(The following statement was released by the rating agency)
Oct 9 - Fitch Ratings notes that taxable closed-end funds (CEFs) have takensignificant advantage of extremely cheap short-term funding that has, in effect,increased yield to retail stock investors. However, the shift to shorter termfunding can also expose them to increased interest rate and funding rolloverrisk.
We expect that Fed policies aimed at keeping interest rates low, such as thethird round of quantitative easing and ample competition among banks to providefunding to CEFs, will keep short-term borrowing costs cheap and bank financingattractive. Still, we feel such short-term funding can pose higher risk, aslenders have the option to pull back or eliminate funding over a short period.During stressful market environments, CEFs might then be forced to seek moreexpensive funding or liquidate assets. Both options could prove very costly.
As a function of decreasing borrowing costs for term securities and desire todiversify funding base, a larger number of CEF managers are leaning towardterming out a portion of their debt. Market feedback suggests funds are seekingto move 50%-75% of their capital structure to three- to seven-year terms whileretaining 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 inmanaging both sides of the balance sheet. Access to multiple sources of fundingwhile balancing rollover risk with the cost of leverage under various interestrate scenarios is key.
For additional information on this topic, please see our report, "TaxableClosed-End Funds Reliant on Short-Term Debt Reap Low-Cost Funding at the Expenseof Rollover Risk," available at
Additional information is available on
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. All opinionsexpressed are those of Fitch Ratings.(New York Ratings Team)