or block redemption payments. In general, the 'borrowing base' represents the amount of assets against which the bank will advance funds under the credit agreement.
Under the credit agreement, the Fund cannot make any redemption or dividend payment on the TPS if immediately after giving effect to such payment the Fund will have less than 263% asset coverage on its senior debt. If the Fund fails to have asset coverage of at least 263% on any business day, it must use available funds to prepay borrowings on that date. If it is unable, it must prepay the senior debt until asset coverage with respect to senior debt is at least 300% within five additional business days the following any breach.
Only after these conditions are met can the fund resume making any payments of dividends or redemptions to the TPS holders due at that time. TPS shareholders would be entitled to receive dividends at the increased rate equal to the dividend rate then in effect plus 5% per annum, prorated to the period of time for which dividends were delayed due to any credit agreement breach as discussed above.
Under the current allocation between preferred shares and borrowing under the credit agreement, Fitch views the likelihood of a delay in dividend or redemption payment to the TPS shareholders due to a breach in the terms of the credit agreement as remote, consistent with the 'AAexp' rating. In the event of a market value decline, the 225% asset coverage test for the TPS will be breached and require mandatory deleveraging well before a breach of either the senior debt asset coverage or borrowing base requirement as stipulated in the credit agreement can occur. In addition the relatively brief cure period for these requirements as provided for in the credit agreement further reduces the potential for dividend or redemption payment delay in the event of a breach.
Fitch notes however that either a substantial increase in the amount drawn under the credit agreement which causes this form of borrowing to become a materially larger part of the fund's capital structure, a material change in the portfolio composition, or a change in the credit agreement terms that increases the likelihood that a TPS dividend or redemption payment could be delayed, could negatively impact Fitch's rating on the TPS.
STRESS TESTS
Fitch performed various stress tests to assess the strength of the structural protections available to the TPS compared to the stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where the Fund's leverage and portfolio composition migrated to the outer limits of the Fund's operating and investment guidelines.
Only under remote circumstances, such as severe credit deterioration or increased issuer concentration did the asset coverage available to the TPS fall below the 'AA' threshold, and instead passed at the 'A' rating level.
Given the relative conservatism of the stress scenarios, and the minimal rating impact, Fitch views the Fund's permitted investments, issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AA' long-term rating.
THE ADVISORS
NFA, a subsidiary of Nuveen Investments, is the Fund's investment advisor, responsible for the Fund's overall investment strategy and its implementation. Symphony is an affiliate of NFA and oversees the day-to-day investment operations of the Fund. Nuveen Investments and its affiliates had approximately $239.5 billion of assets under management as of June 30, 2016.
RATING SENSITIVITIES
The rating assigned to the Term 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.
The Fund has the ability to assume economic leverage through derivative transactions which may not be captured by the Term Preferred Share's asset coverage test. The Fund also has the ability to assume leverage by borrowing securities to fund a short sale. Outside of the CDS protection purchased, the Fund does not engage in speculative derivative activities or short sales of borrowed securities to fund asset purchases and Fitch's analysis assumes the Fund does not envision engaging in material amounts of such activity in the future. Any material derivative exposures or short sales of borrowed assets could have potential negative rating implications if they adversely affect asset coverage available to rated preferred securities.
For additional information about Fitch's rating guidelines applicable to debt and preferred stock issued by closed-end funds, please review the criteria referenced below, which can be found 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
Rating Closed-End Funds and Market Value Structures (pub. 09 Sep 2016)
https://www.fitchratings.com/site/re/886753
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