NEW YORK–(BUSINESS WIRE)–Fitch Ratings today assigns a ‘AA’ long-term rating to the $43 million
of Series 2021 Term Preferred Shares (TPS) issued by Nuveen Senior
Income Fund (the Fund), replacing the ‘AAexp’ rating assigned on Oct. 5,
2016. The TPS are registered with the U.S. Securities and Exchange
Commission and issued under a $60 million shelf registration statement
dated Oct. 4, 2016.
The Fund is expected to use the proceeds of the Series 2021 TPS
issuance, in combination with other cash on hand, to fully redeem its
$45 million of outstanding Series C-4 Variable Rate Term Preferred
Shares (VRTP Shares). Fitch expects the fund to continue to issue TPS
under the registration statement over time to repay borrowings under the
Fund’s credit facility and maintain leverage at or near its current
level of about 37%. The Fund is managed by Nuveen Fund Advisors, LLC
(NFA) and subadvised by Symphony Asset Management LLC (Symphony).
The Fund currently intends to distribute the shares primarily through an
underwriter, although from time-to-time it may also distribute shares
through privately negotiated transactions.
KEY RATING DRIVERS
The ‘AA’ long-term rating primarily reflects:
–Sufficient asset coverage provided to the TPS as calculated per the
Fund’s asset coverage test;
–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 NFA as investment advisor and Symphony as
The Fund’s investment objective is to achieve a high level of current
income, consistent with preservation of capital. Under normal market
circumstances, the Fund invests at least 80% of its managed assets in
adjustable rate U.S. dollar-denominated, secured and unsecured senior
loans. Unsecured loans will be investment grade quality at the time of
investment. Total assets as of Sept. 31, 2016 were about $419 million.
The Fund’s guidelines also permit the short sale of borrowed securities
to finance asset purchases. In addition, the Fund may invest up to 20%
of its assets in senior loans made to borrowers organized or located
outside the U.S. These senior loans must be U.S. dollar-denominated.
As of Sept. 30, 2016, the Fund’s total leverage consisted of
approximately $45 million of VRTP Shares and $110 million outstanding
under a credit facility. The Fund intends to redeem the VRTP Shares as
discussed above, and going forward, maintain effective leverage at or
near its current level of about 37%.
As of Sept. 30, 2016, the Fund’s asset coverage ratio for total
outstanding preferred shares, as calculated in accordance with the
Investment Company Act of 1940, is expected to remain in excess of the
minimum asset coverage of 225% required by the governing documents of
Compliance with the asset coverage test threshold is tested daily.
Failure to have asset coverage of 225% after the close of business on
the asset coverage cure date requires the Fund to redeem sufficient TPS,
reduce the amount outstanding under the bank line, and/or make
corrective trades to restore compliance. The total market value exposure
period (i.e. the pre-specified time period allotted for valuation, cure
and redemption in the event of a breach) for the asset coverage test is
within the 60 business day guideline noted in Fitch’s criteria.
The governing documents of the TPS do not provide for an effective
leverage ratio test; however, the document requirement for asset
coverage of 225% effectively caps structural leverage at 44.4% (1/2.25).
The asset coverage test does not cover economic leverage such as
unhedged derivative exposures. However, based on discussion with
management, Fitch does not expect material amounts of this activity to
take place over the life of the TPS.
The Fund has entered into a credit agreement with several conduit
lenders and Citibank, N.A. as a lender, liquidity provider and as agent
for the lenders. The rights of lenders, such as Citibank, and any other
creditors to receive principal and interest payments on borrowings under
the agreement are senior to the rights of holders the TPS shares to
receive payment of dividends and redemptions.
Under the credit agreement, the Fund may not be permitted to redeem TPS
or make dividend payments unless at such time, the Fund meets certain
senior debt asset coverage and borrowing base requirements and no event
of default or other circumstance exists under the credit agreement that
would limit or block redemption payments. In general, the ‘borrowing
base’ represents the amount of assets against which the bank will
advance funds under the credit agreement.
Under the credit agreement, the Fund cannot make any redemption or
dividend payment on the TPS if immediately after giving effect to such
payment the Fund will have less than 263% asset coverage on its senior
debt. If the Fund fails to have asset coverage of at least 263% on any
business day, it must use available funds to prepay borrowings on that
date. If it is unable, it must prepay the senior debt until asset
coverage with respect to senior debt is at least 300% within five
additional business days following any breach.
Only after these conditions are met can the fund resume making any
payments of dividends or redemptions to the TPS holders due at that
time. TPS shareholders would be entitled to receive dividends at the
increased rate equal to the dividend rate then in effect plus 5% per
annum, prorated to the period of time for which dividends were delayed
due to any credit agreement breach as discussed above.
Under the current allocation between preferred shares and borrowing
under the credit agreement, Fitch views the likelihood of a delay in
dividend or redemption payment to the TPS shareholders due to a breach
in the terms of the credit agreement as remote, consistent with the ‘AA’
rating. In the event of a market value decline, the 225% asset coverage
test for the TPS will be breached and require mandatory deleveraging
well before a breach of either the senior debt asset coverage or
borrowing base requirement as stipulated in the credit agreement can
occur. In addition, the relatively brief cure period for these
requirements as provided for in the credit agreement further reduces the
potential for dividend or redemption payment delay in the event of a
Fitch notes however that either a substantial increase in the amount
drawn under the credit agreement which causes this form of borrowing to
become a materially larger part of the fund’s capital structure, a
material change in the portfolio composition, or a change in the credit
agreement terms that increases the likelihood that a TPS dividend or
redemption payment could be delayed, could negatively impact Fitch’s
rating on the TPS.
Fitch performed various stress tests to assess the strength of the
structural protections available to the TPS compared to the 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, such as severe credit deterioration or
increased issuer concentration did the asset coverage available to the
TPS fall below the ‘AA’ threshold, and instead passed at the ‘A’ rating
Given the relative conservatism of the stress scenarios, and the minimal
rating impact, Fitch views the Fund’s permitted investments, issuer
diversification framework and mandatory deleveraging mechanisms as
consistent with an ‘AA’ long-term rating.
NFA, a subsidiary of Nuveen Investments, is the Fund’s investment
advisor, responsible for the Fund’s overall investment strategy and its
implementation. Symphony is an affiliate of NFA and oversees the
day-to-day investment operations of the Fund. Nuveen Investments and its
affiliates had approximately $239.5 billion of assets under management
as of June 30, 2016.
The rating assigned to the Term 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.
The Fund has the ability to assume economic leverage through derivative
transactions which may not be captured by the Term Preferred Share’s
asset coverage test. The Fund also has the ability to assume leverage by
borrowing securities to fund a short sale. Outside of the CDS protection
purchased, the Fund does not engage in speculative derivative activities
or short sales of borrowed securities to fund asset purchases and
Fitch’s analysis assumes the Fund does not envision engaging in material
amounts of such activity in the future. Any material derivative
exposures or short sales of borrowed assets could have potential
negative rating implications if they adversely affect asset coverage
available to rated preferred securities.
For additional information about Fitch’s rating guidelines applicable to
debt and preferred stock issued by closed-end funds, please review the
criteria referenced below, which can be found at ‘www.fitchratings.com‘.
Additional information is available at ‘www.fitchratings.com‘.
The sources of information used to assess this rating were the public
domain and Nuveen Fund Advisors.
Opt-in to receive Fitch’s forthcoming research on closed-end fund:
Rating Closed-End Funds and Market Value Structures (pub. 09 Sep 2016)
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