NEW YORK--(BUSINESS WIRE)--Fort Dearborn Income Securities, Inc. (NYSE:FDI) (the “Fund”) announced that at the annual meeting of shareholders to be held on December 6, 2013 (the “Annual Meeting”), shareholders will be asked to approve changes to the Fund’s investment policies and restrictions, as described below. These changes, if approved, will become effective on or after December 31, 2013. The proposals being submitted to shareholders differ to some extent from those described in the Media Release previously issued on September 18, 2013.
At the Annual Meeting, shareholders will be asked to approve amendments to the Fund’s fundamental investment policy of investing at least 75% of the Fund’s total assets in investment grade debt (the “75% Policy”) in order to modernize and streamline the related language. For example, the current 75% Policy is linked to credit ratings so that to come under the 75% Policy, debt obligations must be rated in the four highest credit rating grades of Moody’s Investor Services, Inc. or Standard & Poor’s Rating Services. The current 75% Policy dates back to 1993, when the Fund’s prospectus was last updated in conjunction with a rights offering. Since then, Fitch Ratings, Inc. (“Fitch”) has established itself as the third major ratings agency and is viewed by UBS Global Asset Management (Americas), Inc. (“UBS Global AM”), the Fund’s investment advisor, as being as reliable as the other two ratings organizations. The proposed amended 75% Policy, included below, now incorporates Fitch:
The Company may not have less than 75% of the Company's total assets in, non-convertible fixed income securities which at the time of purchase are considered investment grade by being rated in the four highest grades as determined by Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's Ratings Services ("S&P"), or Fitch Ratings, Inc. ("Fitch") or if not rated are considered by the Investment Advisor to be of comparable investment quality.
As noted earlier, the Fund’s offering documents, restrictions and policies have not been updated in almost two decades and, therefore, feature a number of limitations that many modern funds no longer include. As such, shareholders will also be asked to approve amendments to the Fund’s restrictions related to borrowing, senior securities and commodities. These changes will provide the Fund with more modern restrictions that will no longer prevent the Fund from using derivative instruments, such as futures, forwards, swaps and options, to more efficiently manage the Fund’s investments. Also, amending the borrowing and senior securities restrictions will remove any ambiguity with respect to the Fund’s ability to engage in structural leverage (e.g., borrowing from a bank for investment purposes), if it is determined that such leverage would be beneficial at some time in the future. At this time, the Fund does not intend to engage in structural leverage (such as borrowing from a bank for investment purposes), however, Fund shareholders will be alerted in writing should the Board and UBS Global AM decide to implement such strategies in the future.
Finally, shareholders are asked to approve the elimination of four outdated fundamental investment restrictions that currently prevent the Fund from employing derivative instruments as additional tools to manage the Fund’s exposures and provide greater flexibility in portfolio construction. The investment restrictions that shareholders are being asked to approve for elimination include restrictions prohibiting: 1) mortgaging, hypothecating or pledging assets; 2) purchasing securities on margin; 3) making short sales or maintaining short positions; and 4) engaging in options. UBS Global AM seeks to initiate use of derivative instruments to more efficiently manage the Fund’s exposures. For example, the Fund may utilize interest rate instruments, such as futures, to more precisely manage the Fund’s interest rate exposure, while potentially seeking to improve its earnings potential by investing in longer maturity, higher-yielding debt, but reducing overall portfolio interest rate exposure using futures. Furthermore, the Fund intends to utilize currency instruments (e.g., foreign exchange forwards) to hedge any foreign currency exposure back to the US dollar. Overall, the Fund expects to use derivative instruments for both hedging and investment purposes.
The Board set Friday, October 11, 2013 as the record date for determination of the shareholders entitled to vote at the Annual Meeting. Additional matters to be considered at the Annual Meeting are the election of directors and such other business as may properly come before the Annual Meeting. The Board has recommended that shareholders vote for all of the directors nominated and for the proposed amendments to the Fund’s 75% Policy and fundamental investment restrictions.
In connection with the Annual Meeting, a proxy statement was filed with the SEC. WE URGE SHAREHOLDERS TO READ THE PROXY STATEMENT CAREFULLY BECAUSE IT CONTAINS IMPORTANT INFORMATION ABOUT THE FUND. Shareholders are able to obtain free copies of the proxy statement, as well as other filed documents containing information about the Fund, at www.sec.gov, the SEC’s Internet site. Shareholders can also obtain copies of these documents and other related documents for free by calling the Fund’s proxy solicitor, Georgeson Inc. at 866-316 3922.
Additional risk considerations
While the changes discussed above present attractive investment opportunities, they may potentially introduce additional risks, which are further outlined below and in the proxy statement.
Derivatives risk: The value of “derivatives”—so called because their value “derives” from the value of an underlying asset, reference rate or index—may rise or fall more rapidly than other investments. When using derivatives for non-hedging purposes, it is possible for the Fund to lose more than the amount it invested in the derivative. The risks of investing in derivative instruments also include market and management risks. Derivatives relating to fixed income markets are especially susceptible to interest rate risk and credit risk. In addition, many types of swaps and other non-exchange traded derivatives may be subject to liquidity risk, credit risk and mispricing or valuation complexity. These derivatives risks are different from, and may be greater than, the risks associated with investing directly in securities and other instruments.
Leverage risk associated with financial instruments: The use of financial instruments to increase potential returns, including derivatives used for investment (nonhedging) purposes, may cause the Fund to be more volatile than if it had not been leveraged. The use of leverage may also accelerate the velocity of losses and can result in losses to the Fund that exceed the amount originally invested.
Fort Dearborn Income Securities, Inc. is a closed-end bond fund managed by UBS Global AM. The Fund invests principally in investment grade, long-term fixed income debt securities. The primary objective of the Fund is to provide its shareholders with:
- A stable stream of current income consistent with external interest rate conditions; and
- A total return over time that is above what they could receive by investing individually in the investment grade and long-term maturity sectors of the bond market.
Further information regarding the Fund, including a discussion of principal objectives, principal investment strategies and principal risks, may be found in the fund overview located at http://www.ubs.com/closedendfundsinfo. You may also request copies of the fund overview by calling the Closed-End Funds Desk at 888-793 8637.
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