TEXT - Fitch on single-state closed-end funds
Nov 8 - Net asset values (NAVs) for New Jersey, New York, and Connecticut single-state closed end-funds (CEFs) have remained stable in the wake of Hurricane Sandy. Fitch's latest analysis also indicates that New Jersey, New York, and Connecticut single-state funds' preferred shareholders continue to benefit from healthy asset coverage cushions as a protection against the possibility of any near-term price volatility associated with the storm. Our analysis of the six-day trading period from Oct. 29 to Nov. 6 for the 26 outstanding Fitch-rated New Jersey, New York, and Connecticut single-state CEFs indicates that fund NAVs actually increased in most instances (four were unchanged), even as the effects of the storm damage became clearer in the days that followed. Asset coverage ratios relating to preferred shares and debt for the funds remain strong, reflecting the stable NAV performance. On average, Fitch-rated New Jersey, New York, and Connecticut single-state funds enjoyed coverage cushions, at last review, of more than 37% at the 'AAA' rating category. Fitch measures asset coverage available to the rated securities (preferred shares) based on the discounted market price loss expectations, the diversification of the funds' assets, and the use of structural and economic leverage. In case of asset coverage declines, each of the funds' operating documents requires the funds to reduce leverage in a sufficient amount to restore compliance with the applicable asset coverage tests within a specified time. Our CEF criteria consider the inherent concentration risks presented by single-state CEFs, which typically invest 75%-100% of assets in a single state. For single-state concentrations above 25%, we apply higher discount factors for securities of issuers located in a single state. This is intended to capture the increased likelihood of price volatility and correlation between portfolio assets from a single state under credit stress, which may be exacerbated by tail events, headline risk, and/or forced selling. Fitch will continue to monitor NAV volatility and the possibility of asset coverage erosion associated with New Jersey, New York, and Connecticut single-state CEFs in the coming weeks. For additional information on this topic, please see our report, "Rating Closed-End Fund Debt and Preferred Stock," available at www.fitchratings.com.
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