Fitch Hosts Panel on Closed-End Fund Leverage and Derivative Use at Capital Link CEF/ETF Conference
On April 25, Fitch Ratings moderated a panel titled ‘Leverage and Derivatives in Closed-End Funds’ at the 11th Annual Capital Link Closed-End Funds and Global ETFs Forum hosted by the Capital Link. The conference gathered over 1000 participants from the advisor, investor and fund manager communities of the closed-end fund (CEF) industry.
Participants at the presentation included:
–Yuriy Layvand, CFA, Director, Fund & Asset Manager Rating Group – Fitch Ratings.
–Greg Fayvilevich, Associate Director, Fund & Asset Manager Rating Group – Fitch Ratings;
–Tomer Seifan, Head of Structuring for Global Equities and Commodity Derivatives – BNP Paribas;
–Robert Crothers, Vice President – BlackRock;
–Jon Maier, Global Macro Research, Closed-End Fund Analyst and ETF Strategist – Bank of America Merrill Lynch.
Fitch noted that CEFs continued to actively redeem auction rate preferred shares (ARPS) during 2011, such that municipal and taxable CEFs have redeemed 67% and 86%, respectively, of ARPS since year-end 2007. For municipal CEFs additional redemptions announced in 2012 are expected to increase the total ARPS redeemed to 83% when completed. For taxable funds, bank lines and margin loans now account for 50% of total leverage in the sector, up from 5% observed pre-crises when funds relied more heavily on ARPS financing.
According to Fitch’s proprietary closed-end fund leverage database, trends to redeem ARPS have generally shortened the maturity of CEF leverage, changing the primary investor base of leverage from retail to institutional. New forms of borrowing have typically carried higher costs than the replaced ARPS; however, Fitch found that the cost of financing declined across nearly every leverage category since 2010.
Fitch observed that at the end of 2011 derivative use was widespread across CEFs, used for both hedging and investment purposes. When rating debt issued by closed-end funds that utilize derivative strategies, Fitch’s criteria calls for full recognition of any embedded leverage (or risk reducing hedges) by grossing up or down the balance sheet and leverage measures as if the position had been cash funded.
Fitch has been active in rating all new CEF leverage types, evaluating their unique structural characteristics and assessing their credit profiles. The slides used during the presentation can be found at ‘www.fitchratings.com‘ following the link provided at the end of this press release.
Complete agenda of the 11th Annual Capital Link Closed-End Funds and Global ETFs Forum:
Capital Link is a New York-based investor relations and financial communications firm, which, among other activities, maintains a strategic focus on CEFs and exchange-traded funds (ETFs).
Additional information is available at ‘www.fitchratings.com‘.
–’Leverage and Derivatives in Closed-End Funds -Presentation Slides at 2012 Capital Link Forum’ dated April 27, 2012.
Applicable Criteria and Related Research:
Capital Link Closed-End Fund Slides