DNP, Duff & Phelps funds want amendment needed to refinance preferreds

By Susanna Moon

Chicago, Dec. 15 - DNP Select Income Fund Inc. and Duff & Phelps Utility and Corporate Bond Trust Inc. will propose amending the funds' charters to allow them to negotiate a lower rating on their preferred shares if they draw more debt to refinance the preferreds.

Each fund retired a portion of its preferreds with debt under a credit facility but have been unable to refinance additional preferreds with debt, according to a press release by DNP.

The two closed-end registered investment companies advised by Duff & Phelps Investment Management Co. provided the update on their efforts to provide additional liquidity to holders of preferreds in light of the persistent failures in the auction markets, the release noted.

The funds cannot incur debt or enter into reverse repurchase agreements without departing from the guidelines established by the two principal rating agencies, the release noted.

The funds' charters permit departures from the rating agency guidelines but only if the rating agencies confirm in writing that the departures would not adversely affect the then current rating of the preferreds.

In 2009, when the funds received the confirmation from the rating agencies to permit them to enter into their existing credit facilities, one of the rating agencies imposed a limitation that, in order to maintain the AAA rating on the preferreds, no more than 60% of the funds' leverage could be in the form of debt.

On Dec. 12, the board of directors of the funds charged the adviser with formulating a proposed amendment to the funds' charters that would permit the funds to negotiate an arrangement with the rating agencies under which the funds could accept a lower rating on the preferreds in exchange for being allowed to draw a higher percentage of debt leverage, according to the release.

The proposed amendment would still require the funds to ask the rating agencies to state in writing the effect that any departure from the guidelines would have on their rating of the preferreds, and the funds' directors would need to take that information into account in determining that such departure was in the best interests of the fund and its shareholders.

Because charter amendments require the approval of the funds' shareholders, the board directed the adviser to present the proposed amendments at the February board meeting so that they can be included in the funds' proxy statements for the funds' annual meetings, currently scheduled to be held in May 2012.

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