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Closed End Fund (CEF) Leverage Rules in Action – UPDATE

UPDATE–I did a little more digging and these preferred shares were downgraded by Fitch on 5/21/2022 to ‘A’ from ‘AA’. I believe they were originally ‘AAA’

Fitch Downgrade is here.

Here is an item concerning the Virtus (Allianz) Fund II Convertible and Income Fund (NCZ) that shows the CEF leverage rules in action–recall that closed end funds must maintain a 200% coverage ratio on senior securities-in this case the fund has a preferred stock outstanding.

Apparently soft markets caused their ratio to drop causing a short disruption to the fund paying common share dividends. Having to postpone dividends even for a week is obviously a big negative for a closed end fund.

The preferred stock outstanding is here.

The press release is here.

8 thoughts on “Closed End Fund (CEF) Leverage Rules in Action – UPDATE”

  1. There should be shared responsibility with the rating company (Fitch) which still keeps the rating A, High Credit Quality?

    I would have to stay the other shared responsibility is the on going investors that look the other way as they are being fleece . B.T.Barnum said it very well “There is a sucker born every minute”.

  2. Yah its leveraged 50% and now the fund will probably make a “offering” at a discount to NAV to the existing shareholders to cure its liquidity problem. Kinda like a ponzi scheme type of investment.

    1. Yep–that is how these work. As senior securities investors we like common holders to have to cough up more moola.

  3. I am always a little suspicious of CEFs like Gabelli, Allianz, etc that provide 10% or more “dividends” when their average holdings don’t yield anything close to that. It comes across to me as somewhat deceptive of operating as I suspect most small investors who by these funds don’t pay close attention to what the holdings are, or their performance.

    Interesting that as of 10:30am EDT, both NCZ and NCV are up.

    1. TEF–personally I don’t do much of anything with CEF’s common shares–but love the preferreds. This press release was old, but preferreds haven’t reacted at all.

      1. Common holders require high minimum 8-10% cash returns due to poor previous financial choices.

        Financial products exists for every type and scenario of investor.

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