Fitch Ratings has af?rmed the 'A' the long-term ratings assigned to the medium-term notes series and the 'F1' short-term ratings assigned to the short-term notes programs of seven Puerto Rico Investment Family of Funds closed-end funds (CEFs), co-advised by
Please see the Rating Actions table below for additional details.
KEY RATING DRIVERS
The ratings are supported by the following:
The asset coverage requirements for each series of notes at the individual, sub-account level when notes are outstanding;
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
At the time of the rating af?rmations, none of the funds had rated notes outstanding. As such, the rating af?rmations are not driven by current asset coverage levels but by the structural protections, legal and regulatory parameters and investment adviser capability rating drivers listed above.
FUND PROFILE
The funds are non-diversified, closed-end management investment companies organized under the laws of the
On
The funds would normally invest at least 67% of total assets in securities issued by Puerto Rican entities. These include securities issued by the
The funds are heavily exposed to bonds issued by the
Such bonds will not be eligible to collateralize any notes issued under the rated notes programs (see structural protections below) as securities pledged for this purpose will be limited to obligations of higher credit quality such as
If exposure to unrated or below-investment-grade assets such as COFINA remain at current levels, to mitigate liquidity risks at the assigned ratings, Fitch believes effective leverage (the ratio of total leverage as a percentage of the total fund capital structure) should remain at or below the 25% range. If rated notes are issued in the future, Fitch will carefully monitor overall leverage levels in these funds relative to the quality of both pledged and unencumbered assets to ensure the funds remain able to meet collateral obligations as provided in the transaction documents.
LEVERAGE
The funds may borrow under the note programs up to a maximum of 33 1/3% of the fair market value of fund assets, plus other borrowings for temporary or emergency purposes up to an additional 5% of the fair market value of fund assets.
Currently, the funds only utilize leverage in the form of reverse repurchase agreements although medium- and short-term notes issuances are expected in the future. In a reverse repo agreement, the fund borrows cash from a counterparty, and, in exchange, the fund provides securities as collateral for the borrowed cash along with an agreement to repurchase the collateral from the counterparty at a specified future date.
STRUCTURAL PROTECTIONS
At the time of the rating af?rmations, the funds did not have any rated notes outstanding and therefore were not required to maintain Fitch Overcollateralization Test (OC) asset coverage levels. When rated notes are issued and outstanding, Fitch expects that each fund will segregate collateral for the medium-term note series and short-term note series separately in a collateral maintenance account (CMA). The Fitch OC tests calculate asset coverage available to the notes based on discounted market price loss expectations and diversi?cation of the assets in each segregated collateral account. Maintenance of the CMA eliminates any potential refinancing risk or subordination risk associated with the note programs.
Should a fund's Fitch OC test asset coverage decline below 100% (as tested weekly) and not be cured within the pre-speci?ed timeframe of ?ve business days, the governing documents would require the collateral agent to take one or more of the following actions restore coverage to at least 100%: (i) pledge additional securities to the CMA; (ii) deposit cash in the CMA for the relevant series of securities; or (iii) sell pledged securities and deposit the amount needed in the CMA segregated account for the relevant series of securities.
INVESTMENT MANAGER
UBS Asset Managers of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Although unlikely, upgrades to medium- or short-term notes currently rated 'A' could potentially be supported by a material change in portfolio composition toward less volatile and/or more liquid asset classes or changes in the funds' market profile, structure or deleveraging mechanisms, which serve to materially reduce inherent market value risks.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The ratings may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the funds' assets, as described above;
A material adverse deviation from Fitch guidelines for any key rating driver could cause Fitch to downgrade the ratings;
The ratings could be downgraded if asset coverage cushions erode as a result of market volatility, or if Fitch believes the assets the funds invest in, particularly the COFINA bonds, are unlikely to retain suf?cient liquidity and price stability at the current rating stress levels. Fitch deems the level of future market value decline these funds would have to experience to incur a sustained breach in Fitch OC test coverage at the assigned rating levels as unlikely, as Fitch believes the fund manager would take action to restore asset coverage as needed to cause the rated securities to maintain passing Fitch OC test margins at the assigned rating level;
Changes in the supply-demand dynamics with respect to invested collateral types may in?uence Fitch's analytical approach to the liquidity of underlying collateral types. In addition, the amount of total leverage assumed by a fund could also in?uence Fitch's analytical conclusion if such leverage increased the likelihood of a bankruptcy stay with respect to the overall fund.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
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