CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms the 'AAA' ratings of the Variable Rate MuniFund Term Preferred Shares (VMTP Shares) issued by DTF Tax-Free Income Inc. (NYSE: DTF), a closed-end fund managed by Duff & Phelps Investment Management Co.:
--$65,000,000 Series 2018 VMTP shares due August 2018.
KEY RATING DRIVERS
The rating affirmation primarily reflects:
-- Sufficient asset coverage provided to the VMTP shares as calculated per the fund's over-collateralization (OC) tests;
-- The structural protections afforded by mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines;
-- The legal and regulatory parameters that govern the fund's operations;
-- The capabilities of Duff & Phelps Investment Management Co. as investment advisor.
The fund's asset coverage ratio, 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, were in excess of 100%. This is the minimum threshold required under the terms of the VMTP shares.
The test calculates standardized asset coverage by applying haircuts to portfolio holdings based on perceived riskiness and diversification of the assets and measuring its ability to cover both on- and off-balance-sheet liabilities, if any, at the assigned 'AAA' stress level.
The fund's asset coverage ratio for the VMTP Shares, as calculated in accordance with the Investment Company Act of 1940, was in excess of the minimum asset coverage threshold of 225% required by the fund's governing documents (Asset Coverage Ratio).
The fund has covenanted to maintain the effective leverage ratio (Effective Leverage Test) for the VMTP Shares below 45% of total assets. The fund's Effective Leverage Ratio is currently below 45%.
In the event of breaches to any of the above thresholds, the fund is required to restore compliance per structural protections described below.
Compliance with the Fitch OC, Asset Coverage and Effective Leverage thresholds is tested periodically. The fund manager is expected to cure any breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC breaches), or by reducing leverage in a sufficient amount (for all other breaches) within a pre-specified time period.
For Fitch OC, Asset Coverage and Effective Leverage Tests, the maximum market value exposure (i.e. valuation, cure and redemption) that preferred shareholders would be exposed to before cure or redemption is approximately 45 business days.
The fund's investment objective is current income exempt from regular federal income tax consistent with preservation of capital. The fund seeks to achieve its investment objective through investment of at least 80% of assets in a diversified portfolio of tax-exempt obligations. The fund may not invest more than 25% of its total assets (calculated at market value at the time of each investment) in the securities of issuers in a single industry; provided that, for purposes of this restriction, tax exempt securities of issuers that are states, municipalities or their political subdivisions are not considered to be the securities of issuers in any single industry. Under normal market conditions, the fund may not invest more than 20% of its total assets in obligations that pay interest that is subject to the federal alternative minimum tax.
Duff & Phelps Investment Management Co. (Duff & Phelps) is the fund manager and responsible for the implementation and execution of the investment strategy on a day-to-day basis. Duff & Phelps is an SEC registered investment advisor with $10.6 billion in assets under management as of March 31, 2015. Duff & Phelps' managed mutual funds and closed-end funds provide investment opportunities in global infrastructure, global real estate and municipal and corporate bonds.
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 funds, 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' Preferred Shares Asset Coverage test or Effective Leverage Ratio.
The fund currently does not engage in derivative activities for speculative purposes and does not envision engaging in 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.
Additional information is available on www.fitchratings.com
Rating Closed-End Fund Debt and Preferred Stock (pub. 04 Sep 2014)
Dodd-Frank Rating Information Disclosure Form