Fitch Ratings has affirmed the Long-Term ratings assigned to the senior secured notes (notes) and the Series A Mandatory Redeemable Preferred Shares (MRPS) issued by Virtus Diversified Income & Convertible Fund (NYSE: ACV) at 'A'.

Fitch has also affirmed the Long-Term ratings assigned to the Series A Cumulative Preferred Shares issued by Virtus Convertible & Income Fund (NYSE: NCV) and Series A Cumulative Preferred Shares issued by Virtus Convertible & Income Fund II (NYSE: NCZ) at 'A'.

The Adviser to the funds is Virtus Investment Advisers, Inc. and the subadviser is Voya Investment Management Co. LLC.

KEY RATING DRIVERS

The Long-Term ratings are supported by:

Suf?cient asset coverage provided to the rated securities as calculated per each fund's asset coverage tests (please see Rating Sensitivities below for additional information).

The structural protections afforded by mandatory collateral maintenance and deleveraging provisions in the event of asset coverage declines.

The legal and regulatory parameters that govern the funds' operations.

The capabilities of Virtus Investment Advisers as primary investment adviser and Voya Investment Management as subadviser.

Fund Profiles:

The funds are diversi?ed, closed-end management investment companies, registered under the Investment Company Act of 1940 (1940 Act), as amended.

ACV's investment objective is to provide total return through a combination of current income and capital appreciation, while seeking to provide downside protection against capital loss. Under normal market conditions, the fund will seek to achieve its investment objective by investing in a combination of convertible securities, debt and other income-producing instruments and common stock and other equity securities.

NCV's investment objective is to provide total return through a combination of capital appreciation and high current income. Under normal circumstances, the fund will invest at least 80% of its total assets in a diversi?ed portfolio of convertible securities and non-convertible income-producing securities.

NCZ's investment objective is to provide total return through a combination of capital appreciation and high current income. Under normal circumstances, the fund will invest at least 80% of its total assets in a diversi?ed portfolio of convertible securities and non-convertible income-producing securities.

Leverage

As of March 28, 2024, total leverage for ACV was made up of notes, MRPS and bank loans. As of the same date, total leverage for NCV and NCZ consisted of the cumulative preferred shares, MRPS and bank loans. As of March 28, 2024, effective leverage was 32% for ACV, 37% for NCV, and 38% for NCZ. Effective leverage is a ratio measuring a fund's structural leverage as a percentage of its capital structure.

Subordination Risk and Refinancing Risk

Senior debt in the form of bank loans and the rated notes in the case of ACV, and bank loans in the case of NCV and NCZ, create a manageable degree of subordination risk for the preferred share investors of the three funds because the rights of note holders (ACV), bank lenders (ACV, NCV and NCZ) to receive payments of principal and interest are senior to the rights of holders of the preferred share investors to receive principal or dividend payments.

Fitch believes any subordination risk in the three funds is manageable based on the funds' solid performance on the Fitch net overcollateralization (OC) test (please see Preferred Share Asset Coverage below). This test quantifies subordination risk by assessing asset coverage to the rated obligations after first repaying liabilities that are senior in the capital structure, and the preferred shares of ACV, NCV and NCZ have Fitch net OC test coverage well in excess of 100% at the assigned 'A' rating level. Because subordination risk is manageable, the ratings for the ACV notes and MRPS are currently equalized at the 'A' rating level.

Fitch believes there is minimal refinancing risk associated with the rated securities of ACV, NCV and NCZ. The Fitch net OC test results indicate the funds are sufficiently liquid to fully repay all of their leverage within a relatively brief 45- to 60-day exposure period, even during a time of substantial market stress.

Derivatives

As of March 28, 2024, ACV wrote covered call options on shares held in the equity portion of the portfolio as a risk hedging strategy. NCV and NCZ did not utilize derivatives as of March 28, 2024.

Asset Coverage

As of the review date, ACV's asset coverage ratios for the notes and MRPS, as calculated in accordance with the Fitch total and net overcollateralization tests (Fitch OC tests) per the 'A' rating guidelines outlined in Fitch's closed-end fund criteria, were in excess of 100%. This is the minimum asset coverage guideline required by the transaction documents governing the notes and MRPS. In addition, ACV's indebtedness and MRPS are subject to asset coverage requirements of 300% and 200%, respectively, under the transaction documents governing the notes, and the MRPS are subject to an asset coverage requirement of 225% pursuant to the transaction documents governing the MRPS.

As of the review date, NCV and NCZ's asset coverage ratio for the rated cumulative preferred shares, as calculated in accordance with the Fitch OC tests per the 'A' rating guidelines outlined in Fitch's applicable criteria, were each in excess of 100%. This is the minimum asset coverage guideline required by the fund's governing documents. In addition, as of the review date, the funds' asset coverage ratios for total leverage, as calculated in accordance with the 1940 Act, were in excess of the minimum asset coverage required by the 1940 Act and the funds' governing documents.

The Fitch OC tests calculate standardized asset coverage by applying haircuts to portfolio holdings based on riskiness and diversi?cation of the assets and measuring their ability to cover both on- and off-balance-sheet liabilities at the stress level that corresponds to the assigned rating. Fitch OC tests also capture the funds' use of synthetic convertible securities based on the credit rating of the issuer and put provider, the provisions on put protection and stock delta, and whether underlying stock is trading at an equity-sensitive, typical or busted conversion premium, similar to a straight convertible position.

Notes Structural Protections

Should the asset coverage tests decline below their minimum threshold amounts (as tested on the last business day of each week, in the case of Fitch OC tests, or each month, in the case of the asset coverage tests), under the terms of the notes, ACV is required to deliver notice to the note purchasers within ?ve business days.

The fund's managers are then expected to cure the breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC tests breaches), or by reducing leverage in a suf?cient amount (for both the Fitch OC tests and the 1940 Act test breaches) within a pre- speci?ed period as set forth in the applicable governing document. The pre-specified time period provided for in the applicable governing document 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. The fund must then deliver a notice within ?ve business days to the note purchasers, and a vote of holders of at least 51% of the principal amount of the notes may then declare all the notes then outstanding to be immediately due and payable.

The fund is also prohibited from declaring or paying out a common stock dividend or other distribution on common shares unless, immediately after such transaction, the applicable fund would satisfy the 300% asset coverage test on indebtedness. Fitch views this as an added incentive to cure and deleverage in a timely manner, regardless of acceleration by the notes' purchasers.

MRPS Structural Protections

Should the asset coverage test or the Fitch OC test results of the MRPS issued by ACV decline below their minimum threshold amounts (as tested weekly, in the case of Fitch OC tests, or monthly, in the case of the asset coverage tests), the fund is required to cure the breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC test breaches), or by reducing leverage in a suf?cient amount (for both the Fitch OC tests and MRPS documents asset coverage test breaches) within a pre-speci?ed period as set forth in the applicable governing document. The pre-specified time period provided for in the governing document is consistent with Fitch's criteria guidelines.

Cumulative Preferred Shares Structural Protections

Should the asset coverage test results of the NCV or NCZ Series A Cumulative Preferred Shares decline below their minimum threshold amounts, the respective governing documents require the applicable fund to reduce leverage in a suf?cient amount (for both the Fitch OC tests and the 1940 Act test) to restore compliance within a pre-speci?ed period, subject to cure provisions and various other terms and conditions.

The funds will be required to assess compliance with the Fitch OC tests on the last business day of each month for as long as Fitch rates the Series A Cumulative Preferred Shares of NCV and NCZ. Both funds are required to assess compliance with the 1940 Act 200% asset coverage test with respect to preferred stock on the last business day of each quarter.

INVESTMENT MANAGER

Virtus Investment Advisers, Inc., an indirect, wholly owned subsidiary of Virtus Investment Partners, is the funds' investment adviser. Voya Investment Management is the funds' subadviser.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Ratings upgrades are not currently envisioned as the funds invest largely in securities that are ineligible for 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 funds' assets, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause Fitch to downgrade the ratings;

The ratings could be downgraded if asset coverage cushions erode as a result of market volatility, or if Fitch believes the assets a fund invests in are unlikely to retain suf?cient liquidity and price stability at the current rating stress levels.

Fitch deems the level of future market value decline the funds would have to experience to incur a sustained breach in Fitch OC Test coverage as unlikely. Fitch believes the funds would delever or alter the portfolio composition toward lower discount factor assets to the extent needed to cause the rated securities to maintain passing Fitch OC Test margins at the assigned rating level. Based on portfolio composition as of the review date, NCV, NCZ, and ACV can withstand market value declines of 30%, 28%, 37% respectively, before breaching a Fitch OC Test;

While ACV's notes and MRPS are currently equalized at the 'A' rating level, further differentiation between classes is possible in the future based on seniority;

Transaction documents reference Fitch's rating criteria that was published in December 2020 for the purposes of calculating the Fitch OC tests. If Fitch in the future makes material changes to its criteria and transaction documents' references to the 2020 criteria are not updated, this may have a rating impact on the preferred shares.

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