Fitch Affirms VMTPs Issued by Managed Duration Investment Grade Municipal Fund.
--$60,000,000 of VMTP Shares, Series 2020, term redemption on July 31, 2020.
KEY RATING DRIVERS
The rating assignment primarily reflects:
--Sufficient asset coverage provided to the preferred shares as calculated per the funds' over-collateralization (OC) tests;
--The structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the Fund's operations;
--The capabilities of Insight Investment as adviser.
MZF is a closed-end management investment company registered under the Investment Company Act of 1940 as amended (the 1940 Act). MZF's primary investment objective is to provide high current income exempt from regular federal income tax while seeking to protect the value of the Fund's assets during periods of interest rate volatility. Under normal market conditions, the Fund seeks to achieve its objective by investing at least 80% of its total assets in municipal bonds of investment-grade quality and will normally invest substantially all of its total assets in municipal bonds of investment-grade quality.
ASSET COVERAGE AND FUND LEVERAGE
As of May 31, 2018, the Fund's asset coverage ratio for total leverage, as calculated in accordance with the 1940 Act, was in excess of 225%. This is the minimum asset coverage ratio required by the Fund's governing documents. As of the same date, the effective leverage ratio is below the 45% maximum effective leverage ratio allowed by the governing documents of the preferred shares issued by the fund.
Should the Fund's asset coverage tests decline below their minimum threshold amounts, the mandatory redemption provisions of the VMTP Shares governing documents require the fund to cure the breach by reducing leverage in a sufficient amount to restore compliance with the applicable test(s).
Fitch performed various stress tests on the Fund to assess the strength of the structural protections available to the VMTP shares compared with the rating stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where the Fund's leverage and portfolio composition migrated to the outer limits of the Fund's operating and investment guidelines.
Only under remote circumstances did the asset coverage available to the VMTP Shares fall below the 'AAA' threshold, and instead passed at an 'AA' rating level. An example of such a stress test includes increasing a Fund's leverage to 45% and significantly increasing state, sector and issuer concentration.
Given the highly unlikely nature of the stress scenarios, and the minimal rating impact, Fitch views the Fund's permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' rating.
Insight Investment, a subsidiary of The Bank of New York Mellon, is responsible for the implementation and execution of the investment strategy on a day-to-day basis. Insight North America LLC, part of Insight Investment, is an SEC-registered investment advisor. Insight Investment has $836.9 billion in assets under management globally as of March 31, 2018. Assets under management (AUM) are represented by the value of cash securities and other economic exposure calculated on a gross notional basis. Insight includes, among others, Insight Investment Management (Global) Limited (IIMG), Insight Investment International Limited, and Insight North America LLC (INA), each of which provides asset management services.
The rating assigned to the VMTP shares may be sensitive to material changes in the leverage composition, portfolio credit quality, portfolio diversification or market risk of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
The Fund has the ability to assume economic leverage through derivative transactions that may not be captured by the Fund's Preferred Shares Asset Coverage tests or Effective Leverage Ratios. Material derivative exposure on a speculative basis in the future could have potential negative rating implications if it adversely affects asset coverage available to rated preferred shares.
For additional information about Fitch's rating guidelines for debt and preferred stock issued by closed-end funds, please review the criteria referenced below, which can be found at 'www.fitchratings.com'.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Sep 28, 2018|
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