Fitch Rates ClearBridge Fund's MRPS 'AA'.
--$3,000,000 series D MRPS 4.37% due July 2024, PPN 18469 #110;
--$7,000,000 series E MRPS 4.55% due July 2026, PPN 18469 #128;
--$4,100,000 series F MRPS 4.01% due Aug. 2022, PPN 18469 #136;
--$10,900,000 series G MRPS 4.30% due Aug. 2024, PPN 18469 #144.
The MRPS are being issued to facilitate the reorganization of ClearBridge American Energy MLP Fund Inc. (NYSE: CBA) into EMO as described below. EMO is managed by Legg Mason Partners Fund Advisor, LLC (LMPFA) and subadvised by Clearbridge Investments, LLC (Clearbridge).
KEY RATING DRIVERS
The rating assignments reflect:
--Sufficient asset coverage provided to the MRPS as calculated per the fund's asset coverage tests;
--The structural protections afforded by mandatory collateral maintenance and deleveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the fund's operations;
--The capabilities of Clearbridge Investments, LLC as investment subadviser.
The reorganized fund is a non-diversified, closed-end management investment company with an investment goal of obtaining a high level of total return. The fund invests the majority of its portfolio in equity securities of midstream entities, including Master Limited Partnerships (MLPs) and related investments in the energy infrastructure sector. These companies gather, transport, process, store, distribute or market natural gas, natural gas liquids, coal, crude oil, refined petroleum products or other natural resources, or explore, develop, manage or produce such commodities.
On Nov. 7 2018, the shareholders of CBA and EMO approved a proposal to reorganize CBA with and into EMO effective Nov. 16, 2018. Management believes the reorganization may result in economies of scale, as one set of fixed expenses would be spread over a larger asset base. In addition, management believes the reorganization may provide enhanced market liquidity and improved market price trading relative to NAV. The ratings of the outstanding notes and MRPS issued by CBA and EMO, were affirmed by Fitch on Nov. 2, 2018 and are not impacted by the reorganization.
Under the reorganization, CBA has transferred substantially all of its assets and liabilities to EMO and EMO assumes CBA's rights duties and responsibilities related to its outstanding senior notes, with no other changes to their current terms. Accordingly, the CBA notes, for which EMO assumes responsibility, will remain rated 'AAA'.
Per the terms of the reorganization, the CBA Series B senior note with the Private Placement Number 184691 A@2, is replaced with a Series F replacement note with the Private Placement Number 18469# AA0. The CBA Series C senior note with the Private Placement Number 184691 A#0 is replaced with a Series G replacement note with the Private Placement Number 18469# AB8. And the CBA Series D Senior note with the Private Placement Number 184691 B*3 is replaced with a Series H replacement note with the Private Placement Number 18469# AC6.
In addition, the holders of CBA's MRPS have received shares of EMO's newly issued Series D, Series E, Series F and G MRPS in the same number and with terms identical to their existing CBA Series A, Series B, Series C and D MRPS. The CBA Series A, Series B, Series C and D MRPS are marked paid in full by Fitch.
Along with the reorganization, EMO has changed its name from ClearBridge Energy MLP Opportunity Fund Inc. to ClearBridge Energy Midstream Opportunity Fund Inc., and has amended its policy from investing at least 80% of its managed assets in MLPs in the energy sector to investing at least 80% of its managed assets in energy midstream entities, including entities structured as both partnerships and corporations. Based on discussions with management, Fitch does not expect any material change in the portfolio construction in the near term because of this policy change.
The asset coverage ratio of the reorganized fund, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC tests), per the 'AA' rating guidelines for the MRPS, outlined in Fitch's closed-end fund criteria, were in excess of 100%. These are the minimum asset coverage guideline required by the governing documents of the reorganized fund.
The Fitch OC tests calculate asset coverage by applying haircuts to portfolio holdings based on historical volatility and diversification of the assets, and measure their ability to cover both on and off-balance sheet liabilities at the stress level that corresponds to the assigned rating.
As of today's date, the asset coverage ratio for total leverage of the reorganized fund, including the MRPS, as calculated in accordance with the 1940 Act, was in excess of 225%. These are the minimum asset coverage ratios required by the legal documents of the notes and MRPS.
MRPS STRUCTURAL PROTECTIONS
Should the MRPS Asset Coverage Test or Fitch OC Test decline below their minimum threshold amounts, the governing documents of the reorganized fund require it 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 Asset Coverage Test breaches) within a pre-specified time period.
The reorganized fund has entered into credit agreements with several lenders. The rights of lenders to receive principal and interest payments on borrowings under the agreement are senior to the rights of the MRPS holders of the fund to receive payment of dividends and redemptions.
Under the credit agreements, the reorganized fund may not be permitted to redeem MRPS or make dividend payments unless at such time no event of default or other circumstance exists under the credit agreement that would limit or block redemption payments.
LMPFA and Clearbridge are wholly owned subsidiaries of Legg Mason, Inc., a global asset management firm with about $755 billion in assets under management as of Sept. 30, 2018. Clearbridge is Legg Mason, Inc.'s largest equity manager with approximately $148 billion in assets under management as of Sept. 30, 2018.
The rating is based on the terms of the MRPS stipulating mandatory collateral maintenance and deleveraging provisions in the event of asset coverage declines. Should the fund fail to cure an asset coverage breach, or the note purchasers not declare the notes due and payable upon an event of default due to an asset coverage breach, this may lengthen exposure to market value risk and cause the ratings to be downgraded by Fitch.
Fitch's rating on the MRPS could be negatively affected by a material change in the portfolio composition, or a change in the credit agreement terms that increases the likelihood that a MRPS dividend or redemption payment could be delayed.
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 downgraded by Fitch.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jan 21, 2019|
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