SCHEDULE 13D/A: abrdn National Municipal Income Fund Secures Temporary Waivers on Key Financial Covenants from Toronto-Dominion Investments

abrdn National Municipal Income Fund has obtained temporary waivers from Toronto-Dominion Investments, the beneficial owner of its Muni-MultiMode Preferred Shares, regarding its Asset Coverage and Effective Leverage Ratio requirements until July 15, 2025.

Summary

• This filing is Amendment No. 3 to the Schedule 13D for abrdn National Municipal Income Fund, filed by Toronto Dominion Investments, Inc., Toronto Dominion Holdings (U.S.A.), Inc., TD Group US Holdings LLC, and The Toronto-Dominion Bank (collectively, the "Reporting Persons").
• The amendment primarily concerns waivers granted by Toronto-Dominion Investments, Inc. (TDI), as the beneficial owner of 100% of the Fund's Series 2049-2 and Series 2049-3 Muni-MultiMode Preferred Shares (MMP Shares).
• The waivers modify the Fund's obligations regarding its Asset Coverage level and Effective Leverage Ratio.
• The required Asset Coverage level has been temporarily reduced from at least 225% to no less than 200%.
• The maximum Effective Leverage Ratio has been temporarily increased from no more than 45% to no higher than 50%.
• These waivers are effective for a period from April 16, 2025, to July 15, 2025.
• During the waiver period, the Fund is prohibited from issuing any new senior securities (including Preferred Shares, indebtedness, or tender option bond trust financing) without TDI's explicit approval.
• The filing also updates the schedules detailing the executive officers and directors of the TD Entities.

Sentiment

Score: 3

Explanation: The need for waivers on key financial covenants indicates underlying financial stress for the Fund. While the waivers provide temporary relief, they highlight a deterioration in the Fund's financial position relative to its obligations and impose restrictions on future financing, leading to a negative sentiment.

Negatives

• The necessity for abrdn National Municipal Income Fund to seek waivers on its Asset Coverage and Effective Leverage Ratio requirements indicates that the Fund is currently not meeting its original financial covenants.
• The temporary nature of the waivers (until July 15, 2025) suggests that the underlying financial issues are not yet resolved and will need to be addressed within a short timeframe.
• The restriction on issuing new senior securities without TDI's consent during the waiver period limits the Fund's financial flexibility and potential options for addressing its capital structure or liquidity needs.

Risks

• Risk of not meeting original Asset Coverage of 225% and Effective Leverage Ratio of 45%, necessitating waivers.
• Risk of continued financial underperformance beyond the waiver period (July 15, 2025), potentially leading to further covenant breaches or more stringent terms.
• Risk of limited financial flexibility due to the prohibition on issuing new senior securities without the beneficial owner's consent during the waiver period.
• Potential for adverse impact on the Fund's credit rating or investor confidence due to the need for covenant waivers.

Future Outlook

The waivers for Asset Coverage and Effective Leverage Ratio are temporary, effective until July 15, 2025. Upon expiration, the original covenant terms will reinstate. The Fund is restricted from issuing new senior securities during this period without the beneficial owner's consent, indicating a need to address the underlying financial position within the specified timeframe.

Management Comments

• "The Waivers, dated as of April 16, 2025, have been entered into between the Issuer and TDI to waive certain of the Issuer's obligations with respect to the Asset Coverage level and Effective Leverage Ratio as defined in the Issuer's Statements Establishing And Fixing The Rights And Preferences Of Series 2049-2 and Series 2049-3 Muni-MultiMode Preferred Shares for the period beginning on and including April 16, 2025 and continuing to and including July 15, 2025."

Industry Context

This filing reflects a specific financial adjustment for abrdn National Municipal Income Fund, a closed-end fund, related to its preferred share obligations. While not directly indicative of broader industry trends, such waivers can signal challenges within the municipal bond or closed-end fund sectors, particularly if other funds face similar pressures on asset coverage or leverage ratios due to market volatility, interest rate changes, or credit quality shifts in their portfolios.

Corporate Governance

Legal Proceedings

• During the last five years, The Toronto-Dominion Bank and its affiliates (the TD Entities), and to the best knowledge of The TD Entities, none of their executive officers, directors, or controlling persons listed in Schedule I, have been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or were a party to a civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which such person was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws, or finding any violation with respect to such laws.

Stakeholder Impact

• **Shareholders (especially preferred shareholders)**: The waivers directly impact the terms governing the preferred shares, potentially affecting their risk profile and the Fund's ability to meet future obligations. The temporary nature of the waivers means preferred shareholders will be watching closely for the Fund's ability to return to original covenant compliance.
• **Creditors**: The relaxation of leverage ratios could imply increased risk for other creditors, although the restriction on issuing new senior securities without consent provides some control for the preferred shareholder (TDI).
• **Management**: Management faces pressure to improve the Fund's financial metrics to meet the original covenants by July 15, 2025, and to operate within the new restrictions on senior security issuance.

Next Steps

• The Fund must ensure compliance with the waived Asset Coverage (no less than 200%) and Effective Leverage Ratio (no higher than 50%) until July 15, 2025.
• The Fund must not issue any senior security without the consent of Toronto-Dominion Investments, Inc. during the waiver period.
• Upon expiration of the waiver period on July 15, 2025, the Fund will be required to comply with the original Asset Coverage of 225% and Effective Leverage Ratio of 45%.

Key Dates

Recommendation

Keywords

SEC filing, Schedule 13D, abrdn National Municipal Income Fund, Muni-MultiMode Preferred Shares, MMP Shares, Toronto-Dominion Investments, Financial Covenants, Asset Coverage, Effective Leverage Ratio, Waiver, Preferred Shares, Investment Fund, Corporate Governance, Financial Reporting