Fitch: Closed-End Fund Financing Shifts on Regulatory Fallout

NEW YORK--(BUSINESS WIRE)-- Regulatory pressure is likely to drive further changes in financing for taxable and municipal Closed-End Funds (CEF), according to the new Closed-End Fund Leverage Dashboard from Fitch Ratings.

"Regulatory pressure on bank balance sheets is driving up costs for taxable funds and resulting in fewer options for bank funding," said Greg Fayvilevich, Senior Director, Fitch Ratings.

Taxable CEFs have experienced decreasing availability of financing from certain counterparties such as asset-backed commercial paper (ABCP) conduits. Borrowings from asset-backed commercial paper conduits by closed-end funds have declined by approximately 60% since late 2014, much of which has been replaced by syndicated credit facilities.

"In the future, banks and other CEF participants could share or shift risk with syndication of CEF lending facilities or lending through special purpose vehicles," added Fayvilevich.

Municipal funds have recently come under pressures related to money-market fund (MMF) reform taking affect in October. Municipal MMFs have traditionally been a large supplier of financing to CEFs via purchases of Variable Rate Demand Preferred (VRDP) shares. However, municipal MMF assets have been steadily declining which translates to a decline in MMF demand for VRDP shares issued by CEFs. Recent new issuance of municipal CEF leverage has relied on banks via Variable Rate MuniFund Term Preferred (VMTP) Shares and short-term bond funds via Institutional MuniFund Term Preferred (iMTP) Shares. Fitch also observes VRDPs being placed directly with the liquidity provider bank for a certain term (Term VRDP), which has replaced some demand of municipal MMFs.

MLP funds were notably absent from CEF new leverage issuance until September 2016 following a period of significant deleveraging in last half of 2015 and first half of 2016 , largely due to oil price volatility. Fitch expects MLP issuance to pick-up as MLP asset prices stabilize.

For additional detail on the profile and trends of closed-end fund leverage, see Fitch's special report 'Closed-End Fund Leverage Dashboard,' dated Aug. 26, 2016 at www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

Related Research

Closed-End Fund Leverage Dashboard

https://www.fitchratings.com/site/re/886871

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160908006243/en/

Fitch Ratings
Greg Fayvilevich
Senior Director
Fund and Asset Management
+1-212-908-9151
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Brian Knudsen
Associate Director
Fund and Asset Management
+1-646-582-4904
or
Chelsea Nguyen
Analyst
Fund and Asset Management
+1-646-582-4917
or
Media Relations:
Hannah James, + 1-646-582-4947
[email protected]

Source: Fitch Ratings

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