KBRA Assigns Ratings to Mandatory Redeemable Preferred Series G Mandatory Redeemable Preferred Shares Issued by Four Calamos Closed-End Funds
9 Sep 2024 | New York
KBRA assigns ratings to the following Mandatory Redeemable Preferred Shares ("MRPS") issued by four Calamos Closed-End funds: Calamos Convertible and High Income Fund; Calamos Convertible Opportunities and Income Fund; Calamos Dynamic Convertible and Income Fund; and Calamos Strategic Total Return Fund (the “Funds”).
The Funds were established by Calamos as diversified, closed-end management investment companies under the Investment Company Act of 1940 (the "1940 Act"). The Funds are each traded on the Nasdaq Global Select Market exchange under their respective tickers. The ratings assigned to the MRPS are driven by a combination of the Funds’ historically strong asset coverage ratios and liquidity coupled with Calamos’ demonstrated management capabilities. Historically, total asset coverage has averaged around 300% for all of the Funds which is meaningfully above the 1940 Act 200% total leverage threshold.
The proceeds from this issuance will be used toward the redemption of existing Series B MRPS issued per Fund.
Key Credit Considerations
- Asset CoverageThe Funds are registered under the Investment Company Act of 1940, as amended. Regulatory requirements require a minimum asset coverage ratio of 200% on total leverage (including senior debt and preferred shares) and 300% on senior debt to issue additional debt or preferred shares. Further, under the terms of the MRPS agreements, distributions to common shareholders are not allowed unless total asset coverage exceeds 225%, which incentivizes the Funds' management to maintain its asset coverage cushion.
- LiquidityAs each Fund is invested mostly in publicly traded securities, the liquidity of each Fund's assets is relatively strong. These asset classes trade in active secondary markets which provide for transparent pricing and trade execution, should any of the securities need to be sold.
- Diversified InvestmentsEach Fund is diversified across sectors, geographies and product types. This diversity helps mitigate idiosyncratic risk. However, most of each Fund’s assets are unrated securities.
- Sponsor ExperienceCalamos Investments LLC was founded in 1977 by John P. Calamos, Sr., who is currently the firm’s Chairman and Global Chief Investment Officer (CIO). Calamos Investments LLC operates seven publicly traded closed-end funds and has demonstrated its ability and willingness to meet the 1940 Act requirements for each.
Rating Sensitivities
A deterioration in asset coverage levels below ‘40 Act requirements and the Funds' manager’s inability to liquidate assets and demonstrate intention to cure within the 30-day time-period could result in a negative rating change. A trend of stable asset performance coupled with improvements to asset coverage could result in positive rating changes.
Investment Fund Debt Rating Determinants
Quantitative Factors
- Asset Quality:The Funds invest across a variety of asset classes and has investment guidelines which provide for a high degree of flexibility in making investment decisions.
- Asset Coverage:The coverage ratios per Fund exceed the 225% threshold required to pay common dividends and the 200% 1940 Act threshold for total leverage. As summarized in the table below, the Series G MRPS issuance will be used toward the redemption of the Series B MRPS for each Fund (along with a minimal increase in the Senior Debt Balance). As such, post issuance of the Series G the Asset Coverage for each Fund will remain unchanged.
- Liquidity:The majority of the Funds' investments are convertible securities, which generally have a strong liquidity profile and are actively tradable. Equities and other investment types in the Funds trend towards higher liquidity, and certain investments (e.g., 144A securities) can only be made if the security is deemed to be “liquid” by Calamos Investments LLC. The portfolio of each Fund is anticipated to remain highly concentrated in liquid, tradable products.
- Duration:Due to the ongoing nature of the Funds and their traded portfolios of assets, there is no meaningful duration measurement associated with the underlying collateral supporting the transaction.
- Cash Flow Analysis:Given the nature of the assets of the Funds, the risk of the Funds failing to meet interest and principal obligations on the preferred shares is already captured in the Asset Coverage and Liquidity determinants. As such, no weight is assigned to this determinant.
Qualitative Factors
- Manager Review:KBRA’s manager review considers the manager’s capabilities, track record and policies and procedures.
- Other:KBRA's other qualitative factor review considers the Calamos' demonstrated ability and willingness to consistently exceed 1940 Act asset coverage levels.
ESG Considerations
KBRA typically analyzes Environmental, Social, and Governance (ESG) factors through the lens of how management teams plan for and manage relevant ESG risks and opportunities. More information on KBRA’s approach to ESG risk management when evaluating funds can be found here. Over the medium-term, funds and other financial institutions will need to prioritize ESG risk management and disclosure with the likelihood of expansions in ESG-related regulation and rising investor focus on ESG issues.
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