NEW YORK--(BUSINESS WIRE)--On the effective date of March 27, 2015, Fitch Ratings will confirm the 'AAA/F1+' ratings assigned to the following series of Variable Rate Demand Preferred Shares (VRDP shares) issued by four Nuveen municipal closed-end funds (CEF). The funds are managed by Nuveen Fund Advisors, LLC (NFA) and subadvised by Nuveen Asset Management, LLC (NAM).
Fitch will confirm the following ratings:
Nuveen Municipal Market Opportunity Fund, Inc. (NMO):
--$350,900,000 of VRDP Shares, Series 1, final mandatory redemption on March 1, 2040, at 'AAA/F1+'.
Nuveen New York Performance Plus Municipal Fund, Inc. (NNP):
--$89,000,000 of VRDP Shares, Series 1, final mandatory redemption on March 1, 2040, at 'AAA/F1+'.
Nuveen California Dividend Advantage Municipal Fund (NAC):
--$49,800,000 of VRDP Shares, Series 3, final mandatory redemption on March 1, 2040, at 'AAA/F1+'.
Nuveen California AMT-Free Municipal Income Fund (NKX):
--$42,700,000 of VRDP Shares, Series 3, final mandatory redemption on March 1, 2040, at 'AAA/F1+'.
The indicated confirmation will be in connection with a substitution of the liquidity support provider to the VRDP shares, from Deutsche Bank Trust Company Americas (DBTCA: rated 'A+/F1+' by Fitch) to The Toronto-Dominion Bank ('TD': rated 'AA-/F1+'), which becomes effective at the close of business on March 27, 2015. The terms of the new purchase agreement and fee agreement with TD dated as of March 5, 2015 are substantially the same as the terms of the agreements being substituted.
If the short-term rating of DBTCA changes before March 27, 2015, the short-term rating of the VRDP shares will change accordingly. On March 27, 2015, Fitch will confirm that the short-term rating of the VRDP shares will remain unchanged at 'F1+' consistent with the short-term rating of TD as the new liquidity provider.
KEY RATING DRIVERS
The long-term ratings primarily reflect:
--Sufficient asset coverage provided to the VRDP 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.
The short-term ratings primarily reflect:
--The credit strength of TD as liquidity provider to the VRDP shares;
--The terms and conditions of the VRDP shares purchase agreement.
VRDP SHARE ASSET COVERAGE
As of Feb. 28, 2015, the funds' asset coverage ratio 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 the funds' governing documents.
As of the same date, the funds' Effective Leverage Ratio was below the 45% maximum leverage ratio allowed by the funds' governing documents for the preferred shares.
PREFERRED SHARE STRUCTURAL PROTECTIONS
In the event of asset coverage declines, the funds' governing documents require the funds to reduce leverage in order to restore compliance with the asset coverage test. For the VRDP shares, Minimum VRDP Asset Coverage compliance is tested monthly and compliance with the Effective Leverage Ratio is tested daily.
Failure to cure a breach of the Minimum VRDP Asset Coverage requirement by the allotted cure date results in mandatory redemption of the preferred shares of the applicable series. If a fund is in breach it must redeem sufficient preferred shares to restore compliance. To facilitate redemption, the fund will deposit sufficient funds with a third-party tender and paying agent. The time allowed for a fund to restore compliance is consistent with Fitch's 60 business day criteria guideline.
For the VRDP shares, a breach of the Effective Leverage Ratio is a breach of the fee agreement with the liquidity provider and at the option of the liquidity provider, may result in mandatory tender of the VRDP shares of the applicable series for remarketing. However, in the event of a breach, Fitch expects the fund to redeem a sufficient number of preferred shares or reduce the amount of tender option bonds (TOBs) in order to restore compliance. The allotted time to restore compliance to the Effective Leverage Ratio is consistent with Fitch's 60 business day criteria guideline.
VRDP PURCHASE OBLIGATION
The short-term ratings assigned the VRDP shares are directly linked to the short-term creditworthiness of the liquidity provider for each series, which will be TD after the substitution described above. 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 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 a 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 liquidity provider's role under the fee agreement relating to the purchase obligation for each applicable series has a scheduled termination date. Prior to the scheduled termination date, the fee agreement can be extended to a new scheduled termination date, or a new liquidity provider may be selected. Any future changes to the terms of the fee agreement that weakens 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 VRDP shares of each series 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 80% 'BBB,' 10+ years to maturity bonds and 20% high yield bonds, did the asset coverage available to the VRDP shares fall below the 'AAA' guideline, and instead passed at the 'AA' guideline.
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 investment advisor 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 fund. Nuveen and its affiliates had approximately $230.8 billion of assets under management as of Dec. 31, 2014.
The ratings assigned to the VRDP 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 a ratings downgrade 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 rating 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 does 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 objective 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 VRDP 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' (Sept. 4, 2014);
--'Global Rating Criteria for Asset-Backed Commercial Paper' (Oct. 30, 2014);
--'Leveraged Closed-End Funds Weather U.S. Rate Shock Scenarios' (Oct. 7, 2014);
--'Municipal CEFs Refinance Pre-Crisis ARPS' (May 3, 2012).