Fitch Ratings, London: Fitch Ratings has published a special report that analyses and compares the use of leverage in UK investment trusts (ITs) against US closed-end funds (CEFs).
ITs on average employed gross leverage of 9% at end-March 2015, which is low compared with US taxable CEFs that used on average 25% leverage, while US municipal CEFs use higher levels still. Fitch estimates ITs used a total of GBP6bn of leverage as of end-March 2015, a fraction of the absolute size of US taxable CEF leverage (USD54bn; GBP35bn). US leverage ratios are typically reported gross, and can use derivatives off balance-sheet.
Both ITs and taxable US CEFs use bank debt as their main leverage source, although taxable US CEFs use a more diverse range of funding sources compared with ITs.
There are no regulatory limits to the amount of leverage that an IT can use, but each IT’s Board of Directors will impose restrictions on the maximum amount of leverage that can be used. In the US, CEFs are regulated by the Investment Company Act of 1940, which applies various restrictions to the amount of leverage allowed.
Fitch rates debt and preferred securities issued by ITs and offshore CEFs under specific criteria developed for non-US CEFs. Fitch has separate criteria for rating US CEFs, and in the US, Fitch rates about USD31bn of debt and preferred stock issued across 220 US CEFs.
The report, “UK Investment Trusts – Use of Leverage”, is available at www.fitchratings.com or by contacting Elaine Bailey on +44 203 530 1153.