Fitch Affirms Preferred Shares of Delaware Investments

NEW YORK--()--Fitch Ratings affirms the 'AAA' long-term ratings assigned to the Variable Rate MuniFund Term Preferred Shares (VMTP Shares) issued by the following three municipal closed end funds managed by Delaware Management Company (DMC), a series of Delaware Management Business Trust.

Delaware Investments National Municipal Income Fund (VFL)

--$30,000,000 of VMTP Shares, Series 2017, due April 1, 2017.

Delaware Investments Minnesota Municipal Income Fund II, Inc. (VMM)

--$75,000,000 of VMTP Shares, Series 2016, due Dec. 1, 2016.

Delaware Investments Colorado Municipal Income Fund, Inc. (VCF)

--$30,000,000 of VMTP Shares, Series 2016, due Dec. 1, 2016.

KEY RATING DRIVERS

The 'AAA' long-term ratings primarily reflect:

--Sufficient asset coverage provided to the VMTP shares as calculated per each fund's overcollateralization (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 each fund's operations;

--The capabilities of DMC as investment advisor.

FUND PROFILES

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

FUND LEVERAGE

As of Sept. 30, 2014, VFL had approximately $97 million in assets, total leverage consisting of $30 million of VMTP shares and an effective leverage ratio of 30.9%. As of this same date, VMM had approximately $246 million in assets, total leverage consisting of $75 million of VMTP shares and an effective leverage ratio of 30.5%. Also as of this date, VCF had approximately $103 million in assets, total leverage consisting of $30 million of VMTP shares and an effective leverage ratio of 29.0%.

ASSET COVERAGE

As of Sept. 30, 2014, each fund's asset coverage ratios for total outstanding preferred shares, as calculated in accordance with the Investment Company Act of 1940, was in excess of the minimum asset coverage of 225% required by each fund's governing documents.

As of the same date, each fund's effective leverage ratio was below the 45% (46% if due solely to fluctuations in the market value of a fund's portfolio securities) maximum leverage ratio allowed by each fund's governing documents for the VMTP shares.

VMTP STRUCTURAL PROTECTIONS

Compliance with these asset coverage and effective leverage ratio requirements are tested daily. Failure to cure an asset coverage breach within thirty calendar days (the Asset Coverage Cure Date) results in an Asset Coverage Mandatory Redemption. Failure to cure an effective leverage ratio breach within 10 business days (the Effective Leverage Ratio Cure Date) results in an Effective Leverage Ratio Mandatory Redemption.

On the business day following the Asset Coverage Cure Date or the Effective Leverage Ratio Cure Date, each fund shall cause a Notice of Redemption to be issued and shall deposit sufficient funds with the Redemption and Paying Agent for the redemption of a sufficient number of Preferred Shares to restore asset coverage and/or effective leverage ratio compliance. The Notice of Redemption shall not be provided more than 45 calendar days prior to the Redemption Date.

STRESS TESTS

Fitch performed various stress tests on the funds to assess the strength of the structural protections available to the rated preferred shares compared to the stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where each fund's leverage and portfolio composition migrated to the outer limits of each fund's operating and investment guidelines.

Only under certain circumstances, such as increasing each fund's 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 an 'AA' rating level.

Given the highly unlikely nature of the stress scenarios, and the minimal rating impact, Fitch views each fund's permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' rating.

THE FUNDS ADVISOR

DMC, a subsidiary of Macquarie Group Limited (rated 'A-/F2' by Fitch), is the funds' investment advisor responsible for each fund's overall investment strategy and implementation. DMC and its affiliates had more than $180 billion of assets under management as of June 30, 2014.

RATINGS SENSITIVITY

The ratings assigned to the preferred shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of each fund, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.

Each fund has the ability to assume economic leverage through derivative transactions which may not be captured by the funds' Preferred Shares Asset Coverage test or Effective Leverage Ratio. The funds do not currently engage in derivative activities for speculative purposes and do not envision engaging in material amounts of such activity in the future. 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:

http://pages.fitchemail.fitchratings.com/FAMCEFBlankOptin/

Applicable Criteria and Related Research:

--'Rating Closed-End Fund Debt and Preferred Stock' (Sept. 4, 2014);

--'Global Rating Criteria for Asset-Backed Commercial Paper' (Nov. 7, 2013);

--'Municipal Closed-End Funds More Exposed to Rising Interest Rates than Corporate CEFs' (Oct. 7, 2014).

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=903814

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Ralph Aurora
Senior Director
+1-212-908-0528
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Greg Fayvilevich
Director
+1-212-908-9151
or
Committee Chairperson
Ian Rasmussen
Senior Director
+1-212-908-0232
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Ralph Aurora
Senior Director
+1-212-908-0528
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Greg Fayvilevich
Director
+1-212-908-9151
or
Committee Chairperson
Ian Rasmussen
Senior Director
+1-212-908-0232
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com