NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned 'AAA' long-term ratings to three series of Variable Rate MuniFund Term Preferred Shares (VMTP Shares) issued by three separate First American municipal closed-end funds in connection with the refinancings described below. The investment advisor for the three funds is U.S. Bancorp Asset Management, Inc. (USBAM) and the funds are subadvised by Nuveen Fund Advisors, LLC (NFA) and Nuveen Asset Management, LLC (NAM).
Fitch takes the following rating actions on the preferred shares noted below:
Minnesota Municipal Income Portfolio Inc. (MXA)
--$31,100,000 of aggregate liquidation preference of VMTP shares, 311 Shares Series 2017, term redemption on May 1, 2017, rated 'AAA'.
American Municipal Income Portfolio Inc. (XAA)
--$43,500,000 of aggregate liquidation preference of VMTP shares, 435 Shares Series 2017, term redemption on May 1, 2017, rated 'AAA'.
First American Minnesota Municipal Income Fund II, Inc. (MXN)
--$13,000,000 of aggregate liquidation preference of VMTP shares, 130 Shares Series 2017, term redemption on May 1, 2017, rated 'AAA'.
MXA and XAA will use the proceeds of the VMTP share issuances to fully refinance outstanding Remarketed Preferred Shares (RP shares). MXN will use the proceeds of the VMTP share issuances to fully refinance outstanding Auction Preferred Shares (AP shares). Fitch expects each fund to deposit the proceeds of the newly issued VMTP shares in trust for the benefit of the RP and AP shareholders, with the Bank of New York Mellon (BONY) as Remarketing Agent (with respect to the AP shares) and Paying Agent (with respect to the RP shares), pending the required 30-day notification period. For each fund, the amount deposited with BONY will equal the liquidation preference of the RP and AP shares and any accumulated and unpaid dividends. When the notification requirement has passed, the outstanding RP and AP shares are expected to be redeemed using the deposited VMTP share proceeds, upon receipt by BONY of written instructions from each fund.
KEY RATING DRIVERS
The 'AAA' long-term ratings primarily reflect:
--Sufficient asset coverage provided to the VMTP 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.
--The capabilities of USBAM as investment advisor and NFA and NAM as subadvisors.
The funds' asset coverage ratios for the above noted VMTP 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 VMTP shares.
The funds' governing documents 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 Effective Leverage Ratios of both funds 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.
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 VMTP 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 VMTP 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 is 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 VMTP 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 VMTP 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.
USBAM, a subsidiary of U.S. Bank National Association ('U.S. Bank'), manages the funds' assets and serves as the funds' administrator. NAM along with its parent NFA each serve as investment sub-advisor to the fund pursuant to separate investment sub-advisory agreements with USBAM. NAM makes investment decisions for the funds, places purchase and sale orders, and employs the funds' portfolio managers and the securities analysts. NFA provides certain other services to the funds, including assisting in the supervision of the funds' investment program, risk monitoring, managing the forms and level of leverage employed by each fund, assisting in dividend and distribution level determinations, providing tax advice on issues arising in connection with management of the funds' portfolio, and assisting with pricing of the funds' portfolio securities.
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. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
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 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 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).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
Global Rating Criteria for Asset-Backed Commercial Paper
Municipal Closed-End Funds Diversify Funding and Moderate Rollover Risk
Municipal CEFs Refinance Pre-Crisis ARPS