Fitch Rates AllianzGI Diversified Income & Convertible Fund Notes and Preferred Stock

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns the following ratings to senior secured notes (notes) and mandatory redeemable preferred shares (MRPS) issued by AllianzGI Diversified Income & Convertible Fund (NYSE MKT: ACV) (the fund) a registered closed-end fund managed by Allianz Global Investors Fund Management LLC (AGIFM) and sub-advised by Allianz Global Investors U.S. LLC (AGIUS):

--Series A Senior Secured notes, due Nov. 22, 2029, in amount of $50,000,000, rated 'AAA';

--Series A MRPS, with a term redemption date of Oct. 2, 2025, of $30,000,000, rated 'AA'.

KEY RATING DRIVERS

The rating assignments and affirmations reflect:

--Sufficient asset coverage provided to notes and MRPS as calculated per the fund's asset coverage tests;

--The structural protections afforded by mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines;

--The legal and regulatory parameters that govern the fund's operations;

--The capabilities of AGIFM and AGIUS as investment manager and sub-adviser, respectively.

FUND'S PROFILE

The fund's investment objective is to provide total return through a combination of current income and capital appreciation, while seeking to provide downside protection against capital loss. Under normal market conditions, the fund will seek to achieve its investment objective by investing in a combination of convertible securities, debt and other income-producing instruments and common stocks and other equity securities. The fund expects to normally employ a strategy of writing (selling) covered call options on the stocks held in the equity portion of the portfolio.

FUND LEVERAGE

The fund's pro forma total net assets incorporating this issuance were approximately $332 million and total leverage was $105 million. The total leverage ratio is approximately 32% using September 28, 2015 market values. Leverage consists of approximately $25 million in borrowings under the fund's short-term margin loan facility, $50 million in Fitch-rated Notes (pari-passu to the margin loan borrowings) and $30 million in Fitch-rated MRPS.

ASSET COVERAGE

The fund's asset coverage ratio, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC tests) per the 'AAA' rating guidelines for the notes and the 'AA' rating guidelines for the MRPS, outlined in Fitch's closed-end fund criteria, were in excess of 100%. This is the minimum asset coverage guideline required by the transaction documents governing the Notes and MRPS.

The Fitch OC tests calculate standardized asset coverage by applying haircuts to portfolio holdings based on riskiness and diversification of the assets and measuring their ability to cover both on and off-balance sheet liabilities at the stress level that corresponds to the assigned rating.

The fund's senior securities representing indebtedness and stock are subject asset coverage requirements of 300% and 200%, respectively, under the transaction documents governing the Notes (the "Notes Documents Asset Coverage tests"), while the fund's senior securities representing stock are subject to an asset coverage requirement of 225% pursuant to the transaction documents governing the MRPS (the "MRPS Documents Asset Coverage test," and, together with the Notes Documents Asset Coverage tests, the "asset coverage tests").

As of transaction close, on a pro forma basis for the issuance of the Notes and MRPS, the fund's asset coverage levels were in excess of those required by the asset coverage tests.

NOTES STRUCTURAL PROTECTIONS

Should the asset coverage tests decline below their minimum threshold amounts (as tested on the last business day of each week, in the case of rating agency tests, or each month, in the case of the asset coverage tests), under the terms of the notes, ACV is required to deliver notice to the note purchasers within five business days. The fund's managers are then expected to cure the breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC tests breaches), or by reducing leverage in a sufficient amount (for both the Fitch OC tests and the 1940 Act test breaches) within a pre-specified time period.

Failure to cure an asset coverage breach as described above is an event of default under the terms of the notes. The fund must then deliver a notice within five business days to the Note purchasers and a vote of holders of at least 51% of the principal amount of the Notes may then declare all the Notes then outstanding to be immediately due and payable.

The fund is also prohibited from declaring paying out a common stock dividend or other distribution on common shares unless, immediately after such transaction, the fund would satisfy the 300% asset coverage test. Fitch views this as an added incentive to cure and deleverage in a timely manner, regardless of acceleration by the notes' purchasers.

MRPS STRUCTURAL PROTECTIONS

Should the MRPS Asset Coverage test and Fitch OC test decline below their minimum threshold amounts (tested weekly, in the case of rating agency tests, or monthly, in the case of the asset coverage tests) the fund is required to deliver notice to the MRPS purchasers within five days of becoming aware of such fact.

The fund is required to cure the breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC tests breaches), or by reducing leverage in a sufficient amount (for both the Fitch OC tests and MRPS Documents Asset Coverage Test breaches) within a pre-specified time period.

THE INVESTMENT MANAGER AND SUB-ADVISER

AGIFM, the fund's investment manager, is a wholly-owned indirect subsidiary of Allianz Asset Management of America L.P. As of June 30, 2015, AGIUS, an AGIFM affiliate and the fund's sub-adviser, had $94.3 billion in assets under management.

RATING SENSITIVITIES

The rating is based on the terms stipulating mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines. In the case of the rated notes, should the fund fail to cure an asset coverage breach within the cure period and the note purchasers not declare the notes due and payable upon an event of default, this may lengthen exposure to market value risk and cause the ratings to be lowered by Fitch.

The ratings may also be sensitive to material changes in the credit quality or market risk profile of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause the ratings to be lowered by Fitch.

For additional information about Fitch closed-end fund ratings guidelines, please review the criteria referenced below, which can be found on Fitch's website.

Additional information is available at www.fitchratings.com.

The sources of information used to assess this rating were the public domain and AGIUS.

To receive forthcoming complimentary closed-end fund research from Fitch, opt-in at the following link: http://pages.fitchemail.fitchratings.com/FAMCEFBlankOptin/

Applicable Criteria

Rating Closed-End Fund Debt and Preferred Stock (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871119

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991837

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991837

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151005006741/en/

Fitch Ratings
Primary Analyst
Ian Rasmussen, +1-212-908-0232
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Russ Thomas, +1-312-368-3189
Director
or
Committee Chairperson
Ralph Aurora, +1-212-908-0528
Senior Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
[email protected]

Source: Fitch Ratings

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