Approximately $6.4 billion in preferred shares issued by 88 state-specific municipal closed-end funds affected
New York, July 12, 2012 -- Moody's Investors Service has today downgraded the ratings of preferred
shares issued by 69 state-specific municipal closed-end
funds (CEFs) sponsored by eight asset managers to Aa2 from Aaa.
These rating actions conclude the reviews initiated on 2 May 2012,
when all obligations of CEFs were placed on review for downgrade following
the publication of Moody's revised methodology for rating securities
issued by CEFs.
The short-term ratings assigned to securities issued by CEFs are
not affected by the application of the new methodology, as they
are directly linked to the rating of the respective security's liquidity
provider.
A detailed list of the current and former ratings of these securities
can be accessed at: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_143832
RATINGS RATIONALE
The preferred securities issued by state-specific municipal CEFs
have been downgraded to Aa2. These CEFs typically demonstrate the
highest risk-adjusted asset coverage ratios, strong asset
profiles and very high fixed charge coverage metrics. The key rating
factors for securities issued by these funds are discussed below.
For CEFs whose rating factor scores deviate from those of typical state-specific
municipal CEFs, an explanation is provided as part of the detailed
list at the above link.
Factor 1: Adjusted Leverage
CEFs that invest in state-specific municipal securities have the
highest risk-adjusted asset coverage ratios. A risk-adjusted
asset coverage ratio discounts portfolio assets based on the historical
price volatility of a CEF's municipal debt securities and compares
that value to the CEF's debt and preferred obligations. All
state-specific municipal funds achieve a score consistent with
the Aaa rating category for this metric, with an average coverage
of 1.6 times the standard for the Aaa level.
The second metric in Moody's analysis of leverage assesses the risk
that a fund will breach the regulatory coverage requirement imposed by
the Investment Company Act of 1940 ('40 Act), based on the historical
volatility of the fund and its current capital structure. The majority
of municipal CEFs achieve a score consistent with Aaa for this factor.
A few CEFs with total leverage in excess of 40% score in the Aa
range because higher leverage increases the likelihood of a '40
Act breach.
Factor 2: Portfolio Profile
State-specific municipal CEFs hold securities with very strong
credit quality across various general obligation, tax obligation,
revenue bonds, pre-refunded bonds and other security types.
Municipal CEFs have a profile consistent with the Aa level for this factor,
incorporating the high credit quality of their portfolios, offset
somewhat by the lower liquidity and limited price transparency in the
municipal market. Funds oriented toward high yields with assets
rated below A2 on average score in the A to Baa range for this factor.
The portfolio profile factor includes sector and issuer correlation metrics
based on relative size and number of heterogeneous sectors and/or issuers,
and for state-specific funds incorporates the risk associated with
geographical concentration. In Moody's opinion, general
tax revenue and revenue from municipal projects within the same state
are derived from the same regional economy, which concentrates risk
from fiscal and political problems at the state level. Accordingly,
Moody's adjusts its concentration metrics for state-specific
funds to account for increased security performance and price correlation
risks. Of the 18 states in which Moody's rates securities
issued by state-specific CEFs, the revenue bases of four
states -- Connecticut, Massachusetts, Michigan
and Virginia -- are considered to be less diversified than
those of the other states, and the scores are adjusted accordingly.
The average raw score for state-specific CEFs is Aa1 for the concentration
metric; the scores range from Aaa to A1, with the latter applying
to funds with greater sector concentration or more concentrated issuers.
Adjusted for geographical concentration, scores for this metric
range from Aa3 to Baa1, with the average at A1.
Factor 3: Fixed Charge Coverage
State-specific CEFs demonstrate excellent fixed charge coverage,
reflecting strong coverage of periodic payments associated with financing
activities out of recurring earnings after deducting basic operating expenses.
On average, state-specific municipal CEFs achieve a score
consistent with Aaa for this metric, with average coverage levels
in excess of 10 times for both one- and five-year periods.
Coverage ratios vary significantly among funds, based largely on
whether their liabilities are fixed or floating. While funds with
long-term fixed rate capital do not perform as well on this metric
as those with floating rate liabilities, Moody's does factor
in the positive effect of fixed rate debt and preferred obligations when
rates eventually rise.
Senior Rating Profile
The complete evaluation of the quantitative factors produces an indicative
senior rating level for a CEF's leverage. In the case of
the state-specific municipal CEFs, the senior indicative
rating is Aa1.
Relative Priority of Claim
In addition to assessing the key rating factors described above,
Moody's considers the priority of claim of a fund's specific
security types and any other qualitative factors relevant to the fund's
credit profile. In the case of preferred securities, which
is the instrument class associated with these ratings, a one-notch
downward adjustment from the rating suggested by the key factors is made
to reflect the weaker position of investors holding preferred stock relative
to those holding senior unsecured debt obligations.
The principal methodology used in these ratings was "Moody's Methodology
for Rating Securities Issued by U.S. Closed-End Funds,"
published in May 2012. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
In addition to the information provided below please find on the ratings
tab of the issuer page at www.moodys.com, for each
of the ratings covered, Moody's disclosures on the lead rating
analyst and the Moody's legal entity that has issued each of the
ratings.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
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Please see Moody's Rating Symbols and Definitions on the Rating Process
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Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
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Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Daniel Serrao
Associate Managing Director
Managed Investments Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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Yaron Ernst
MD - Managed Investments
Managed Investments Group
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SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
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Moody's lowers ratings of securities issued by closed-end funds investing in state-specific municipal bonds
