NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned 'AAA' long-term ratings to four series of Variable Rate MuniFund Term Preferred Shares (VMTP Shares) issued by four Nuveen municipal closed-end funds in connection with the refinancings described below. Fitch also affirms the long-term ratings of two existing series of Variable Rate Demand Preferred Shares (VRDP shares) issued by Nuveen AMT-Free Municipal Income Fund (NEA). All of the funds are managed by Nuveen Fund Advisors, LLC (NFA) and subadvised by Nuveen Asset Management, LLC (NAM).
Fitch takes the following rating actions on the preferred shares noted below:
Nuveen Dividend Advantage Municipal Fund (NAD):
--$265,000,000 of VMTP shares, 2,650 Shares Series 2016, term redemption on Dec. 30, 2016, rated 'AAA'.
Nuveen AMT-Free Municipal Income Fund (NEA)
--$151,000,000 of VMTP shares, 1,510 Shares Series 2016, term redemption on Dec. 30, 2016, rated 'AAA'.
Nuveen Arizona Premium Income Municipal Fund (NAZ)
--$79,000,000 of VMTP shares, 790 Shares Series 2016, term redemption on Dec. 30, 2016, rated 'AAA'.
Nuveen Michigan Quality Income Municipal Fund (NUM)
--$159,000,000 of VMTP shares, 1,590 Shares Series 2016, term redemption on Dec. 30, 2016, rated 'AAA'.
Nuveen AMT-Free Municipal Income Fund (NEA)
--$219,000,000 of VRDP Shares, Series 1, final mandatory redemption date June 1, 2040, affirmed at 'AAA/F1+'. The liquidity provider is Deutsche Bank Trust Company Americas (Deutsche Bank Trust Company Americas, rated 'A+/F1+' by Fitch).
--$130,900,000 of VRDP Shares, Series 2, final mandatory redemption date Dec. 1, 2040, affirmed at 'AAA/F1'. The liquidity provider is Citibank, N.A. (rated 'A/F1').
The four funds will use the proceeds of the preferred share issuances to fully refinance outstanding MuniFund Term Preferred Shares (MTP shares) and outstanding VMTP shares. Fitch expects the proceeds of the newly issued preferred shares to be deposited irrevocably in an escrow account with the MTP and VMTP shares redemption agent pending any required notification period to the MTP and VMTP shareholders and accordingly the issuance of new preferred shares will not adversely affect the ratings of the MTP and VMTP shares while they remain outstanding. For each fund, the amount deposited with the redemption agent will equal the notional value of the MTP and VMTP shares and any accrued and unpaid dividends. When the notification requirement has passed, the outstanding MTP and VMTP shares are expected to be redeemed using the escrowed preferred share proceeds and then marked paid in full by Fitch.
Fitch notes NEA has issued Series 2016 VMTP shares in an amount sufficient to refinance the existing MTP Series 2015 and VMTP Series 2014. The existing Series 1 and Series 2 VRDP shares of NEA will remain outstanding and their ratings have been affirmed by Fitch as described above.
KEY RATING DRIVERS
The short-term ratings of the VRDP shares primarily reflect:
--The credit strength of the liquidity providers for the NEA VRDP shares -- DBTCA ('A+ / F1+') and Citibank, N.A. (rated 'A/F1').
--The terms and conditions of the VRDP shares purchase agreements (purchase agreements).
The 'AAA' long-term ratings primarily reflect:
--Sufficient asset coverage provided to the preferred shares as
calculated per the funds' over-collateralization (OC) tests.
--The structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines.
--The legal and regulatory parameters that govern the funds' operations.
--Both the short- and long-term ratings also reflect the capabilities of NFA as investment advisor and NAM as subadvisor.
TENDER AND REMARKETING
The VRDP shares benefit from a feature giving investors the right to tender the securities with a seven-day notice for remarketing. These VRDP shares are also subject to a mandatory tender for remarketing upon the occurrence of certain events, such as non-payment of dividends by the applicable fund, among others. VRDP shares that are unsuccessfully remarketed are purchased by the applicable liquidity provider.
The Series 1 VRDP shares have a final mandatory redemption date of June 1, 2040 and the Series 2 VRDP shares have a final mandatory redemption date of Dec. 1, 2040. Both series pay an adjustable dividend rate set weekly by the applicable remarketing agent. Should a remarketing be unsuccessful, the dividend rate will reset to a maximum rate as defined in the governing documents.
The VRDP shares are supported by a purchase agreement to ensure full and timely repayment of the liquidation preference amount plus any accumulated and unpaid dividends to holders upon occurrence of certain events.
The VRDP agreement requires the liquidity provider to purchase all VRDP shares of the applicable fund tendered for sale that were not successfully remarketed. The liquidity provider must also purchase all outstanding VRDP shares of the applicable fund if the fund has not obtained an alternate purchase agreement prior to the termination of the purchase agreement being replaced or following the downgrade of the liquidity provider's rating below 'F2' (or equivalent).
The purchase of the VRDP shares pursuant to the purchase agreement is unconditional and irrevocable, and as such the short-term ratings assigned to the VRDP shares are directly linked to the short-term creditworthiness of the associated liquidity provider. The liquidity provider's obligation under each purchase agreement has a scheduled termination date. Fitch expects each purchase agreement to be subsequently extended, with terms that are substantially similar to the current purchase agreement.
The funds' asset coverage ratios for the above noted VMTP and VRDP shares, as calculated in accordance with the Investment Company Act of 1940, were in excess of the minimum asset coverage threshold of 225% currently set by the terms of the preferred shares, and with respect to the VRDP Shares, the fee agreement between each fund and the applicable liquidity provider (Minimum Asset Coverage test).
The funds' governing documents or fee agreement also require the funds to maintain Effective Leverage Ratios (the calculation of which includes both preferred shares and floating-rate certificates of tender option bonds) below 45% (or 46% if the increase in the ratio is due exclusively to asset market value volatility). The funds' Effective Leverage Ratios are currently below 45%.
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 asset coverage test breaching the required threshold.
PREFERRED SHARE STRUCTURAL PROTECTIONS
Compliance with the asset coverage and effective leverage ratio requirements are tested daily. Failure to cure an asset coverage breach by the Asset Coverage Cure Date results in an Asset Coverage Mandatory Redemption. Failure to cure an Effective Leverage Ratio breach by the Effective Leverage Ratio Cure Date results in an Effective Leverage Ratio Mandatory Redemption.
In the event of an asset coverage breach, subsequent to the Asset Coverage Cure Date each fund shall deposit sufficient funds with the Redemption and Paying Agent for the redemption of a sufficient number of Preferred Shares to restore asset coverage compliance. The exposure period to market risk for the preferred shares in the event of a mandatory redemption due to an asset coverage breach is 45 days, consistent with Fitch's 60 day criteria guideline.
In the event of an effective leverage ratio breach, subsequent to the Effective Leverage Ratio Cure Date each fund shall (a) deposit sufficient funds with the Redemption and Paying Agent for the redemption of a sufficient number of Preferred Shares to restore effective leverage ratio compliance, (b)engage in transactions involving or relating to the floating rate securities not owned by the Fund and/or the inverse floating rate securities owned by the Fund, including the purchase, sale or retirement of these securities to restore effective leverage ratio compliance, or (c) engage in a combination of these approaches in order to restore effective leverage ratio compliance. The exposure period to market risk for the preferred shares in the event of a mandatory redemption due to an effective leverage ratio breach ranges between 11 and 41 days, consistent with Fitch's 60 day criteria guideline.
Fitch performed various stress tests on the funds to assess the strength of the structural protections available to the preferred shares compared to the 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.
Only under remote circumstances, such as increasing the funds' issuer concentration, while simultaneously migrating the portfolios to a mix of 80% long-term 'BBB' bonds and 20% high yield bonds, did the asset coverage available to the preferred Shares fall below the 'AAA' threshold, and instead passed at a 'AA' rating level.
Given the highly 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 currently invest primarily in investment grade quality municipal bonds.
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 $215 billion of assets under management as of September 30, 2013.
The ratings assigned to the preferred shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the funds, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
Certain terms relevant to key VRDP structural protections, including the Minimum Asset Coverage Test and the Effective Leverage Ratio are set forth in the fee agreements relating to the purchase agreements and are renewed on a periodic basis. Any future changes to these terms that weaken the structural protections may have negative rating implications.
The short-term ratings assigned to the VRDP shares may also be sensitive to changes in the financial condition of the liquidity providers. A downgrade of the liquidity providers to 'F2' would result in a downgrade of the short-term ratings of the VRDP shares to 'F2,' absent other mitigants. A downgrade below 'F2', on the other hand, would not necessarily result in a downgrade of the short-term rating of the VRDP shares, given the features in the transactions that would result in a mandatory tender of the VRDP shares for remarketing, or purchase by the liquidity provider in the event of a failed remarketing.
The funds have the ability to assume economic leverage through derivative transactions which may not be captured by the funds' Minimum Asset Coverage test or Effective Leverage Ratio. The funds do not currently engage in derivative activities and do not envision engaging in material amounts of such activity in the future. In fact, such activity is limited by the funds' investment guidelines and could run counter to the funds' investment objectives of achieving tax-exempt income. Material derivative exposures 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 fund, 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 Nuveen Fund Advisors.
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Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 14, 2013);
--'Global Rating Criteria for Asset-Backed Commercial Paper' (Nov. 8, 2012);
--'Municipal Closed-End Funds Diversify Funding and Moderate Rollover Risk' (Oct. 11, 2012);
--'Municipal CEFs Refinance Pre-Crisis ARPS' (May 3, 2012).