Fitch Rates & Affirms Nuveen Muni CEF Preferred Shares on Merger

NEW YORK--()--Fitch Ratings has affirmed and assigned the following ratings to the Variable Rate Demand Preferred Shares (VRDP Shares) issued by Nuveen Investment Quality Municipal Fund, Inc. (NQM), and the Variable Rate MuniFund Term Preferred Shares (VMTP Shares) issued by NQM and Nuveen Minnesota Municipal Income Fund (NMS).

Nuveen Investment Quality Municipal Fund, Inc. (NQM)

--$236,800,000 of VRDP Shares, Series 1, final mandatory redemption on May 1, 2041, affirmed at 'AAA/F1'. The liquidity provider is Barclays Bank PLC (Barclays, 'A/F1');

--$43,500,000 of VMTP shares, Series 2017, term redemption on May 1, 2017, rated 'AAA'.

Nuveen Minnesota Municipal Income Fund (NMS)

--$44,100,000 of VMTP shares, Series 2017, term redemption on May 1, 2017, rated 'AAA'.

The funds are managed by Nuveen Fund Advisors, LLC (NFA) and subadvised by Nuveen Asset Management, LLC (NAM). The rating actions are taken in connection with the fund mergers described below.

KEY RATING DRIVERS

The short-term ratings of the VRDP shares of NQM primarily reflect:

--The credit strength of the VRDP Shares' liquidity provider Barclays ('A/F1');

--The terms and conditions of the VRDP shares purchase agreements.

The 'AAA' long-term ratings of the VRDP and VMTP shares 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.

FUND MERGERS

Nuveen Investments (Nuveen) announced the closing of two separate fund mergers on Oct. 6, 2014. Each merger has been approved, as applicable, by the common and preferred shareholders of the acquiring and target funds.

American Municipal Income Portfolio Inc. (XAA) merged with NQM, with substantially all the assets and liabilities of XAA becoming assets and liabilities of NQM. This merger and the merger noted in the paragraph below follow the 2011 acquisition by Nuveen of the long-term asset management business of U.S. Bancorp Asset Management Inc. representing approximately $25 billion of assets.

Minnesota Municipal Income Portfolio Inc. (MXA) and First American Minnesota Municipal Income Fund II, Inc. (MXN) merged with NMS, with substantially all the assets and liabilities of MXA and MXN becoming assets and liabilities of NMS. NMS is a new fund created by Nuveen to facilitate the merger of MXA and MXN.

Upon the closing of the mergers, holders of the VMTP shares of target fund XAA that were previously rated 'AAA' by Fitch received, for each VMTP share held immediately prior to the merger, one share of a new series of NQM VMTP Shares having substantially the same terms. Fitch now marks the VMTP shares of XAA as Paid in Full.

Upon the closing of the mergers, holders of the VMTP shares of target funds MXA and MXN that were previously rated 'AAA' by Fitch received, for each VMTP share held immediately prior to the merger, one share of a new series of NMS VMTP Shares having substantially the same terms. Fitch now marks the VMTP shares of MXA and MXN as Paid in Full.

FUND PROFILES

The funds are closed-end management investment companies regulated by the Investment Company Act of 1940. NQM invests in municipal securities that are exempt from federal income taxes. NMS invests in municipal securities that are exempt from federal income taxes and Minnesota personal income tax. Both funds may invest up to 20% of assets in below investment grade and or unrated securities.

FUND LEVERAGE

As of Aug. 29, 2014, NQM had approximately $1,032 million in assets including the impact of the XAA acquisition on a pro forma consolidated basis. Total leverage on a pro forma consolidated basis consisted of approximately $236.8 million of VRDP shares issued previously by NQM, $43.5 million of new VMTP shares issued to facilitate the acquisition of XAA, and $97.9 million of tender option bond obligations.

As of Aug. 29, 2014, MXA and MXN had approximately $130 million in assets on a pro forma consolidated basis. Total leverage on a pro forma consolidated basis consisted of the approximately $44.1 million of the then outstanding VMTP shares of MXA and MXN.

ASSET COVERAGE

As of Aug. 29, 2014, the asset coverage ratios for total outstanding preferred shares on a post-merger pro forma consolidated basis for each of NQM and NMS, 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 applicable.

As of Aug. 29, 2014, the effective leverage ratio for NQM, including the impact of the merger with XAA on a pro forma consolidated basis was 36.7%. As of the same date, the effective leverage ratio for MXA and MXN on a pro forma consolidated basis was 33.8%. These effective leverage ratio results are below the 45% maximum leverage ratios allowed by the governing documents of the VMTP and VRDP shares.

STRUCTURAL PROTECTIONS

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.

For the VRDP shares, a breach of the Effective Leverage Ratio is a breach of the fee agreement with liquidity provider Barclays, 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). However, in the event of a breach, Fitch expects NQM to take actions similar to those discussed in the paragraph directly above in order to restore compliance.

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 guidelines provided in Fitch's criteria.

VRDP PURCHASE OBLIGATION

The short-term rating assigned to the VRDP Shares is directly linked to the short-term creditworthiness of Barclays as liquidity provider. The VRDP Shares are supported by a purchase agreement to ensure full and timely repayment of all tendered VRDP Shares plus any accumulated and unpaid dividends. The purchase agreement is unconditional and irrevocable.

The VRDP purchase agreement requires Barclays as liquidity provider to purchase all VRDP Shares tendered for sale that were not successfully remarketed. The liquidity provider must also purchase all outstanding VRDP Shares 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).

Barclays' role as liquidity provider under the fee agreement relating to the purchase obligation has a scheduled termination date. Subsequent to the scheduled termination date, the fee agreement can be extended with the existing liquidity provider, or a new liquidity provider may be selected. Any future changes to the terms of the fee agreements or any prospective replacement that weakens the structural protections discussed above may have negative rating implications.

STRESS TESTS

Fitch performed various stress tests on the funds to assess the strength of the structural protections available to the VRDP and 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.

Only under remote circumstances, such as increasing the funds' issuer concentration, while simultaneously migrating the portfolios to a mix of 80% 'BBB', 10+ years to maturity bonds and 20% high yield bonds, did the asset coverage available to the VRDP and VMTP Shares fall below the 'AAA' long-term rating level, and instead passed at an 'AA' long-term 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' 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 the short term rating of the liquidity provider.

THE FUNDS ADVISOR

The investment advisor for the funds is NFA, a subsidiary of Nuveen. 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 and its affiliates had nearly $231 billion of assets under management as of June 30, 2014.

RATINGS SENSITIVITIES

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 agreement relating to the purchase agreement 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 rating 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 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 Nuveen Fund Advisors.

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

Global Rating Criteria for Asset-Backed Commercial Paper

Municipal Closed-End Funds Diversify Funding and Moderate Rollover Risk

Municipal CEFs Refinance Pre-Crisis ARPS

Applicable Criteria and Related Research:

Rating Closed-End Fund Debt and Preferred Stock

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=765528

Global Rating Criteria for Asset-Backed Commercial Paper

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721566

Municipal Closed-End Funds Diversify Funding and Moderate Rollover Risk

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=691173

Municipal CEFs Refinance Pre-Crisis ARPS

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677576

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=890974

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Contacts

Fitch Ratings
Primary Analyst
Ralph Aurora (NMS, XAA, MXA and MXN)
Senior Director
+1-212-908-0528
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Primary Analyst
Greg Fayvilevich (NQM)
Director
+1-212-908-9151
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Russ Thomas (NQM, NMS, XAA, MXA, MXN)
Director
+1-312-368-3189
or
Committee Chairperson
Ian Rasmussen
Senior Director
+1-212-908-0232
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Ralph Aurora (NMS, XAA, MXA and MXN)
Senior Director
+1-212-908-0528
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Primary Analyst
Greg Fayvilevich (NQM)
Director
+1-212-908-9151
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Russ Thomas (NQM, NMS, XAA, MXA, MXN)
Director
+1-312-368-3189
or
Committee Chairperson
Ian Rasmussen
Senior Director
+1-212-908-0232
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com