Duff & Phelps seeks rating agencies' OK to redeem preferreds with debt

By Toni Weeks

San Diego, Nov. 7 - Duff & Phelps Investment Management Co. said it recently met with representatives of the two principal rating agencies to request the use of additional borrowings and/or reverse repurchase agreement financing to redeem additional preferred shares of its DNP Select Income Fund and Duff & Phelps Utility and Corporate Bond Trust.

According to a DNP Select Income Fund press release, both funds are attempting to obtain alternative sources of financial leverage that would enable them to provide additional liquidity to holders of preferreds in light of the persistent failures in the auction markets.

To date, the funds have retired a portion of their outstanding preferred shares with funds borrowed under a credit facility but are restrained by two factors in their ability to refinance all of their outstanding preferreds with debt.

The first of these factors is the need to adhere to guidelines established by the two rating agencies as a condition of maintaining the "AAA" rating of the preferreds unless a rating agency has confirmed in writing that a proposed action would not adversely affect the rating. At the time the funds entered into their existing credit facilities, one of the rating agencies set a limit that not more than 60% of the funds' leverage could be in the form of debt. Duff & Phelps has requested that figure be raised and has also asked if additional borrowings and/or reverse repo financing could be used to redeem additional shares.

Another factor constraining the funds' ability to refinance their preferred shares is the requirement of the Investment Company Act of 1940 that each fund maintains 300% asset coverage for debt leverage, rather than the 200% required for preferred stock leverage. Duff & Phelps said it has reviewed the potential use of reverse repo financing that would not be subject to the 300% asset coverage requirement. The Securities and Exchange Commission is considering revising its position so that reverse repurchase agreements are also subject to the 300% asset coverage requirements, and Duff & Phelps said it is monitoring the SEC's related actions to determine whether a reverse repo structure would offer a long-term solution to the funds' leverage needs.

The funds will take action consistent with the decisions of the SEC and the rating agencies as soon as the rulings have been communicated to Duff & Phelps, who will continue to align their actions with the three principles that have guided the funds' efforts since 2008 to provide additional liquidity to preferred shareholders. Those principles are (1) that a successful solution should not materially disadvantage common shareholders and their ability to benefit from leverage, (2) the solution should be long-term in nature, and (3) the solution should not encumber the investment process or reduce the pool of available investment alternatives.

Duff & Phelps said that once a course of action is agreed upon, the funds will announce any preferred share redemptions.

A subsidiary of Virtus Invesment Partners, Duff & Phelps is an investment management firm based in Chicago.

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