LEGG MASON BW GLOBAL INCOME OPPORTUNITIES FUND INC.
Fitch Ratings has affirmed the following long-term ratings assigned to the mandatory redeemable preferred shares (MRPS) issued by
BWG is a closed-end fund managed by
KEY RATING DRIVERS
The ratings are supported by:
Suf?cient asset coverage as calculated per the Fitch overcollateralization (OC) tests at the 'A' level, as required by the MRPS's governing documents;
The structural protections afforded by mandatory deleveraging provisions in the event of asset coverage declines;
The legal and regulatory parameters that govern the fund's operations;
The capabilities of LMPFA and Brandywine.
FUND PROFILE
BWG is a non-diversi?ed, closed-end management investment company seeking to provide current income and, secondarily, capital appreciation. The fund invests at least 80% of its assets in global ?xed-income securities, including sovereign debt of developed and emerging market countries,
LEVERAGE
Fitch believes the fund's current leverage level is high and carries the potential for negative rating pressure on the MRPS, particularly given the volatile asset pricing in the markets in which the fund is active. Fitch notes BWG's net asset value (NAV) fell by about 22% during the first eight months of 2022.
BWG's effective leverage was about 43% as of
Although the present effective leverage level is in line with the terms of its preferred share agreements (see Preferred Share Asset Coverage and Structural Protections sections below) it is toward the higher end of the range in which closed-end funds rated by Fitch typically operate.
Furthermore, as discussed in the Derivatives section below, the fund carries additional economic leverage in the form of unhedged derivative positions. Fitch notes that unhedged derivatives negatively impact Fitch OC test results because they are treated as additional leverage in the calculations. Please see the Asset Coverage section and MRPS Structural Protections sections below for additional Fitch OC test discussion.
BWG's present structural and economic leverage levels in tandem with reduced NAV due to 2022 price volatility, result in only minimal margins above Fitch guidelines at the assigned 'A' rating level for the MRPS on the Fitch total OC test. Fitch believes the low margins create an increased risk for OC test coverage guideline breaches in the future. Any such potential future breaches which are not cured either through deleveraging or by reallocation of the fund's assets into lower discount factor securities would likely lead Fitch to place the MRPS ratings on Rating Watch Negative or potentially downgrade to the 'BBB' category.
SUBORDINATION RISK AND REFINANCING RISK
Fitch believes the level of subordination risk to the MRPS created by the borrowing under the bank line is manageable. The rights of the lender under the bank line to receive payments of principal and interest are fully secured by the fund collateral and are senior to the rights of holders of the rated MRPS to receive dividends. The Fitch net OC test quantifies subordination risk by assessing asset coverage to the rated obligations after first repaying liabilities that are senior in the capital structure and BWG has Fitch net OC test coverage in excess of 100% at the assigned 'A' rating level.
Fitch believes there is minimal refinancing risk associated with the BWG preferred shares. The Fitch OC test results indicate the funds are sufficiently liquid to fully repay all of their leverage within a relatively brief 45 to 60 day exposure period, even during a time of substantial market stress.
DERIVATIVES
BWG holds the following derivative positions:
The fund currently holds a long futures position in 10-year treasury notes in order to gain exposure to this asset class.
The fund enters into forward foreign currency contracts to hedge against foreign currency exchange rate risk on its non-
The fund enters into credit default swap contracts for investment purposes, to manage its credit risk or to add leverage.
Although Fitch believes the economic leverage added by the unhedged portions of its derivative positions is moderate, it is additive to the structural leverage that must be covered under the Fitch OC test calculations and has the effect of further reducing the fund's coverage levels under these calculations.
ASSET COVERAGE
As of the review date, the fund's asset coverage ratios, as calculated in accordance with the Fitch OC tests per the 'A' rating guidelines for the MRPS, outlined in Fitch's closed-end fund criteria, were in excess of 100%. These are the minimum asset coverage guidelines required by the fund's governing documents.
As of the review date, the fund's asset coverage ratio for total leverage, including the MRPS, as calculated in accordance with the Investment Company Act of 1940, also at current market values, was in excess of 225%. These are the minimum asset coverage ratios required by the fund's governing documents.
MRPS STRUCTURAL PROTECTIONS
Per the fund's governing documents, should the MRPS Asset Coverage Test (as tested on the last day of each month) and Fitch OC test (as tested weekly) decline below their minimum threshold amounts, the fund's managers are required to cure the breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC tests breaches), or by reducing leverage in a suf?cient amount (for both the Fitch OC tests and Asset Coverage Test breaches) within a pre- speci?ed time period consistent with Fitch criteria.
INVESTMENT MANAGER
LMPFA and Brandywine are wholly owned subsidiaries of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade is not currently envisioned as BWG invests largely in securities that are ineligible for credit at the 'AA' rating level.
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 fund's assets, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause Fitch to downgrade the ratings;
A material adverse deviation from Fitch guidelines for any key rating driver could result in a downgrade of the ratings;
As noted above, the fund's Fitch OC tests coverage levels exceed Fitch's guidelines at the assigned rating level with only a minimal margin. The ratings could be placed on negative rating watch or potentially downgraded if asset coverage cushions erode as a result of market volatility, or if Fitch believes the assets the fund invests in are unlikely to retain suf?cient liquidity and price stability at the current rating stress levels.
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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