Fitch Affirms Notes Issued by 12 UBS Puerto Rico CEFs

August 15, 2011 05:39 PM Eastern Daylight Time

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has reviewed the ratings assigned to $663 million of 100% Principal Protection Short-Term Notes, $26 million of 100% Principal Protection Medium-Term Notes, and $2.8 million of Term Preferred Stock issued by 12 Puerto Rico closed-end funds advised by UBS Asset Managers of Puerto Rico. As a result of this review, Fitch has affirmed the following ratings:

--Medium-term notes of four funds at 'AA' and short-term notes of the same funds at 'F1+';

--Medium-term notes of eight funds at 'A' and the short-term notes of the same funds at 'F1';

--One series of preferred stock at 'A.'

In addition, certain securities are Paid in Full following their maturity. A complete list of the rating actions is at the end of this release.

KEY RATING DRIVERS

The main drivers for the rating actions are the asset coverage available to the notes at the individual, sub-account level, the structural protections afforded by mandatory collateral maintenance provisions in the event of asset coverage declines, the legal and regulatory parameters that govern the funds' operations, and the capabilities of UBS Asset Managers of Puerto Rico as investment adviser. The funds' credit parameters are consistent with Fitch's Puerto Rico closed-end fund rating criteria at the assigned rating levels for each series of notes.

FUND SUMMARY

The funds are corporations organized under the laws of the Commonwealth of Puerto Rico and are duly registered as non-diversified, closed-end management investment companies under the Puerto Rico Investment Companies Act, as amended.

The funds normally invest at least 67% of total assets in securities issued by Puerto Rico entities. These include securities issued by the Commonwealth of Puerto Rico, Puerto Rico mortgage-backed and asset-backed securities and corporate obligations and preferred stock of Puerto Rico entities.

The funds increase amounts available for investment through the issuance of preferred stock, debt securities, or other forms of leverage, representing not more than 50% of total assets immediately after any such issuance. Currently the funds utilize short-term and medium-term notes and reverse repurchase agreements.

STRUCTURAL PROTECTIONS

At the time of the ratings affirmations, the funds' asset coverage ratios, as calculated in accordance with the Fitch OC tests using the asset specific discount factors and the minimum discount factors found in the rating guidelines outlined in Fitch's applicable criteria, were in excess of 100%, which are the minimum asset coverage amounts deemed consistent with the assigned ratings.

Each fund segregates collateral for each series of 100% Principal Protected Notes (comprised of a medium-term note series and a short-term note series) and preferred stock. The Fitch OC tests calculate asset coverage available to the notes and preferred stock based on the discounted market price loss expectations and diversification of the assets in each segregated collateral account. Should any such asset coverage tests decline below 100% (as tested weekly) and not be cured within the pre-specified timeframe of five business days, the governing documents would require the fund to reduce leverage in a sufficient amount to restore compliance with the applicable asset coverage tests on the final day of the cure period.

THE ADVISOR

UBS Asset Managers of Puerto Rico is the funds' investment advisor, and subject to the supervision of the funds' boards of directors is responsible for the funds' overall investment strategy and implementation. UBS Asset Managers of Puerto Rico is a division of UBS Trust Company of Puerto Rico, which is an affiliate of UBS Financial Services Incorporated of Puerto Rico. As of June 30, 2011, UBS Asset Managers of Puerto Rico had $9.8 billion of assets under management.

RATINGS SENSITIVITY

The ratings may be sensitive to material changes in the credit quality or market risk profiles of the funds. A material adverse deviation from Fitch guidelines for any key rating driver could cause the ratings to be lowered by Fitch. Changes in the supply-demand dynamics with respect to invested collateral types may influence Fitch's analytical approach to the liquidity of underlying collateral types. In addition, the amount of leverage assumed by a fund could also influence Fitch's analytical conclusion if such leverage increased the likelihood of a bankruptcy stay with respect to the overall fund.

As noted in the Rating Actions section of this release, six of the funds have 100% Principal Protection Medium-Term Notes that are indexed notes, whereby the amount of interest payable on an interest payment date is calculated under transaction-specific terms tied to the performance of a reference equity index, a basket of equity indices, or the performance of market interest rates. For all outstanding indexed notes, the funds have entered into an interest rate swap, in order to hedge against exposure to changes in the value of the referenced index. Ratings assigned to indexed notes consider the rating of the swap counterparty, the terms and conditions of the swap agreement, and the ability of the fund to access the swap proceeds to meet the interest payments. Given the potential for the reliance on a swap counterparty to ensure payment of interest on rated indexed notes, ratings assigned to indexed notes may change with the rating of the swap counterparty.

For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end fund, please review the criteria referenced below, which can be found on Fitch's web site at 'www.fitchratings.com'.

RATING ACTIONS

Fitch has taken the following rating actions:

Puerto Rico AAA Portfolio Bond Fund, Inc.

--100% Principal Protection Medium-Term Notes series, affirmed at 'AA';

--100% Principal Protection Short-Term Notes series, affirmed at 'F1+'.

Puerto Rico AAA Portfolio Bond Fund II, Inc.

--100% Principal Protection Medium-Term Notes series, affirmed at 'AA';

--100% Principal Protection Short-Term Notes series, affirmed at 'F1+'.

Puerto Rico AAA Portfolio Target Maturity Fund, Inc.

--100% Principal Protection Medium-Term Notes series, including indexed notes, affirmed at 'AA';

--100% Principal Protection Short-Term Notes series, affirmed at 'F1+';

--Preferred Shares, 2004 series, affirmed at 'A';

--Three series of 100% Principal Protection Medium-Term Notes and Preferred Shares, 2005 series, marked as 'paid in full' following their maturity.

Puerto Rico GNMA & US Government Target Maturity Fund, Inc.

--100% Principal Protection Medium-Term Notes series, affirmed at 'AA';

--100% Principal Protection Short-Term Notes series, affirmed at 'F1+'.

Puerto Rico Fixed Income Fund, Inc.

--100% Principal Protection Medium-Term Notes series, including indexed notes, affirmed at 'A';