CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AAA' rating assigned to the following preferred shares issued by The Denali Fund Inc. (NYSE: DNY), a closed-end fund co-advised by Boulder Investment Advisers LLC (BIA) and Stewart Investment Advisers (SIA):
--$21,950,000 of auction preferred shares (APS), series A, with a liquidation preference of $25,000 per share.
KEY RATING DRIVERS
The affirmation follows Fitch's review of DNY and reflects:
--Sufficient asset coverage relative to Fitch's published criteria;
--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 BIA as the investment advisor.
Fitch's ratings on the APS speak only to timely payment of dividends and principal in accordance with the terms of the APS and not to potential liquidity in the secondary market.
ASSET COVERAGE
At the time of the rating affirmation, the fund's asset coverage ratio for preferred stock, as calculated in accordance with the Investment Company Act of 1940 (1940 Act), was in excess of 200%, which is the minimum asset coverage required by the 1940 Act. Also, at the time of this affirmation, the fund's asset coverage ratios, as calculated in accordance with the Fitch total and net overcollateralization tests per the 'AAA' rating guidelines outlined in Fitch's applicable criteria were in excess of 100%, which are the minimum asset coverage amounts deemed consistent with an 'AAA' rating.
Should the asset coverage tests of the APS decline below their minimum threshold amounts (as tested on the last business day of each month) and are not cured within a pre-specified timeframe of seven business days, the governing documents require the fund to reduce the leverage in a sufficient amount to restore compliance with the applicable asset coverage tests within a specified timeframe.
FUND PROFILE
The Denali Fund Inc. is a non-diversified, closed-end management investment company, registered under the Investment Company Act of 1940, as amended, that commenced investment operations in September 2002. The fund's primary investment objective is achieving a total return consistent with dependable, but not assured, cash flow. The fund invests primarily in common stocks, including dividend-paying common stocks such as those issued by utilities, real estate investment trusts and closed-end registered investment companies. The fund also invests in fixed income securities such as U.S. government securities, preferred stocks, and bonds. The fund invests primarily in securities of U.S.-based companies and to a lesser extent in foreign equity securities and sovereign debt, in each case denominated in foreign currency.
As of Nov. 30, 2012, common equity securities constituted 80% of the portfolio, auction-rate preferred stock issued by other closed-end funds comprised 5% of the portfolio across two securities, a limited partnership investment in one long-short equity fund represented approximately 11% of the portfolio. The remaining balance consisted of cash equivalents and foreign currency positions.
With respect to the fund's investments in auction-rate preferred stock issued by other closed-end funds, the fund utilizes a third party pricing service to price such securities. Fitch affords these types of assets 40% price credit in its asset coverage tests, consistent with its treatment of the preferred stock asset class outlined in its rating criteria.
The fund has invested 22% of total assets in common stock of Berkshire Hathaway, Inc., which Fitch currently views as meeting the definition of a broadly diversified investment portfolio or holding company. As such, Fitch utilizes a higher maximum issuer concentration threshold at 20% for this exposure (in contrast to the maximum 10% threshold utilized for largest issuers per Fitch's criteria) when calculating Fitch total and net overcollateralization tests.
The fund has no restrictions on its ability to invest in foreign securities. Fitch notes that potential exchange rate risk associated with investments in foreign denominated securities is included as part of Fitch's assessment of the sufficiency of asset coverage available to rated APS.
THE ADVISOR
Boulder Investment Advisers, LLC and Stewart West Indies Trading Company, Ltd. (operating under the name Stewart Investment Advisers) act as the co-investment advisers to the fund. As of Dec. 31, 2012, the co-investment advisors along with Rocky Mountain Advisers, LLC, an affiliate, had approximately $991.9 million of assets under management.
RATING SENSITIVITY
The rating assigned to the APS may be sensitive to material changes in the leverage composition, credit quality of portfolio assets or market risk profile of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause the ratings to be lowered by Fitch.
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'.
The sources of information used to assess this rating were the public domain, BIA and SIA.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Closed-End Fund Debt and Preferred Stock Rating Criteria' (Aug. 15, 2012).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
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