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TEXT-Fitch: closed-end funds s-term funding boosts yields
October 9, 2012 / 3:50 PM / 5 years ago

TEXT-Fitch: closed-end funds s-term funding boosts yields

Oct 9 - Fitch Ratings notes that taxable closed-end funds (CEFs) have taken
significant advantage of extremely cheap short-term funding that has, in effect,
increased yield to retail stock investors. However, the shift to shorter term
funding can also expose them to increased interest rate and funding rollover

We expect that Fed policies aimed at keeping interest rates low, such as the
third round of quantitative easing and ample competition among banks to provide
funding to CEFs, will keep short-term borrowing costs cheap and bank financing
attractive. Still, we feel such short-term funding can pose higher risk, as
lenders have the option to pull back or eliminate funding over a short period.
During stressful market environments, CEFs might then be forced to seek more
expensive funding or liquidate assets. Both options could prove very costly.

As a function of decreasing borrowing costs for term securities and desire to
diversify funding base, a larger number of CEF managers are leaning toward
terming out a portion of their debt. Market feedback suggests funds are seeking
to move 50%-75% of their capital structure to three- to seven-year terms while
retaining the remainder in existing short-term bank leverage for flexibility,
cash management, and yield-curve diversification.

Going forward, we believe that leveraged CEFs will need to be more proactive in
managing both sides of the balance sheet. Access to multiple sources of funding
while balancing rollover risk with the cost of leverage under various interest
rate scenarios is key.

For additional information on this topic, please see our report, "Taxable
Closed-End Funds Reliant on Short-Term Debt Reap Low-Cost Funding at the Expense
of Rollover Risk," available at

Additional information is available on

The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article, which may include hyperlinks to companies
and current ratings, can be accessed at All opinions
expressed are those of Fitch Ratings.

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