NEW YORK--(BUSINESS WIRE)--Fitch Ratings takes the following rating actions on the Variable Rate MuniFund Term Preferred Shares (VMTP Shares) and the Variable Rate Demand Preferred Shares (VRDP Shares) issued by three Nuveen closed-end municipal funds in connection with the refinancing described below:
Nuveen Georgia Dividend Advantage Municipal Fund 2 (NKG):
--$75,000,000 of VMTP Shares, Series 2017, term redemption on June 1, 2017, rated 'AAA'.
Nuveen Maryland Premium Income Municipal Fund (NMY):
--$167,000,000 of VMTP Shares, Series 2017, term redemption on June 1, 2017, rated 'AAA'.
Nuveen Pennsylvania Investment Quality Municipal Fund (NQP):
--$48,000,000 of VMTP Shares, Series 2017, term redemption on June 1, 2017, rated 'AAA'.
--$105,000,000 of VRDP Shares, Series 3, final mandatory redemption on Dec. 1, 2042, affirmed at 'AAA/F1+'. The liquidity provider is Royal Bank of Canada (RBC, 'AA/F1+').
--$112,500,000 of VRDP Shares, Series 2, final mandatory redemption on Dec. 1, 2042, affirmed at 'AAA/F1+'. The liquidity provider is RBC.
The funds are managed by Nuveen Fund Advisors, LLC (NFA) and subadvised by Nuveen Asset Management, LLC (NAM).
KEY RATING DRIVERS
The short-term ratings of the VRDP Shares of NQP primarily reflect:
--The credit strength of RBC as liquidity provider.
--The terms and conditions of the VRDP Shares purchase agreements.
The 'AAA' long-term ratings of the VRDP and VMTP Shares of NKG, NMY and NQP primarily reflect:
--Sufficient asset coverage provided to the preferred shares as calculated per the fund's 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 fund's operations.
--Both the short- and long-term ratings also reflect the capabilities of NFA as investment advisor and NAM as subadvisor.
The three funds will use the proceeds of the VMTP Share issuances to fully refinance all of their outstanding MuniFund Term Preferred Shares (MTP Shares). Fitch expects the proceeds of the newly issued VMTP Shares to be deposited irrevocably in an escrow account with the MTP Shares redemption agent pending the required 10-day notification period to the MTP shareholders and accordingly the issuance of new VMTP Shares will not adversely affect the ratings of the MTP Shares while they remain outstanding. For each fund, the amount deposited with the redemption agent will equal the liquidation preference of the MTP Shares and any accrued and unpaid dividends. When the notification requirement has passed, the outstanding MTP Shares are expected to be redeemed using the escrowed VMTP Share proceeds and then marked paid in full by Fitch.
As of April 23, 2014, the funds' 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 for the VMTP and VRDP Shares.
As of the same date, the funds' Effective Leverage Ratios were below the 45% maximum Effective Leverage tests allowed by the funds' governing documents for the VMTP and VRDP Shares.
Compliance with the Asset Coverage and Effective Leverage thresholds is tested periodically. A breach of the Asset Coverage threshold requires the funds to redeem sufficient VMTP or VRDP Shares to restore compliance. For the VMTP Shares, an Effective Leverage breach requires the fund to redeem a sufficient number of preferred shares or reduce the amount of tender option bonds (TOBs) in order to restore compliance.
An Effective Leverage breach for the VRDP Shares would be a breach of the fee agreement and, at the option of the liquidity provider, may result in mandatory tender of VRDP Shares for remarketing (see VRDP Purchase Obligation section below for additional details).
For the Asset Coverage and Effective Leverage Ratio tests, the total market value exposure periods (i.e. the pre-specified time period allotted for valuation, cure and redemption in the event of a breach) are within the 60 business day Fitch criteria guidelines.
VRDP PURCHASE OBLIGATION
The short-term ratings assigned to the VRDP Shares are directly linked to the short-term creditworthiness of RBC.
The VRDP Shares of each series are supported by a purchase agreement to ensure full and timely repayment of all tendered VRDP Shares of the applicable series plus any accumulated and unpaid dividends. Each purchase agreement is unconditional and irrevocable.
Each VRDP purchase agreement requires RBC as the Liquidity Provider to purchase all VRDP Shares of the applicable series tendered for sale that were not successfully remarketed. The Liquidity Provider must also purchase all outstanding VRDP Shares of the applicable series 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).
RBC's role as liquidity provider under the fee agreement relating to the purchase obligation has a scheduled termination date. Prior to the scheduled termination date, the fee agreement can be extended to a new scheduled termination date with RBC, or a new liquidity provider may be selected. Any future changes to the terms of the fee agreement with RBC or a prospective replacement that weaken the structural protections discussed above may have negative rating implications.
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' long-term rating level, and instead passed at an 'AA' long-term rating level.
Given the relative conservatism 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' long-term rating.
Short term ratings assigned to the remarketable VRDP Shares were not subject to the above stress tests as these are linked directly to RBC as the liquidity provider.
The funds are closed-end management investment companies regulated by the Investment Company Act of 1940. The investment advisor is NFA, a subsidiary of Nuveen Investments. NFA is responsible for the funds' overall investment strategies and their implementation. The sub-advisor, NAM, is a subsidiary of NFA that oversees the day-to-day operations of the funds. Nuveen Investments and its affiliates had approximately $221 billion of assets under management as of Dec. 31, 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 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 provider. A downgrade of the liquidity provider 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 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:
--'Fitch: Minimal Impact on Nuveen CEFs from TIAA Acquisition' (April 15, 2014);
--'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).