Flaherty & Crumrine changes asset-purchase policies of four funds

By Wendy Van Sickle

Columbus, Ohio, Jan. 20 – Flaherty & Crumrine Inc. made changes to the investment policies of four funds that adjusted the investment-grade ratings requirements of assets purchased by each fund, effective Feb. 21, according to 8-K filings with the Securities and Exchange Commission.

Flaherty & Crumrine said the adviser recommended the new policies to address both the change in the composition of the preferred market and frequent changes in rating methodologies for preferred securities by referencing the issuer or senior unsecured debt ratings instead of the direct ratings on the preferreds.

The adviser noted: “Rating methodologies for each of Moody’s, S&P, and Fitch have evolved in dramatic fashion ever since the financial crisis of 2008-2009.”

As a result, preferred securities now have lower ratings than before the crisis – even though the adviser believes most preferred issuers are now financially stronger.

Only 62% of the preferred market now has an investment-grade rating from at least one agency, down from 90% before the financial crisis.

The new changes include

• For both the Flaherty & Crumrine Total Return Fund Inc. and the Flaherty & Crumrine Preferred Securities Income Fund Inc., at the time of purchase at least 90% of the fund’s managed assets will now either be rated investment grade by any one of Moody’s Investor Service, Inc., S&P Global Ratings or Fitch Ratings or issued by companies with senior unsecured debt ratings that are rated investment grade by at least one of those ratings agencies.

The fund may also invest is unrated securities deemed by its investment adviser to be comparable in quality to rated issues in which the fund may invest.

Previously, only 80% of assets purchased by the fund had to meet investment-grade requirements, but the remainder of the assets purchased had to be rated at least, or be from an issuer with an outstanding class of senior debt rated at least, Ba3 by Moody’s, BB- by S&P or BB- by Fitch.

• For both the Flaherty & Crumrine Preferred Income Fund Inc. and the Flaherty & Crumrine Preferred Income Opportunity Fund Inc., at the time of purchase at least 85% of the fund’s managed assets will now either be rated investment grade by Moody’s, S&P or Fitch or be issued by companies with senior unsecured debt ratings that are rated investment grade by at least one of those ratings agencies.

The fund may also invest is unrated securities deemed by its investment adviser to be comparable in quality to rated issues in which the fund may invest. Previously, only 75% of assets purchased by the fund had to meet investment-grade requirements, but the remainder of the assets purchased had to be rated at least, or be from an issuer with an outstanding class of senior debt rated at least, Ba3 by Moody’s, BB- by S&P or BB- by Fitch.

Flaherty & Crumrine is an investment adviser based in Pasadena, Calif.

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