Fitch Affirms Preferred Share Rating of The Denali Fund at 'AAA'

Fitch Ratings has affirmed the 'AAA' rating assigned to the following preferred shares issued by The Denali Fund Inc. (NYSE: DNY), a closed-end fund co-advised by Boulder Investment Advisers, LLC (BIA) and Stewart Investment Advisers (SIA):

--$21,950,000 of auction preferred shares (APS), series A, with a liquidation preference of $25,000 per share.

KEY RATING DRIVERS

The 'AAA' rating assignment reflects:

--Sufficient pro forma asset coverage provided to APS as calculated per the fund's asset coverage 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 BIA & SIA as fund co-advisers.

ASSET COVERAGE

At the time of the rating affirmation, the fund's asset coverage ratio for preferred stock, as calculated in accordance with the Investment Company Act of 1940 (1940 Act), was in excess of 200%, which is the minimum asset coverage required by the 1940 Act. Also, at the time of this affirmation, the fund's asset coverage ratios (as calculated in accordance with the Fitch total and net overcollateralization tests per the 'AAA' rating guidelines outlined in Fitch's applicable criteria) were in excess of 100%, which are the minimum asset coverage amounts deemed consistent with an 'AAA' rating.

STRUCTURAL PROTECTIONS

Should the asset coverage tests of the APS decline below their minimum threshold amounts (as tested on the last business day of each month) and are not cured within a pre-specified timeframe of seven business days, the governing documents require the fund to restore compliance with the applicable asset coverage tests within a specified timeframe.

The fund manager is required 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 sufficient amount (for both the Fitch OC Tests and 1940 Act asset coverage test breaches).

THE FUND

The Denali Fund Inc. is a non-diversified, closed-end management investment company, registered under the Investment Company Act of 1940, as amended, that commenced investment operations in September 2002. The fund's primary investment objective is achieving a total return consistent with dependable, but not assured, cash flow. The fund invests primarily in common stocks, including dividend-paying common stocks such as those issued by utilities, real estate investment trusts and closed-end registered investment companies. The fund also invests in fixed income securities such as U.S. government securities, preferred stocks, and bonds. The fund invests primarily in securities of U.S.-based companies and to a lesser extent in foreign equity securities and sovereign debt, in each case denominated in foreign currency.

At the time of the rating affirmation, common equity securities constituted 85% of the portfolio and a limited partnership investment in one long-short equity fund represented approximately 13% of the portfolio. The remaining balance consisted of cash equivalents and foreign currency positions.

The fund has invested 25% of total assets in common stock of Berkshire Hathaway, Inc., which Fitch currently views as meeting the definition of a broadly diversified investment portfolio or holding company. As such, Fitch utilizes a higher maximum issuer concentration threshold at 20% for this exposure (in contrast to the maximum 10% threshold utilized for largest issuers per Fitch's criteria) when calculating Fitch total and net overcollateralization tests.

The fund has no restrictions on its ability to invest in foreign securities. Potential exchange rate risk associated with investments in foreign denominated securities is included as part of Fitch's assessment of the sufficiency of asset coverage available to rated APS.

THE FUND'S ADVISER

Boulder Investment Advisers, LLC and Stewart West Indies Trading Company, Ltd. (operating under the name Stewart Investment Advisers) act as the co-investment advisers to the fund. As of Dec. 31, 2013, the co-investment advisers along with Rocky Mountain Advisers, LLC, an affiliate, had approximately $1.1 billion of assets under management.

RATINGS SENSITIVITY

The rating assigned to the preferred shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the fund, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating to be lowered by Fitch.

The fund has the ability to assume economic leverage through derivative transactions that may not be captured by the fund's Preferred Shares Basic Maintenance Amount. The fund does not currently engage in derivative activities for speculative purposes and does not envision engaging in material amounts of such activity in the future. Material derivative exposure in the future could have potential negative rating implications if it adversely affects asset coverage available to rated preferred shares.

For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end funds, please review the criteria referenced below, which can be found on Fitch's web site at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

The sources of information used to assess this rating were the public domain and BIA/SIA.

Opt-in to receive Fitch's forthcoming research on closed-end funds:

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Applicable Criteria and Related Research:

--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 14, 2013).

Applicable Criteria and Related Research:

Rating Closed-End Fund Debt and Preferred Stock

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716220

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=814117

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Fitch Ratings
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Russ Thomas
Director
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Secondary Analyst
Yuriy Layvand, CFA
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Peter Patrino
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