NEUBERGER BERMAN MUNICIPAL FUND INC.
Fitch Ratings has affirmed the 'AA' long-term ratings assigned to the Variable Rate Municipal Term Preferred Shares (VMTP shares) issued by
Fitch has also affirmed the 'A' long-term ratings assigned to the senior notes and mandatory redeemable preferred shares (MRPS) issued by
KEY RATING DRIVERS
The ratings primarily reflect:
Sufficient asset coverage provided to the notes and preferred shares as calculated per the fund's over-collateralization (OC) tests;
The structural protections afforded by mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines;
The legal and regulatory parameters that govern the fund's operations;
The capabilities of Neuberger Berman as investment manager/fund adviser.
FUND PROFILES
All four funds are closed-end management investment companies regulated by the Investment Company Act of 1940. NBH's investment objective is to provide common stockholders a high level of current income exempt from federal income tax. NBO's investment objective is to provide common stockholders a high level of current income exempt from federal income tax and
NHS's primary investment objective is to seek high total return (income plus capital appreciation) and invests primarily in high yield debt securities to pursue that objective. NHS is a non-diversified closed-end fund and has a policy where at least 80% of the fund must be invested in below investment-grade (high yield) debt securities (including corporate loans) of
LEVERAGE
As of the review date, effective leverage for NBH and NBO was 39%, effective leverage for NBW was 40% and effective leverage for NHS was 42%. Effective leverage measures the funds' structural leverage as a percentage of their capital structure. Leverage for the three municipal funds is composed solely of the outstanding VMTP shares, while leverage for NHS is composed of the outstanding MRPS and outstanding senior notes.
SUBORDINATION RISK AND REFINANCING RISK
The rights of the NHS noteholders to receive payments of principal and interest are senior to the rights of holders of the NHS MRPS to receive principal or dividend payments. The ratings for the NHS notes and MRPS are currently equalized at the 'A' rating level because Fitch believes the level of subordination risk to the NHS MRPS relative to the notes is manageable at the assigned rating level. The Fitch net OC 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 NHS MRPS have Fitch net OC test coverage in excess of 100% at the assigned 'A' rating level.
Fitch believes there is minimal refinancing risk associated with the preferred shares. The Fitch 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 the review date, the three municipal funds did not utilize derivatives. As of the review date, NHS utilized interest rate swaps during 2022 to reduce interest rate risk.
PREFERRED SHARE ASSET COVERAGE
As of the review date, NBO, NBW, and NBH's asset coverage ratios were in excess of 100%, as calculated in accordance with the Fitch total and net overcollateralization tests per the 'AA' rating guidelines outlined in Fitch's criteria (Fitch OC Tests). NHS's asset coverage ratios were in excess of 100%, as calculated in accordance with the Fitch OC Tests per the 'A' rating guidelines for the senior notes and for the MRPS. These are the minimum asset coverage guidelines required by the fund's governing documents and evaluated as such by Fitch compared to the assigned rating levels.
NBO, NBW, and NBH's asset coverage ratios, as calculated in accordance with the Investment Company Act of 1940 (Asset Coverage Test) at current market value, were in excess of 225%, which is the minimum asset coverage threshold required under the terms of the VMTP shares. NHS's asset coverage ratio for the notes, as calculated in accordance with the Investment Company Act of 1940 (1940 Act), exceeded 300%, and the fund's asset coverage ratio for the MRPS, also as calculated in accordance with the 1940 Act, exceeded 200%, which are the minimum asset coverage ratios required by the 1940 Act and the transaction documents.
The Effective Leverage Test ratios for NBO, NBW, and NBH, which Fitch also calculated at current market value, were below 50%. This is the maximum leverage threshold allowed under the terms of the preferred shares (51% if the increase in the ratio is due exclusively to asset market value volatility).
In the event of breaches to any of the above thresholds, the funds are required to restore compliance per structural protections described below.
STRUCTURAL PROTECTIONS
Compliance with the Fitch OC, Asset Coverage and Effective Leverage thresholds, as applicable, is tested periodically. The fund manager is expected to cure any 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 sufficient amount (for all other breaches) within a pre-specified time period.
For Fitch OC, Asset Coverage and Effective Leverage Tests, the maximum market value exposures (i.e. valuation, cure and redemption) that preferred shareholders would be exposed to before cure or redemption is consistent with Fitch's criteria guidelines.
INVESTMENT MANAGER
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Rating upgrades are not currently envisioned for the 'AA' rated preferred shares issued by the municipal funds NBO, NBW, and NBH, as Fitch criteria effectively caps CEF ratings at 'AA'.
An upgrade is not currently envisioned for the senior notes or the MRPS of NHS as the fund invests largely in securities that are ineligible for credit at the 'AA' rating level under Fitch criteria.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The ratings assigned to the preferred shares of the four funds and the notes of NHS may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the fund, as described above;
The ratings could be downgraded if asset coverage cushions erode as a result of market volatility, or if Fitch believes the assets the funds invest 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, as 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 margins at the assigned rating level on the Fitch OC Test.
A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be downgraded by Fitch;
The funds have the ability to assume economic leverage through speculative derivative transactions that may not be captured by the funds' minimum asset coverage test or effective leverage ratio. The Fitch OC Tests would capture any such economic leverage;
The funds do not currently engage in speculative derivative activities, and Fitch's analysis assumes the funds do not envision engaging in material amounts of such activity in the future. Any material speculative derivative exposures in the future could have potential negative rating implications if they adversely affect asset coverage available to rated securities.
In the case of the NHS rated notes, should the fund fail to cure an asset coverage breach within the cure period and the note purchasers not declare the notes due and payable upon an event of default, this may lengthen exposure to market value risk and cause Fitch to downgraded the ratings.
While NHS's notes and MRPS are currently equalized at the 'A' rating level, future events could result in further differentiation between classes based on seniority.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
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