Fitch Ratings has affirmed the ratings assigned to the auction market preferred shares (AMPS) issued by Eaton Vance Limited Duration Income Fund (NYSE AMEX:EVV), a closed-end fund managed by Eaton Vance Management:
--Series A, 2133 shares outstanding, with a liquidation preference of $25,000 per share, affirmed at 'AAA';
--Series B, 2133 shares outstanding, with a liquidation preference of $25,000 per share, affirmed at 'AAA';
--Series C, 2133 shares outstanding, with a liquidation preference of $25,000 per share, affirmed at 'AAA';
--Series D, 2133 shares outstanding, with a liquidation preference of $25,000 per share, affirmed at 'AAA';
--Series E, 2133 shares outstanding, with a liquidation preference of $25,000 per share affirmed at 'AAA'.
KEY RATING DRIVERS
The affirmation follows Fitch's annual review of EVV and reflects:
-- Sufficient asset coverage relative to Fitch's published criteria;
-- The structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines;
-- The legal and regulatory parameters that govern the funds' operations;
-- The capabilities of Eaton Vance Management as the investment advisor.
Fitch's ratings on AMPS speak only to timely repayment of interest and principal in accordance with the governing documents and not to potential liquidity in the secondary market.
LEVERAGE
As of Jan. 31, 2012, leverage, which consisted of senior borrowings and rated AMPS, was approximately 29% of total assets. Leverage consisted of $266.6 million of rated AMPS, $434.2 million from a conduit credit facility and $66.3 million from reverse repurchase agreements. The fund also had Term Asset-Backed Securities Loan Facility (TALF) loans that were approximately $51 million.
ASSET COVERAGE
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 applicable criteria, were in excess of 100%, which is the minimum asset coverage amount deemed consistent with an 'AAA' rating. These tests serve as minimum asset coverage covenants required by the fund's governing documents. Should the asset coverage for the AMPS decline below 100%, the governing documents require the fund to restore compliance within 38 business days.
Due to the non-recourse nature of the fund's TALF loans, Fitch does not include the loans or segregated CMBS collateral in the calculation of the Fitch OC Tests.
Additionally, the fund's asset coverage ratios for total outstanding AMPS and borrowings, as calculated in accordance with the Investment Company Act of 1940, were in excess of 200%, which is also a minimum asset coverage required by the fund's governing documents.
FUND PROFILE
Eaton Vance Limited Duration Income Fund is a non-diversified, closed-end management investment company, registered under the Investment Company Act of 1940, as amended. The fund commenced operations in May 2003 with the investment objective of seeking a high level of current income with a secondary objective of seeking capital appreciation. The fund invests primarily in two investment categories, U.S. government agency mortgage-backed securities and investments rated below investment grade including senior loans and bonds.
As of Jan. 31, 2012, the portfolio consisted mainly of high-yield corporate securities, mortgages-backed securities guaranteed by U.S. government agencies and senior loans. EVV's top sector concentrations were in the Fitch sector categories of U.S. government agencies; computer and electronics, telecommunications; and healthcare. Given the high levels of issuer and sector diversification of the fund's assets, in accordance with Fitch's applicable rating criteria, no additional haircuts were added to the asset specific discount factors used for calculating asset coverage.
The fund may purchase senior loans that may be fully or partially unfunded and the commitments of which the fund is obligated to fulfill at the borrower's discretion. Fitch reviewed the size of unfunded loan commitments and found them to be less than 1% of total assets. The fund also invests in foreign currency denominated securities. The fund currently utilizes forward foreign currency exchange contracts to hedge the potential exchange rate risk associated with such investments. Fitch notes that for unhedged positions, exchange rate risk is included as part of Fitch's assessment of the sufficiency of asset coverage available to rated AMPS.
THE ADVISOR
Eaton Vance Management, a subsidiary of Eaton Vance Corp. acts as the investment adviser to the funds. As of Dec. 31, 2011, Eaton Vance Corp. and affiliates managed approximately $184.5 billion in assets.
RATING SENSITIVITY
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. For additional information about Fitch closed-end fund ratings guidelines, please review the criteria referenced below, which can be found on Fitch's website.
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 and Eaton Vance Management.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=660709
Closed-End Funds: Derivatives Under Review (Increased Use and Limited Transparency Are Key Considerations)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656591
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