SRH TOTAL RETURN FUND, INC.
Fitch Ratings has affirmed the 'A' long-term ratings on the series A, B and C senior notes issued by
STEW is a closed-end fund whose investment advisor is
KEY RATING DRIVERS
The 'A' ratings reflect the following:
Sufficient asset coverage as calculated per the Fitch total and net overcollateralization tests (Fitch overcollateralization [OC] Tests) at the 'A' level, as required by the note's governing documents;
The structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines;
The legal and regulatory parameters that govern the fund's operations;
The capabilities of Paralel and RMA.
FUND PROFILE
STEW is a non-diversified, closed-end management investment company regulated by the Investment Company Act of 1940 with a total return objective. Under normal market conditions, the fund intends to invest at least 80% of its net assets in common stocks.
Common stocks include dividend-paying closed-end funds, open-end funds and REITs. The portion of the fund's assets that are not invested in common stocks may be invested in fixed income securities and cash equivalents.
On
LEVERAGE
STEW's leverage is composed of
Fitch believes refinancing risk on the notes is minimal. The Fitch OC test results indicate the fund is sufficiently liquid to fully repay the notes within a relatively brief (45 day-60 day) period, even during a period of substantial stress.
The fund does not currently make material use of derivatives for hedging or speculative purposes.
ASSET COVERAGE
As of the review date, asset coverage ratios as calculated in accordance with the 'A' Fitch total and net OC tests (Fitch OC tests) outlined in Fitch's closed-end fund criteria, were each in excess of 100%. This is the minimum threshold required under the terms of the notes' governing documents.
Also, as of the review date, the fund's asset coverage as calculated in accordance with the 1940 Act, were in excess of 300% (Senior 1940 Act Asset Coverage Test) and 200% (Total 1940 Act Asset Coverage Test). These are the minimum asset coverage thresholds under the terms of the notes' governing documents.
NOTES' STRUCTURAL PROTECTIONS
Compliance with the Fitch OC test is tested weekly, and compliance with the Senior 1940 Act Asset Coverage Test and the Total 1940 Act Coverage Test are tested monthly. 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 the Fitch OC test), or by reducing leverage in a sufficient amount (for the Fitch OC test, the Senior 1940 Act Asset Coverage Test and the Total 1940 Act Coverage Test) within a pre-specified period. The time allowed for the fund to restore compliance is consistent with Fitch's criteria guidelines.
Failure to cure an asset coverage breach as described above is an event of default under the terms of the notes, following which, a majority vote from note purchasers may declare all the notes then outstanding to be immediately due and payable.
In addition, the fund may not declare or pay any dividend, distribution or similar payment in respect of, or redeem any of, its shares if immediately before or after giving effect to such action. This would be, or is considered a breach of the Senior 1940 Act Asset Coverage test, or the Fitch OC test. An exception would be a breach of the Fitch OC tests, to the extent required in order for the fund to qualify as a regulated investment company or to otherwise minimize or eliminate federal or state income taxes payable by the fund. Fitch views this as an added incentive to cure and de-leverage in a timely manner, regardless of acceleration by the note purchasers.
INVESTMENT MANAGER
Paralel is a wholly owned subsidiary of
Fitch views Paralel's and RMA's investment advisory capabilities, resource commitment, operational controls, corporate governance and compliance procedures as consistent with the ratings assigned to the fund.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The notes' 'A' long-term rating is the highest achievable rating based on the applicable criteria because SRH invests largely in securities that are ineligible for Fitch OC test model 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 result in a ratings downgrade;
Terms relevant to structural protections, including but not limited to the Fitch OC tests, asset coverage and effective leverage are set forth in the notes' governing and offering documents. Any future changes to terms that weaken the structural protections may have negative rating implications.
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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