NEW YORK--(BUSINESS WIRE)--Fitch Ratings today published updated sector-specific rating criteria for debt and preferred stock issued by Puerto Rico closed-end funds (PR CEFs). Fitch expects no ratings changes as a result of the criteria update.
This criteria supplements the CEF master criteria that Fitch published on Aug. 16, 2011 titled 'Rating Closed-End Fund Debt and Preferred Stock,' and updates and replaces the previous report titled 'Puerto Rico Closed-End Fund Debt and Preferred Stock Rating Criteria' published on March 30, 2011.
The core rating methodology remains intact, with the following key changes:
--Discount factors (DF) applied to investments in municipal bonds of a single state or commonwealth have been increased for states or commonwealths whose general obligations are rated below 'BBB'. This is consistent with the criteria for U.S. CEFs and applies to exposures greater than 25% of a fund's portfolio. The increased DF is intended to capture the increased likelihood of price volatility and correlation between portfolio assets from a single state or commonwealth facing credit stress. At this time, no asset coverage or rating implications are expected as a result of this change given that that Fitch currently rates general obligation bonds of Puerto Rico at 'BBB+', Outlook Stable.
--Municipal sectors used in assessing diversification have been reclassified in line with U.S. CEF criteria to better align correlation of credit and market risk factors amongst sectors.
--Framework has been expanded to address certain limited circumstances under which leverage issued by PR CEFs may be able to achieve 'AAA' ratings. Beyond these circumstances, a qualitative rating cap of 'AA' continues to be in effect for PR CEF leverage, reflecting the concentrated market and investor base of certain invested asset classes, and the overall regulatory differences from U.S. CEFs pertaining to the U.S. bankruptcy law.
--Fitch's treatment of certain structured conduit transactions arranged by Puerto Rican government bodies to facilitate the purchase of U.S. municipal and corporate collateral by PR CEFs is clarified. The updated criteria limits the amount of credit that such holdings are eligible to receive toward the Fitch overcollateralization (OC) Tests to reflect the untested track record of such securities.
Fitch expects no immediate ratings changes as a result of the criteria update, as the criteria changes are limited in scope.
The criteria report, titled 'Rating Puerto Rico Closed-End Fund Debt and Preferred Stock' (Aug. 16, 2011), is available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
Related Research:
--'Tax-Exempt CEFs Change Leverage' (June 17, 2011);
--'Taxable Closed-End Funds Reduce ARPS Leverage, Shift to Alternate Forms' (May 25, 2011);
--'CLOs and CEFs: A Comparison of Leveraged Loan Investment Vehicles' (April 26, 2011);
--'Tax-Exempt Closed-End Fund Weather Price Declines' (Feb. 2, 2011);
--'Closed-End Fund: Evolving Use of Leverage and Derivatives' (Sept. 27, 2010);
--'Closed-End Fund: Redemptions Provide Some Liquidity to Illiquid ARPS Market' (Aug. 31, 2010).
Applicable Criteria and Related Research: Puerto Rico Closed-End Fund Debt and Preferred Stock
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648889
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