Business Context and Reporting Period
This Form 8-K is filed by Flaherty & Crumrine Total Return Fund Inc on January 20, 2017. The report details a material change to the Fund's investment policies effective February 21, 2017.
Key Financial Metrics
This filing is a current report regarding policy changes and does not contain financial statements. Consequently, data regarding revenue, profit, cash flow, margins, debt, and liquidity are not provided in this document.
Material Changes Versus Prior Period
The Fund is modifying its credit quality guidelines to address shifts in rating methodologies and market composition since the 2008-2009 financial crisis.
- Old Policy: Required at least 80% of securities to be rated investment grade. Up to 20% could be below investment grade, provided they were rated at least Ba3/BB-/BB- or issued by an entity with investment grade senior debt.
- New Policy: Requires at least 90% of managed assets to be either rated investment grade or issued by companies with investment grade issuer/senior unsecured debt ratings.
- Market Context: The adviser notes that preferred securities with an investment grade rating now comprise only ~62% of the market, down from 90% pre-crisis.
Guidance, Outlook, and Risks
Management Commentary: The changes are intended to align the Fund's guidelines with current market realities where rating agencies have lowered preferred security ratings despite credit strengthening at issuers.
Impact on Holdings:
- The Fund may now purchase below investment-grade preferred securities of investment-grade issuers.
- Subject to a 10% limit, the Fund may purchase securities rated below Ba3/BB-/BB- even if the issuer's senior debt is below investment grade.
- While the policy permits acquiring securities rated B and below, the adviser states there is no current intention to do so.
- The Fund is not required to dispose of securities if they are downgraded after purchase, meaning more than 10% of holdings could eventually be issued by companies with below investment-grade ratings.
Key Facts for Investor Verification
- Effective date of new investment policy: February 21, 2017.
- Minimum investment-grade asset threshold increased from 80% to 90% (including issuer-rated securities).
- The adviser explicitly states no current intention to purchase securities rated B or below.
- Downgrades post-purchase do not trigger mandatory sales, potentially increasing exposure to lower-rated issuers over time.