CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirms the 'AAA' ratings of the Variable Rate MuniFund Term Preferred Shares (VMTP Shares) issued by DTF Tax-Free Income Inc. (NYSE: DTF), a closed-end fund managed by Duff & Phelps Investment Management Co. (DPIM):
--$65,000,000 Series 2018 VMTP Shares due August 2018.
KEY RATING DRIVERS
The 'AAA' rating affirmation reflects:
--Sufficient asset coverage provided to the VMTP shares as calculated per the fund's over-collateralization (OC) 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 DPIM as fund adviser.
FUND PROFILE
The fund's investment objective is current income exempt from regular federal income tax consistent with preservation of capital. The fund seeks to achieve its investment objective through investment of at least 80% of assets in a diversified portfolio of tax-exempt obligations. The fund may not invest more than 25% of its total assets (calculated at market value at the time of each investment) in the securities of issuers in a single industry; provided that, for purposes of this restriction, tax exempt securities of issuers that are states, municipalities or their political subdivisions are not considered to be the securities of issuers in any single industry. Under normal market conditions, the fund may not invest more than 20% of its total assets in obligations that pay interest that is subject to the federal alternative minimum tax.
At the time of the rating affirmation, the portfolio held investments from issuers across 30 states with the three largest state exposures were represented by California (14%), Texas (10%) and Florida (9%). The remaining balance consisted of cash equivalents and foreign currency positions. The three largest Fitch municipal sectors were represented by general obligation and lease/appropriation (35%), municipal essential service revenue (18%) and transportation revenue (13%). The fund had a small Detroit exposure of approximately 0.26% of the portfolio represented by a bond payable from the city's share of distributable state aid which is derived from its share of a statewide sales tax. The fund does not have any exposure to Puerto Rico.
FUND LEVERAGE
At the time of the rating affirmation the fund had approximately $205 million in total market value of assets with outstanding leverage of 32% represented solely by the rated VMTP shares. As such, the fund was operating well within the limits of its 45% Effective Leverage boundary.
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 outlined in Fitch's applicable criteria, were in excess of 100%. This is the minimum threshold required under the terms of the VMTP shares.
The test calculates standardized asset coverage by applying haircuts to portfolio holdings based on perceived riskiness and diversification of the assets and measuring its ability to cover both on and off-balance sheet liabilities, if any, at the assigned 'AAA' stress level.
The fund's asset coverage ratio for the VMTP Shares, as calculated in accordance with the Investment Company Act of 1940, was in excess of the minimum asset coverage threshold of 225% required by the fund's governing documents (Asset Coverage Ratio).
The fund has covenanted to maintain the effective leverage ratio (Effective Leverage Test) for the VMTP Shares below 45% of total assets. The fund's Effective Leverage Ratio is currently below 45%.
In the event of breaches to any of the above thresholds, the fund is required to restore compliance per structural protections described below.
STRUCTURAL PROTECTIONS
Compliance with the Fitch OC, Asset Coverage and Effective Leverage thresholds is tested periodically. The fund manager is expected to cure any breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC breaches), or by reducing leverage in a sufficient amount (for all other breaches) within a pre-specified time period.
For Fitch OC, Asset Coverage and Effective Leverage Tests, the maximum market value exposure (i.e. valuation, cure and redemption) that preferred shareholders would be exposed to before cure or redemption is approximately 45 business days.
THE FUND'S ADVISER
DPIM is responsible for the implementation and execution of the investment strategy on a day-to-day basis. DPIM is an SEC registered and regulated investment advisor with $10.7 billion in assets under management as of June 30, 2014. DPIM acts as investment adviser to four other closed-end investment companies and five open-end investment companies registered under the 1940 Act.
RATINGS SENSITIVITY
The rating assigned to the preferred shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the fund, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating to be lowered by Fitch.
For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end funds, please review the criteria referenced below, which can be found on Fitch's web site at 'www.fitchratings.com'.
The sources of information used to assess this rating were the public domain and DPIM.
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Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 14, 2013).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716220
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=854834
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