RPT-Fitch: Rate hike causes divergence between loan and bond closed-end funds
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Aug 23 (Reuters) - (The following statement was released by the rating agency)
Closed-end funds (CEFs) investing in longer-term bonds have performed poorly in the face of a rising interest rate environment, according to a new Fitch Ratings report. However, CEFs investing in corporate loans remain stable, with further divergence possible.
Towards the end of August 2013, there were over 90 leveraged CEFs investing in corporate bonds and loans, managing $60 billion in assets and utilizing $17 billion in balance sheet leverage.
Among the report's key findings:
--Leveraged CEFs investing in loans fared well during recent market turbulence due to their floating-rate nature and low interest rate risk of the asset class. NAVs for the funds in the sector lost only 3% before rebounding to old highs. Average leverage ratios rose closer to 35% before scaling back slightly.
--More recently, loans as an asset class have regained popularity as investors looked for natural hedges against a rise in rates, but demand has come mostly through open-end funds, which attracted 33% inflows year to date versus just one loan CEF launched in the last two years.
--Leveraged CEFs investing bonds, however, diverged in performance. The 73 CEFs in the sector saw the average NAVs decline by 8% and pushing leverage ratios up by 1.4% at the end of June before coming down slightly. Funds' common stock traded down to an average discount of more than 5% from a 2.4% premium.
--The report further discusses how the 'risk-off' contagion drove broader price volatility and presents detailed NAV and leverage statistics for other sectors.
Fitch has not taken any rating actions on rated-debt and preferred stock in the sector despite the volatility but continues to monitor the situation.
Fitch rates approximately $9 billion of notes and preferred shares issued by U.S. leveraged taxable CEFs, currently in the 'AAA' and 'AA' categories. The full report 'Closed-End Funds Weather Rate Rise (Loan Funds Sail Through Volatility, Bond Funds Diverge' is available at 'www.fitchratings.com'.
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