DNP SELECT INCOME FUND INC.
Fitch Ratings affirms at 'A' the Long-Term Ratings (LT Ratings) assigned to the Series A and Series B notes (notes) and the Mandatory Redeemable Preferred Shares (MRPS) issued by
Fitch also affirms at 'AA' the LT Rating to the 2050 Remarketable Variable Rate MuniFund Term Preferred Shares (RVMTP shares) issued by
The funds are advised by
KEY RATING DRIVERS
The LT Ratings are supported by:
Sufficient asset coverage provided to the rated securities as calculated per the funds' over-collateralization (OC) tests at current rating levels;
The structural protections afforded by mandatory collateral maintenance and de- leveraging provisions in the event of asset coverage declines;
The legal and regulatory parameters that govern the funds' operations;
The capabilities of DPIM as fund manager.
FUND PROFILES
The funds are closed-end management investment companies regulated by the Investment Company Act of 1940. DNP invests primarily in a diversified portfolio of equity and fixed income securities of companies in the public utilities industry, and DPG invests primarily in equities of domestic and foreign utilities and infrastructure providers. DTF invests in a diversified portfolio of at least 80% tax-exempt obligations.
LEVERAGE
Fitch believes the funds manage leverage prudently. As of the review date, effective leverage (a ratio measuring structural leverage as a percentage of the funds' capital structure) was at levels deemed moderate by Fitch. DNP's structural leverage was made up of
On
SUBORDINATION RISK AND REFINANCING RISK
Senior debt in the form of a bankline and rated notes in the case of DNP, and a bankline in the case of DPG, create a manageable degree of subordination risk for the MRPS investors of the two funds because the rights of senior debtholders to receive payments of principal and interest are senior to the rights of holders of the preferred share investors to receive principal or dividend payments.
That said, Fitch believes any subordination risk in the two funds is manageable based on the funds' solid performance on the Fitch net OC test (please see Preferred Share Asset Coverage below). This test quantifies subordination risk by assessing asset coverage to the rated obligations after first repaying liabilities that are senior in the capital structure, and the MRPS of DNP and DPG have Fitch net OC test coverage well in excess of 100% at the assigned 'A' rating level. Because subordination risk is manageable, the ratings for the DNP notes and MRPS are currently equalized at the 'A' rating level. Since DTF leverages only with preferred shares, subordination risk is not a concern with this fund.
Fitch believes there is minimal refinancing risk associated with the rated securities of DNP, DPG and DTF. 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
None of the Duff & Phelps funds under review currently use derivatives for speculative purposes.
NOTE AND PREFERRED SHARE ASSET COVERAGE
As of the review date, the asset coverage ratio for the notes and MRPS of DNP and the MRPS of DPG, as calculated in accordance with the 'A' Fitch total and net OC tests (Fitch OC Tests) outlined in Fitch's criteria, was in excess of 100%, which is the minimum threshold required under the terms of the DNP notes and MRPS and the DPG MRPS.
As of the review date, the asset coverage ratio for the RVMTP shares of DTF, as calculated in accordance with the 'AA' Fitch OC Tests outlined in Fitch's criteria, was in excess of 100%, which is the minimum threshold required under the terms of the DTF RVMTP shares.
As of the review date, each fund's asset coverage ratio, as calculated in accordance with the Investment Company Act of 1940 at current market value, was in excess of 225%. This is the minimum asset coverage threshold required by the governing documents of each fund's preferred shares.
As of the review date, DTF's effective leverage ratio was below the 45% maximum leverage ratio allowed by the fund's governing documents for the RVMTP shares.
STRUCTURAL PROTECTIONS
Compliance with both the Fitch OC and 1940 Act asset coverage tests is tested periodically for each fund. The fund manager is expected to seek to cure any breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC breaches), or by reducing leverage in a sufficient amount (for all breaches) within a specified time period. For the Fitch OC tests, the maximum market value exposure (i.e. valuation, cure and redemption) that preferred shareholders of the three funds or DNP noteholders would be exposed to before cure or redemption is between approximately 37 and 45 business days.
Compliance with the effective leverage ratio threshold is evaluated periodically for DTF. Should DTF's effective leverage ratio breach 45%, under the terms of the RVMTP shares DTF is required to cure the breach by reducing leverage in a sufficient amount within a specified time period.
INVESTMENT MANAGER
DPIM is the funds' manager and responsible for the implementation and execution of the investment strategies on a day-to-day basis. DPIM is a subsidiary of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A rating upgrade is not currently envisioned for the 'AA' rated preferred shares issued by DTF as Fitch criteria effectively caps CEF ratings at 'AA';
Rating upgrades are is not currently envisioned for DNP or DPG, as the funds invest 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 funds' assets, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause Fitch to downgrade the ratings;
The ratings could be 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 sufficient liquidity and price stability at the current rating stress levels. Fitch deems the level of future market value decline the funds would have to experience to incur a sustained breach in Fitch OC test coverage as unlikely, as Fitch believes the fund manager would delever or alter the portfolio composition toward lower discount factor assets to the extent needed to cause the rated securities to maintain passing Fitch OC test margins at the assigned rating level;
While DNP's notes and MRPS are currently equalized at the 'A' rating level, further differentiation between classes is possible in the future based on seniority.
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 '
SOURCES OF INFORMATION
The sources of information used to assess this rating were the public domain and DPIM.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONS
Entity / Debt
Rating
Prior
DTF TaxFree Income 2028
23334J503
LT
AA
Affirmed
AA
26433C4#9
LT
A
Affirmed
A
23325P4#8
LT
A
Affirmed
A
23325PA*5
LT
A
Affirmed
A
23325PA@3
LT
A
Affirmed
A
23325P6#6
LT
A
Affirmed
A
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