NEW YORK--()--Fitch Ratings has assigned 'AAA' ratings to Variable Rate MuniFund Term Preferred Shares (VMTP Shares) issued by two municipal closed-end funds managed by Nuveen Fund Advisors, Inc. (NFA) and subadvised by Nuveen Asset Management, LLC (NAM):
Nuveen Municipal High Income Opportunity Fund (NMZ):
--$51,000,000 of VMTP shares, series 2016, due Jan. 1, 2016.
Nuveen Municipal High Income Opportunity Fund 2 (NMD):
--$36,000,000 of VMTP shares, series 2016, due Jan. 1, 2016.
KEY RATING DRIVERS
The 'AAA' ratings are based on asset coverage provided to the VMTP shares by the funds' portfolios and structural protections afforded by mandatory deleveraging provisions in the event of asset coverage declines. Also supporting the 'AAA' ratings are the legal and regulatory parameters that govern the funds' operations and the capabilities of NFA as investment advisor and NAM as subadvisor.
As of Nov. 30, 2012, the funds' pro forma asset coverage ratios for total outstanding preferred shares (as calculated in accordance with the Investment Company Act of 1940) were in excess of the minimum asset coverage of 225% required by the funds' governing documents (Minimum Asset Coverage Test).
Also as of the same date, the funds' pro forma effective leverage ratios were below the maximum leverage ratio of 45% allowed by the funds' governing documents (Effective Leverage Test).
In the event of asset coverage declines, the funds' governing documents will require the funds to reduce leverage in order to restore compliance with the test(s) breaching the required threshold(s).
The funds' investment guidelines allow them to invest up to 50% of assets in non-investment grade quality municipal bonds. Fitch views these securities as exhibiting greater volatility than investment grade municipal bonds, and therefore assigns them greater risk weights. The greater risk-weighting of these two portfolios (compared to funds that invest in investment grade municipals) lowers the levels of cushion of the funds' asset coverage tests compared to the stresses outlined in Fitch's criteria at the 'AAA' rating level.
Fitch performed various stress tests on the funds to assess the strength of the structural protections available to the VMTP shares compared to the rating stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where the funds' leverage and portfolio composition migrated to the outer limits of the funds' operating and investment guidelines. Fitch assumed in this analysis that the funds will not deviate materially from their current leverage ratios. Fitch also assumed that the funds will continue to maintain issuer diversification greater than Fitch's issuer diversification framework.
Only under certain circumstances, such as increasing the funds' state and sector concentration while simultaneously migrating the portfolios to a mix of 50% long-term 'BBB' bonds and 50% high yield bonds, did the asset coverage available to the VMTP Shares fall below the 'AAA' threshold, and instead passed at an 'AA' rating level.
Given the unlikely nature of the stress scenarios, and the minimal rating impact, Fitch views the funds' permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' rating.
The funds are closed-end management investment companies regulated by the Investment Company Act of 1940. The funds can invest up to 50% of assets in municipal securities that at the time of purchase are rated below investment grade quality or that are unrated but judged to be of comparable quality by the investment adviser.
NFA, a subsidiary of Nuveen Investments, is the funds' investment advisor, responsible for the funds' overall investment strategies and their implementation. NAM is a subsidiary of NFA and oversees the day-to-day operations of the funds. Nuveen Investments and its affiliates had approximately $220 billion of assets under management as of Sept. 30, 2012.
The ratings assigned to the VMTP shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the funds (as described above). In particular, increases in the funds' issuer concentration may put negative pressure on the ratings. A material adverse deviation from Fitch guidelines for any key rating driver could prompt Fitch to downgrade the ratings.
Additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end funds is available in the criteria referenced below, available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
The sources of information used to assess this rating were the public domain and Nuveen Fund Advisors.
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Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 15, 2012);
--'Municipal Closed-End Funds Diversify Funding and Moderate Rollover Risk' (Oct. 11, 2012);
--'Municipal CEFs Refinance Pre-Crisis ARPS' (May 3, 2012).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
Municipal Closed-End Funds Diversify Funding and Moderate Rollover Risk
Municipal CEFs Refinance Pre-Crisis ARPS