NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned 'AAA' long-term ratings to the following Series 4 Variable Rate Demand Preferred Shares (VRDP Shares) issued by Nuveen Enhanced AMT-Free Municipal Credit Opportunities Fund (NVG):
--$180,000,000 of VRDP Shares, Series 4, final mandatory redemption on June 1, 2046.
In addition, Fitch has affirmed the long- and short-term ratings for the following preferred shares issued by NVG:
--$179,000,000 of VRDP Shares, Series 1, final mandatory redemption on Dec. 1, 2043, at 'AAA';
--$385,400,000 of VRDP Shares, Series 2, final mandatory redemption on Dec. 1, 2040, at 'AAA/F1+'. The liquidity provider is JPMorgan Chase Bank, N.A. ('AA-/F1+');
--$667,200,000 of VRDP Shares, Series 3, final mandatory redemption on Dec. 1, 2040, at 'AAA/F1'. The liquidity provider is Citibank, N.A. ('A+/F1');
--$240,400,000 of VMTP Shares, Series 2018, term redemption on Dec. 1, 2018, at 'AAA'.
The fund is managed by Nuveen Fund Advisors, LLC (NFA) and subadvised by Nuveen Asset Management, LLC (NAM).
KEY RATING DRIVERS
The long-term ratings primarily reflect:
--Sufficient asset coverage provided to the preferred shares as calculated per the over-collateralization (OC) tests of NVG;
--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;
The short-term ratings, where applicable, primarily reflect:
--The credit strength of the liquidity provider for each series of VRDP Shares;
--The terms and conditions of the VRDP Shares purchase agreements.
Both the short- and long-term ratings reflect the capabilities of NFA as investment advisor and NAM as subadvisor.
SPECIAL RATE PERIOD
The newly issued Series 4 VRDP Shares and the Series 1 VRDP Shares issued in Dec. 2013 are both subject to a Special Rate Period (SRP) scheduled to conclude Dec. 14, 2016 in the case of the Series 1 VRDP Shares and June 19, 2019 for the Series 4 VRDP Shares. During the respective SRPs, the applicable VRDP shares will not be remarketed pursuant to optional or mandatory tender events and are not supported by a liquidity provider.
At the conclusion of the respective SRPs for the Series 1 and Series 4 VRDP Shares, the fund may mutually elect to extend these Special Rate Periods with the holders of the Series 1 or Series 4 VRDP Shares or enter into a new Special Rate Period with those holders or different qualified parties. Alternatively, the fund at that time may seek to appoint a liquidity provider and a remarketing agent for either Series of VRDP Shares and designate the subsequent rate period and following rate periods as minimum rate periods, in which the applicable VRDP Shares will be remarketable securities, available for purchase by qualified third party investors.
FUTURE REMARKETINGS FOR NVG VRDPs
If the rate periods subsequent to the SRP for the Series 1 and/or Series 4 VRDP Shares are designated as minimum rate periods, NVG will appoint a liquidity provider and a remarketing agent for the applicable Series of VRDP Shares. In this event, the applicable Series would be expected to benefit from an unconditional and irrevocable purchase obligation (see VRDP PURCHASE OBLIGATION below) similar to other Fitch-rated VRDP Shares issued by Nuveen closed-end funds. Under these circumstances, Fitch would expect to assign a short-term rating to the applicable Series of VRDP Shares based on the short-term rating of the liquidity provider(s) designated at that time.
FUND PROFILE
NVG is a closed-end management investment company regulated by the Investment Company Act of 1940 (the Act). NVG invests primarily in municipal securities that are exempt from alternative minimum tax (AMT) as well as regular federal tax.
Prior to a reorganization, as described in Fitch's press release dated April 11, 2016, NVG invested up to 20% of assets in below investment grade and / or unrated securities. Subsequent to the reorganization, NVG's investment mandate was expanded to permit the fund to invest up to 55% of assets in municipal securities rated 'BBB' or below, including below investment grade securities or unrated securities of comparable quality. Fitch expects the repositioning of the fund's portfolio to take place over time. As of May 31, 2016, NVG's total investment exposure (i.e. total assets under management including assets purchased using leverage) was about $5.3 billion.
FUND LEVERAGE
NVG's total leverage on May 31, 2016 consisted of about $1.5 billion of preferred shares and about $364 million of tender option bonds and effective leverage was about 35%. These leverage amounts do not include the $237 million of Series 4 VRDP Shares amounts, which is the primary reason effective leverage for the fund has increased from its May 31, 2016 level to slightly below 38%.
ASSET COVERAGE
As of today's date including the impact of the new issuance, the fund's asset coverage ratio, as calculated in accordance with the Act, is in excess of the minimum asset coverage threshold of 225% required by the fund's governing documents.
As of today's date including the impact of the new issuance, the fund's effective leverage ratio is below the 45% maximum effective leverage ratio allowed by the governing documents of the preferred shares issued by the fund.
PREFERRED SHARE STRUCTURAL PROTECTIONS
In the event of asset coverage declines, the fund's governing documents require the fund to reduce leverage in order to restore compliance with the applicable asset coverage test.
Minimum Asset Coverage compliance is tested daily for the VMTP Shares and monthly for the VRDP Shares. Compliance with the Effective Leverage Ratio is tested daily for all preferred shares.
For VRDP and VMTP Shares, failure to cure a breach of the Minimum Asset Coverage requirement by the allotted cure date results in mandatory redemption of sufficient preferred shares to restore compliance. To facilitate redemption, the fund will deposit sufficient funds with a third-party tender/redemption and paying agent. The time allowed for the fund to restore compliance is consistent with Fitch's 60 business day criteria guideline.
Under the terms of the VMTP Shares and the VRDP Shares that are in a SRP, a breach of the Effective Leverage Ratio threshold requires the fund to redeem a sufficient number of preferred shares, and/or reduce the amount of TOBs the fund has outstanding in order to restore compliance. The time allowed for the fund to restore compliance is consistent with Fitch's 60 business day criteria guideline.
The governing documents for the Series 2 and Series 3 VRDP Shares, which are not under SRP, do not require mandatory deleveraging in the event of a breach of the Effective Leverage Ratio. Rather, the documents state that a breach of the Effective Leverage Ratio is a breach of the fee agreement with the applicable liquidity provider and at the option of the applicable liquidity provider, may result in mandatory tender of VRDP Shares of the applicable series for remarketing (see the VRDP Purchase Obligation section below for additional details). However, for as long as either the VMTP Shares are outstanding or a series of VRDP Shares is in an SRP, the fund will be required to restore compliance either through the redemption of preferred shares or a reduction in the amount of TOBs outstanding.
VRDP PURCHASE OBLIGATION
The short-term ratings assigned to the VRDP Shares of each applicable series are directly linked to the short-term creditworthiness of the associated liquidity provider. The VRDP Shares of the applicable series are supported by a purchase agreement to ensure full and timely repayment of all tendered VRDP Shares of such series 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 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).
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.
STRESS TESTS
Fitch performed various stress tests on the fund in order 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 fund's leverage and portfolio composition migrated to the outer limits of its operating and investment guidelines.
Only under remote circumstances, such as increasing leverage to 45% while simultaneously increasing issuer concentration and migrating the portfolio to a mix of 80% long-term 'BBB' 10+ years to maturity bonds and 20% high yield bonds, did the asset coverage available to the rated preferred 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 the fund's permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with a 'AAA' rating.
THE ADVISORS
NFA, a subsidiary of Nuveen Investments, is the fund's investment advisor. NFA is responsible for the fund's 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 Investments and its affiliates had approximately $230 billion of assets under management as of March 31, 2016.
RATING SENSITIVITIES
The ratings assigned to the preferred shares may be sensitive to material changes in the leverage level or composition, portfolio credit quality or market risk of the fund, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
For the VRDP Shares not under SRP, certain terms relevant to key VRDP structural protections, including asset coverage and effective leverage are set forth in the fee agreements relating to the purchase agreements and are renewed on a periodic basis. Any future changes to terms that weaken the structural protections may have negative rating implications. For the VRDP Shares under SRP, terms relevant to structural protections, including asset coverage and effective leverage are set forth in the Notice of SRP, which may be extended in the future. Any future changes to 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 fund has the ability to assume economic leverage through derivative transactions which may not be captured by the minimum asset coverage test or effective leverage ratio. The fund does not currently engage in speculative derivative activity and do not envision engaging in material amounts of such activity in the future. In fact, such activity is limited by the fund's investment guidelines and could run counter to their investment objective of achieving tax-exempt income. Material derivative exposures in the future could have potential negative rating implications if they adversely affect asset coverage available to rated preferred shares.
For additional information about Fitch's rating guidelines applicable to debt and preferred stock issued by closed-end funds, please review the criteria referenced below, which can be found 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
Rating Closed-End Funds and Market Value Structures (pub. 11 May 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881003
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