Fitch Ratings has reviewed and affirmed the ratings assigned to the medium-term notes series and short-term notes series issued by seven Puerto Rico closed-end funds (CEFs) co-advised by Popular Asset Management and UBS Asset Managers of Puerto Rico. A complete list of rating actions follows at the end of this release.
These rating affirmations are based on currently outstanding criteria, published Sept. 4, 2014.
On July 30, 2015, Fitch published an exposure draft indicating minor changes to the rating criteria applicable to the ratings assigned to the notes issued by Puerto Rican closed-end funds. A proposed change that impacts the funds as the collateral accounts are currently constituted is a decrease in exposure to state-level general obligations (GOs) rated below investment grade. However, based on structural protections and the dynamic way the funds manage these leverage programs, Fitch does not anticipate negative rating impact as a result of this change. The affirmations also reflect the funds' ability to keep asset coverage in line with the assigned ratings through decreasing leverage and diversifying portfolios following recent negative price performance of Puerto Rican debt.
KEY RATING DRIVERS
The main drivers for the rating actions are:
--The asset coverage available to each series of notes at the individual, sub-account level;
--The structural protections afforded by mandatory collateral maintenance provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the funds' operations;
--The capabilities of UBS Asset Managers of Puerto Rico and Popular Asset Management as co-advisers.
FUND SUMMARY
The funds are corporations organized under the laws of the Commonwealth of Puerto Rico and are duly registered as non-diversified, closed-end management investment companies under the Puerto Rico Investment Companies Act, as amended.
The funds normally invest at least 67% of total assets in securities issued by Puerto Rico entities. These include securities issued by the Commonwealth of Puerto Rico, Puerto Rico mortgage-backed and asset-backed securities and corporate obligations and preferred stock of Puerto Rico entities.
The funds increase amounts available for investment through the issuance of preferred stock, debt securities, or other forms of leverage, representing not more than 50% of total assets immediately after any such issuance. Currently, the funds utilize short-term and medium-term notes and reverse repurchase agreements.
STRUCTURAL PROTECTIONS
At the time of the ratings affirmations, the funds' asset coverage ratios, as calculated in accordance with the Fitch OC tests using the asset specific discount factors and the minimum discount factors found in Fitch's applicable criteria were in excess of 100%, which are the minimum asset coverage amounts deemed consistent with the assigned ratings.
Each fund segregates collateral for each series of 100% Principal Protected Notes (comprised of a medium-term note series and a short-term note series). The Fitch overcollateralization (OC) tests calculate asset coverage available to the notes and preferred stock, based on discounted market prices and diversification of the assets in each segregated collateral account. Should either of the asset coverage tests decline below 100% (as tested weekly) and not cure within the pre-specified timeframe of five business days, the governing documents would require the fund to reduce leverage in a sufficient amount to restore compliance with the applicable asset coverage tests on the final day of the cure period.
THE ADVISOR
UBS Asset Managers of Puerto Rico and Popular Asset Management are the funds' investment advisors. Subject to the supervision of the funds' boards of directors they are responsible for the funds' overall investment strategy and implementation. UBS Asset Managers of Puerto Rico is a division of UBS Trust Company of Puerto Rico, which is an affiliate of UBS Financial Services Incorporated of Puerto Rico and Popular Asset Management is a division of Banco Popular de Puerto Rico.
RATING SENSITIVITIES
The ratings may be sensitive to material changes in the credit quality or market risk profiles of the funds. A material adverse deviation from Fitch guidelines for any key rating driver could cause the ratings to be lowered by Fitch. Changes in the supply-demand dynamics with respect to invested collateral types may influence Fitch's analytical approach to the liquidity of underlying collateral types. In addition, the amount of total leverage assumed by a fund could also influence Fitch's analytical conclusion if such leverage increased the likelihood of a bankruptcy stay with respect to the overall fund.
The ratings may be sensitive to material changes in the criteria applied to evaluate closed-end fund leverage. An exposure draft titled 'Rating Closed-End Fund Debt and Preferred Stock' (July 30, 2015), available at 'www.fitchratings.com', details proposed changes to the ratings criteria that may adversely affect the ratings described above. Fitch anticipates releasing updated rating methodology shortly after the conclusion of the exposure draft feedback period, at which time the current ratings will be re-evaluated using the new criteria.
For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end fund, please review the criteria referenced below, which can be found on Fitch's web site at 'www.fitchratings.com'.
RATING ACTIONS
Fitch affirms the following:
Puerto Rico Investors Tax-Free Bond Fund I
--Medium-term notes series at 'A';
--Short-term notes series at 'F1'.
Puerto Rico Investors Tax-Free Fund
--Medium-term notes series at 'A';
--Short-term notes series at 'F1'.
Puerto Rico Investors Tax-Free Fund II
--Medium-term notes series at 'A';
--Short-term notes series at 'F1'.
Puerto Rico Investors Tax-Free Fund III
--Medium-term notes series at 'A';
--Short-term notes series at 'F1'.
Puerto Rico Investors Tax-Free Fund IV
--Medium-term notes series at 'A';
--Short-term notes series at 'F1'.
Puerto Rico Investors Tax-Free Fund V
--Medium-term notes series at 'A';
--Short-term notes series at 'F1'.
Puerto Rico Investors Tax-Free Fund VI
--Medium-term notes series at 'A';
--Short-term notes series at 'F1'.
Additional information is available on www.fitchratings.com
The sources of information used to assess this rating were the public domain, Popular Asset Management and UBS Asset Managers of Puerto Rico.
Applicable Criteria
Rating Puerto Rico Closed-End Fund Debt and Preferred Stock (pub. 04 Sep 2014)
Fitch Affirms Notes Issued by 7 UBS/Banco Popular Puerto Rico Funds
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