NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned 'AAA/F1' ratings to the variable rate demand preferred shares (VRDPs) issued today by Western Asset Municipal Partners Fund Inc. (NYSE: MNP), a closed-end fund managed by Western Asset Management Company (sub-adviser).
Fitch takes the following actions:
Western Asset Municipal Partners Fund Inc. (NYSE:MNP)
--$66,500,000 of VRDP Shares series 1, final mandatory redemption on March 11, 2045 rated 'AAA/F1'. The liquidity provider is Citibank, N.A. ('A/F1');
KEY RATING DRIVERS
The short-term rating of the VRDP Shares primarily reflect:
--The credit strength of Citibank, N.A. ('A/F1') as liquidity provider;
--The terms and conditions of the purchase agreements.
The 'AAA' long-term rating primarily reflects:
--Sufficient pro-form asset coverage provided to the VRDP Shares;
--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;
--Both the short- and long-term ratings also reflect the capabilities of the sub-adviser.
MNP will use the proceeds of the VRDP Share issuance to redeem a portion of its outstanding auction rate preferred shares (ARPS). Leverage is expected to remain materially unchanged. Proceeds of the newly issued VRDP Shares will be deposited irrevocably in an escrow account with the ARPS redemption agent. The amount deposited with the ARPS redemption agent will equal 90% of the liquidation preference of the ARPS and any accrued and unpaid dividends. Fitch expects the outstanding ARPS to be redeemed using the escrowed VRDP Share proceeds, which will then be marked paid in full by Fitch.
Fitch estimates that $18.5 million of ARPS will remain outstanding after the refinancing. Fitch does rate these securities.
MNP is registered as a diversified, closed-end management investment company under the 1940 Act. MNP invests mainly in investment grade municipal securities and seeks to maximize current income exempt from federal income tax as is consistent with preservation of principal.
As of Jan. 31, 2015, MNP had approximately $333.1 million in assets. Total pro-forma leverage consists of $66.5 million of Fitch-rated VRDP Shares and $18.5 million of ARPS.
As of Jan. 31, 2015, the MNP's pro-forma asset coverage ratio for all preferred shares, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC Tests) per the 'AAA' rating guidelines outlined in Fitch's applicable criteria was in excess of 100%. This is the minimum asset coverage guideline required by the fund's governing documents.
The Fitch OC tests calculate standardized asset coverage by applying haircuts to portfolio holdings based on riskiness and diversification of the assets and measuring their ability to cover both on- and off-balance sheet liabilities at the stress level that corresponds to the assigned rating.
As of Jan. 31, 2015, the pro-forma effective leverage ratio for MNP was 26%, below the 45% maximum allowed by the governing documents of VRDP Shares.
VRDP STRUCTURAL PROTECTIONS
For the VRDP Shares, a breach of the effective leverage ratio is a breach of the fee agreement with the liquidity provider, and, at the option of the liquidity provider, may result in mandatory tender of VRDP Shares for remarketing (see VRDP Purchase Obligation section below for additional details). However, in the event of a breach, Fitch expects the fund to redeem sufficient VRDP Shares to restore compliance. The Effective Leverage Ratio is tested daily.
For the effective leverage ratio test, the total market value exposure periods (i.e. the pre-specified time period allotted for valuation, cure and redemption in the event of a breach) was within the 60 business day guidelines provided in Fitch's criteria.
VRDP PURCHASE OBLIGATION
The short-term rating assigned to the VRDP Shares is directly linked to the short-term creditworthiness of the liquidity provider. The VRDP Shares are supported by a purchase agreement to ensure full and timely repayment of all tendered VRDP Shares plus any accumulated and unpaid dividends. The purchase agreement is unconditional and irrevocable.
The VRDP purchase agreement requires the liquidity provider to purchase all VRDP Shares tendered for sale that were not successfully remarketed. The liquidity provider must also purchase all outstanding VRDP Shares if the fund has not obtained an alternate purchase agreement prior to the termination of the purchase agreement being replaced or following the downgrade of the liquidity provider's rating below 'F2' (or equivalent).
The role of the liquidity provider under the fee agreement relating to the purchase obligation has a scheduled termination date. Subsequent to the scheduled termination date, the fee agreement can be extended with the existing liquidity provider, or a new liquidity provider may be selected. Any future changes to the terms of the fee agreements or any prospective replacement that weakens the structural protections discussed above may have negative rating implications.
Western Asset acts as the sub-adviser to MNP, providing day-to-day management of its portfolio. Legg Mason Partners Fund Advisor, LLC acts as the manager to MNP, providing management and administrative services. Western Asset is a wholly owned subsidiary of Legg Mason Inc. As of Dec. 31, 2014, Western Asset had approximately $466 billion in assets under management (AUM).
The ratings assigned to the VRDP 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.
Certain terms relevant to key structural protections of the VRDP shares, including the effective leverage ratio are set forth in the fee agreements relating to the purchase agreements and are renewed on a periodic basis. Any future changes to these terms that weaken the structural protections may have negative rating implications.
The short-term ratings assigned to the VRDP shares may also be sensitive to changes in the financial condition of the liquidity provider. A downgrade of the liquidity provider to 'F2' would result in a downgrade of the short-term ratings of the VRDP shares 'F2,' absent other mitigants. A downgrade below 'F2', on the other hand, would not necessarily result in a downgrade of the short-term rating of the VRDP shares, given the features in the transactions that would result in a mandatory tender of the VRDP shares for remarketing, or purchase by the liquidity provider in the event of a failed remarketing.
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'.
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The sources of information used to assess this rating were the public domain and the sub-adviser.
Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Sept. 4, 2014);
--' Fitch: Closed-End Funds Welcome Volcker TOBs Delay' (Feb 12, 2015);
--' 2015 Outlook: Closed-End Funds' (Dec 10, 2014).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
2015 Outlook: Closed-End Funds