Fitch Ratings has affirmed the 'AAA' ratings assigned to the following auction rate preferred shares (ARPS) issued by AGIC Convertible & Income Fund II (NYSE: NCZ), a closed-end fund sub-advised by Allianz Global Investors Capital (AGIC):
--$274,000,000 of ARPS consisting of Series A, B, C, D and E, each with a liquidation preference of $25,000 per share.
KEY RATING DRIVERS
The affirmation follows Fitch's annual review of the fund. The 'AAA' ratings are based on sufficient asset coverage provided to the ARPS by the fund's underlying portfolio of assets, the structural protections afforded by mandatory cure and de-leveraging provisions in the event of asset coverage declines, the legal and regulatory parameters that govern the fund's operations and the capabilities of AGIC as the sub-advisor. Fitch's ratings assigned to the ARPS speak only to timely repayment of interest and principal in accordance with the governing documents and not to potential liquidity in the secondary market.
As of Jan. 31, 2012 the fund had assets of approximately $741 million, current liabilities of $6 million and leverage of $274 million, or 37% of net assets. Assets consisted of $726 million in cash-purchased securities and $15 million in synthetic convertible securities. Leverage consisted entirely of rated ARPS.
As of the same date, the fund's asset coverage ratios, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC Tests) per the 'AAA' rating guidelines outlined in Fitch's closed-end fund criteria, were in excess of 100%, which is the minimum asset coverage amount deemed consistent with an 'AAA' rating per Fitch's criteria. The fund's governing documents require that asset coverage for the ARPS, as calculated in accordance with the Fitch OC Tests, be maintained in excess of 100%. As such, should the asset coverage decline below 100%, the governing documents require the fund to alter the composition of its portfolio towards assets with lower discount factors, or to reduce leverage in a sufficient amount to restore compliance within a 38 business day period.
On Aug. 16, 2011, Fitch published an update to its closed-end fund rating criteria that includes several changes to the way the Fitch OC test is calculated. There was no material effect of these changes on the Fitch OC tests given the high diversification profile of the funds. AGIC expects to finalize changes to the ARPS documents that incorporate the changes to updated criteria in the near future, subject to approval by the funds' board of directors. In the mean time, Fitch has extended a grace period to the funds given the high asset coverage, but may take rating action sooner if asset coverage declines.
Additionally, as of the same date the fund's asset coverage ratio for total outstanding ARPS, as calculated by AGIC in accordance with the Investment Company Act of 1940, was in excess of 200%, which is also a minimum asset coverage required by the fund's governing documents.
As of Jan. 31, 2012, the portfolio consisted mainly of high-yield corporate and straight convertible securities with U.S. domicile issuers. The fund was highly diversified by industry and issuer and therefore no additional overconcentration discount factor was applied in calculating the Fitch OC Tests. The fund is a non-diversified, closed-end management investment company, registered under the Investment Company Act of 1940, as amended.
AGIC acts as the sub-adviser to the fund, performing all investment management functions. As of Dec. 31, 2011, AGIC had $46.4 billion in assets under management. Allianz Global Investors Fund Management, LLC (AGIFM) acts as the advisor to the fund, performing all distribution, legal, operations and compliance functions. AGIC and AGIFM are indirect, majority owned subsidiary of Allianz SE.
The ratings may be sensitive to material changes in the credit quality or market risk profiles of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating to be lowered by Fitch. Furthermore, ratings are sensitive to the fund's adoption of mandatory cure and deleveraging provisions consistent with the 'AAA' levels outlined in Fitch's updated Aug. 16, 2011 closed-end fund criteria. For additional information about Fitch closed-end fund ratings guidelines, please review the criteria referenced below, which can be found on Fitch's web site.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
The sources of information used to assess this rating were the public domain, AGIC and AGIFM.
Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 16, 2011);
--'Closed-End Funds: Derivatives Under Review (Increased Use and Limited Transparency Are Key Considerations)' (Nov. 16, 2011);
--'2012 Outlook: Closed-End Fund Leverage' (Dec. 19, 2011).
Applicable Criteria and Related Research:
2012 Outlook: Closed-End Fund Leverage
Closed-End Funds: Derivatives Under Review (Increased Use and Limited Transparency Are Key Considerations)
Rating Closed-End Fund Debt and Preferred Stock