Fort Dearborn Income Securities, Inc. (NYSE:FDI) (the “Fund”)
announced that the Board of Directors of the Fund approved changes
to certain investment policies of the Fund, as well as approved and
recommended that shareholders approve the amendment and elimination
of certain fundamental investment policies and restrictions at the
Fund’s upcoming annual meeting. Together, the approved and
recommended changes seek to provide additional investment
flexibility to more efficiently manage the Fund’s exposures, help
maintain the distribution rate at competitive levels relative to
the market and make sure that the Fund’s shares remain attractive
to both existing and prospective shareholders.
The Board approved the following, effective December 31, 2013:
1) permitting the Fund to purchase non-US dollar-denominated
securities; 2) allowing the Fund to invest up to 10% of its assets
in collateralized loan obligations; and 3) clarifying that the Fund
may invest up to 25% of its total assets in a combination of (a)
below investment grade privately placed debt securities; (b)
preferred stock; (c) convertible securities or debt issued with
warrants to purchase common stock, provided the market value of all
warrants does not exceed 2% of the net asset value of the Fund; and
(d) below investment grade obligations of foreign governments or
foreign corporations.
Each of the changes highlighted above, combined with the changes
outlined below, seek to provide the Fund with a broader array of
investment choices, presenting the Fund with the opportunity to
improve its overall risk-adjusted returns.
In addition, as noted above, the Board approved and recommended
that at the annual meeting of shareholders, to be held on December
6, 2013, that shareholders approve changes to the Fund’s investment
policies and restrictions, as described below. These changes, if
approved, will also become effective on December 31, 2013.
Shareholders will be asked to approve amendments to convert the
Fund’s fundamental policy of investing at least 75% of the Fund’s
total assets in investment grade debt to a non-fundamental policy.
The amended policy will also clarify, modernize and streamline the
language used to describe the types of investment grade securities
that are permitted to be included in the 75% bucket and seek to
provide the Fund with future flexibility to respond to market
changes. For example, a number of the Fund’s investment policies
are linked to credit ratings, including the Fund’s current policy
to invest 75% of the Fund’s total assets in debt obligations that
at the time of purchase are rated in the four highest credit rating
grades of Moody’s Investor Services, Inc. (“Moody’s”) and Standard
& Poor’s Rating Services (“S&P”). The current ratings
policies date back to 1993, when the Fund’s prospectus was last
updated in conjunction with a rights offering. Since then, Fitch
Ratings, Inc. (“Fitch”) has established itself as the third major
ratings agency and is viewed by UBS Global Asset Management
(Americas), Inc. (“UBS Global AM”), the Fund’s Investment Advisor,
as being just as reliable as the other two ratings organizations.
The proposed amended 75% policy, noted below, now incorporates
Fitch:
The Fund invests at least 75% of its total assets in
non-convertible fixed income securities, which at the time of
purchase are considered investment grade by being rated in the four
highest grades as determined by Moody’s, S&P or Fitch, or if
not rated, are considered by the Investment Advisor to be of
comparable investment quality. For purposes of this policy, the
Fund’s investment in investment grade, non-convertible fixed income
securities may include corporate debt securities of US and non-US
issuers, securities of the US government, its agencies and
government-sponsored enterprises, securities guaranteed by the US
government, obligations of non-US governments or their
subdivisions, agencies and government-sponsored enterprises,
obligations of international agencies or supranational entities,
mortgage-backed securities, asset-backed securities, commercial
paper and cash or cash equivalents.
As noted earlier, the Fund’s offering documents and respective
policies have not been updated in almost two decades and,
therefore, feature a number of restrictions that many modern funds
no longer employ. As such, shareholders will also be asked to
approve amendments to the Fund’s borrowing and senior securities
investment restriction and the Fund’s commodities restriction.
These changes will provide the Fund with more modern restriction
that will no longer prevent the Fund from using derivative
instruments, such as futures, forwards, swaps and options, to more
efficiently manage the Fund’s investments. Also, amending the
borrowing and senior securities restrictions will modernize the
language of the restriction and remove any ambiguity with respect
to the Fund’s ability to engage in structural leverage (e.g.,
borrowing from a bank for investment purposes), if it is determined
that such leverage would be beneficial at some time in the future.
At this time, while we do not intend to engage in structural
leverage (such as borrowing from a bank for investment purposes),
we will alert the Fund’s shareholders, in writing, should the Board
and UBS Global AM decide to implement such strategies in the
future.
Finally, shareholders will be asked to approve the elimination
of four outdated fundamental investment restrictions that currently
prevent the Fund from employing derivative instruments as
additional tools to manage the Fund’s exposures and provide greater
flexibility in portfolio construction. The investment restrictions
that shareholders are being asked to approve for elimination
include restrictions prohibiting: 1) mortgaging, hypothecating or
pledging assets; 2) purchasing securities on margin; 3) making
short sales or maintaining short positions; and 4) engaging in
options. UBS Global AM seeks to initiate use of derivative
instruments in the Fund to more efficiently manage its exposures.
For example, the Fund may utilize interest rate instruments, such
as futures, to more precisely manage the Fund’s interest rate
exposure, while potentially seeking to improve its earnings
potential by investing in longer maturity, higher-yielding debt,
but reducing overall portfolio interest rate exposure using
futures. Furthermore, the Fund intends to utilize currency
instruments (e.g., foreign exchange forwards) to hedge any foreign
currency exposure back to the US dollar. Overall, the Fund expects
to use derivative instruments for both hedging and investment
purposes.
Collectively, the aforementioned changes build on policy
adjustments the Fund already implemented in June 2013, which
included: 1) changing the Fund’s benchmark from the Investment
Grade Bond Index, to the Barclays US Aggregate Index; and 2)
adjusting the Fund’s portfolio duration range, from its prior range
of ±2 years, to ±3 years, of the benchmark’s duration. While
changes implemented in June 2013 sought to reduce the Fund’s
interest rate risk sensitivity, these new changes now target to
redeploy that risk in other areas of the portfolio, seeking to
improve the overall risk-adjusted performance and the Fund’s
earnings potential by widening the investable universe, modernizing
policies, removing outdated limitations and arming the investment
team with tools to more efficiently manage portfolio risks and
exposures.
The Board has set Friday, October 11, 2013 as the record date
for determination of the shareholders entitled to vote at the
Fund’s annual meeting of shareholders, to be held on Friday,
December 6, 2013. The matters to be considered at the annual
meeting are the election of directors, amending and converting to
non-fundamental the Fund's fundamental investment policy, amending
certain fundamental restrictions, eliminating certain outdated
fundamental investment restrictions, and transacting such other
business as may properly come before the meeting.
In connection with the Fund’s annual meeting of shareholders, a
proxy statement will be filed with the SEC. WE URGE SHAREHOLDERS TO
READ THE PROXY STATEMENT CAREFULLY WHEN IT BECOMES AVAILABLE
BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION ABOUT THE FUND.
Shareholders will be able to obtain free copies of the proxy
statement (when available), as well as other filed documents
containing information about the Fund, at www.sec.gov, the SEC’s
Internet site. Shareholders can also obtain copies of these
documents and other related documents, when available, for free by
calling the Fund’s proxy solicitor, Georgeson Inc. at 866-316
3922.
Additional risk considerations
While the changes discussed above present attractive investment
opportunities, they may potentially introduce additional risks,
which are further outlined below.
Derivatives risk: The value of “derivatives”—so called
because their value “derives” from the value of an underlying
asset, reference rate or index—may rise or fall more rapidly than
other investments. When using derivatives for non-hedging purposes,
it is possible for the Fund to lose more than the amount it
invested in the derivative. The risks of investing in derivative
instruments also include market and management risks. Derivatives
relating to fixed income markets are especially susceptible to
interest rate risk and credit risk. In addition, many types of
swaps and other non-exchange traded derivatives may be subject to
liquidity risk, credit risk and mispricing or valuation complexity.
These derivatives risks are different from, and may be greater
than, the risks associated with investing directly in securities
and other instruments.
Leverage risk associated with financial instruments: The
use of financial instruments to increase potential returns,
including derivatives used for investment (nonhedging) purposes,
may cause the Fund to be more volatile than if it had not been
leveraged. The use of leverage may also accelerate the velocity of
losses and can result in losses to the Fund that exceed the amount
originally invested.
Collateralized Loan Obligations (CLOs): A CLO is a trust
typically collateralized by a pool of loans, which may include,
among others, domestic and foreign senior secured loans, senior
unsecured loans, and subordinate corporate loans, including loans
that may be rated below investment grade or equivalent unrated
loans. CLOs may charge management fees and administrative expenses.
In addition to the normal risks associated with debt securities
(e.g., interest rate risk, credit risk and default risk), CLOs
carry additional risks including, but not limited to: (i) the
possibility that distributions will not be adequate to make
interest or other payments; (ii) the collateral may decline in
value or quality or go into default; (iii) the Fund may invest in
tranches of a CLO that are subordinate to other classes; and (iv)
the complex structure of the security may not be fully understood
at the time of investment and may produce disputes with the issuer,
difficulty in valuing the security or unexpected investment
results.
Fort Dearborn Income Securities, Inc. is a closed-end bond fund
managed by UBS Global AM. The Fund invests principally in
investment grade, long-term fixed income debt securities. The
primary objective of the Fund is to provide its shareholders
with:
- A stable stream of current income
consistent with external interest rate conditions; and
- A total return over time that is above
what they could receive by investing individually in the investment
grade and long-term maturity sectors of the bond market.
Further information regarding the Fund, including a
discussion of principal objectives, principal investment strategies
and principal risks, may be found in the fund overview located
at http://www.ubs.com/closedendfundsinfo. You may
also request copies of the fund overview by calling the Closed-End
Funds Desk at 888-793 8637.
UBS Global Asset ManagementClosed-End Funds Desk:
888-793-8637ubs.com
Fort Dearborn Income Securities, Inc. (NYSE:FDI)
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