Fitch Rates VMTP Shares Issued by Nuveen Closed End Funds

NEW YORK--()--Fitch Ratings has assigned 'AAA' long-term ratings to the Series 2019 Variable Rate MuniFund Term Preferred Shares (VMTP Shares) issued by the following Nuveen closed-end funds in connection with the exchange offer described below:

Nuveen Arizona Premium Income Municipal Fund (NAZ)

--$88,300,000 of VMTP Shares, Series 2019, term redemption on June 1, 2019.

Nuveen AMT-Free Municipal Income Fund (NEA)

--$238,000,000 of VMTP Shares, Series 2019, term redemption on June 1, 2019.

Nuveen Michigan Quality Income Municipal Fund (NUM)

--$173,000,000 of VMTP Shares, Series 2019, term redemption on June 1, 2019.

Nuveen Enhanced Municipal Credit Opportunities Fund (NZF)

--$336,000,000 of Variable Rate MuniFund Term Preferred Shares (VMTP Shares), Series 2019, term redemption on July 1, 2019.

Fitch has also affirmed the Variable Rate Demand Preferred Shares (VRDP Shares) of NEA and Institutional MuniFund Term Preferred Shares (iMTP Shares) of NZF that remain outstanding after today's exchange offer as follows:

NEA

--$219,000,000 of VRDP Shares, Series 1, final mandatory redemption on June 1, 2040, at 'AAA/F1'. The liquidity provider is Deutsche Bank Trust Company Americas ('A-/F1');

--$130,900,000 of VRDP Shares, Series 2, final mandatory redemption on Dec. 1, 2040, at 'AAA/F1'. The liquidity provider is Citibank, N.A. ('A+/F1').

NZF

--$268,800,000 of VRDP Shares, Series 1, final mandatory redemption on March 1, 2040, at 'AAA/F1+'. The liquidity provider is JPMorgan Chase Bank, N.A. ('AA-/F1+');

--$262,200,000 of VRDP, Series 2, final mandatory redemption on March 1, 2040, at 'AAA/F1+'. The liquidity provider is JPMorgan Chase Bank, N.A. ('AA-/F1+');

--$196,000,000 of VRDP Shares, Series 3, final mandatory redemption on June 1, 2040, at 'AAA/F1+'. The liquidity provider is the Toronto-Dominion Bank (TD Bank, 'AA-/F1+');

--$150,000,000 of iMTP Shares, Series 2017, term redemption on Oct. 1, 2017, at 'AAA'.

The funds are 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 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, where applicable, primarily reflect:

--The credit strength of the VRDP Shares' liquidity providers;

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

THE EXCHANGE OFFERS

On June 1, 2016, NAZ issued the Series 2019 VMTP Shares in exchange for all outstanding Series 2016 VMTP Shares plus an additional upsize amount increasing total leverage outstanding by about $9 million. After the exchange, the Series 2016 VMTP Shares will be marked as Paid in Full by Fitch.

On June 1, 2016, NEA issued the Series 2019 VMTP Shares in exchange for all outstanding Series 2016 VMTP Shares plus an additional upsize amount increasing total leverage outstanding by $87 million. After the exchange, the Series 2016 VMTP Shares will be marked as Paid in Full by Fitch.

On June 1, 2016, NUM issued the Series 2019 VMTP Shares in exchange for all outstanding Series 2016 VMTP Shares plus an additional upsize amount increasing total leverage outstanding by $14 million. After the exchange, the Series 2016 VMTP Shares will be marked as Paid in Full by Fitch.

On June 1, 2016, NZF issued the Series 2019 VMTP Shares in exchange for all outstanding Series 2017 VMTP Shares plus an additional upsize amount increasing total leverage outstanding by $255 million. After the exchange, the Series 2017 VMTP Shares will be marked as Paid in Full by Fitch.

FUND PROFILE

NAZ, NEA, NUM and NZF are closed-end management investment companies regulated by the Investment Company Act of 1940 (the Act). NAZ and NUM invest at least 80% of their managed assets in municipal securities that are exempt from regular federal tax and may invest up to 20% of assets in below investment grade and/or unrated securities.

Recently, NEA's investment mandate was expanded to permit the fund to invest up to 35% of assets in municipal securities rated 'BBB' or below, including below investment grade securities or unrated securities of comparable quality. However, in connection with certain of its outstanding preferred securities, the Fund has agreed to limit its investments in below investment grade and/or unrated securities to not more than 20% of assets. Fitch notes those agreements may be amended in the future.

NZF's investment mandate was recently 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 portfolios of both funds to take place over time.

As of April 29, 2016, total investment exposure (i.e. total assets under management including assets purchased using leverage) for the funds was: NAZ ($272 million), NEA ($1.9 billion), NUM ($521 million) and NZF ($3.5 billion).

FUND LEVERAGE

NAZ's total leverage on April 29, 2016 consisted of $79 million of preferred shares and about $17 million of tender option bonds and effective leverage was about 35%. NEA's total leverage on April 29, 2016 consisted of $501 million of preferred shares and about $140 million of tender option bonds and effective leverage was 34%. NUM's total leverage on April 29, 2016 consisted of $159 million of preferred shares and about $27 million of tender option bonds and effective leverage was about 36%. NZF's total leverage consisted of $958 million of preferred shares and about $201 million of tender option bonds and effective leverage was about 33%.

The leverage amounts noted in the paragraph above do not include the upsize amounts which have increased effective leverage for the funds from their April 29, 2016 levels to the 37-38% range.

ASSET COVERAGE

As of today's date including the impact of the upsize, each 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 each fund's governing documents.

As of today's date including the impact of the upsize, each fund's effective leverage ratio is below the 45% maximum effective leverage ratio allowed by the governing documents of the preferred shares issued by each fund.

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 applicable asset coverage test.

Minimum Asset Coverage compliance is tested daily for the iMTP, and VMTP shares and monthly for the VRDP shares. Compliance with the Effective Leverage Ratio is tested daily for all preferred shares.

For VRDP, iMTP 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 and paying agent. The time allowed for the funds to restore compliance is consistent with Fitch's 60 business day criteria guideline.

For iMTP and VMTP Shares, 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 funds to restore compliance is consistent with Fitch's 60 business day criteria guideline.

For VRDP Shares of each series, 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, in the event of a breach, Fitch expects the fund to redeem a sufficient number of preferred shares or reduce the amount of TOBs outstanding in order to restore compliance. The allotted time to restore compliance to the Effective Leverage Ratio test is consistent with Fitch's 60 business day criteria guideline.

VRDP PURCHASE OBLIGATION

The short-term ratings assigned to the VRDP Shares of each series are directly linked to the short-term creditworthiness of the associated 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 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 funds 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 funds' leverage and portfolio composition migrated to the outer limits of their 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 (in the case of NAZ, NEA and NUM) and 55% high yield bonds and 45% bonds in the 'A' category (in the case of NZF), did the asset coverage available to the Series 2018 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 the funds' permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' rating.

THE ADVISORS

NFA, a subsidiary of Nuveen Investments, is the funds' 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 $225 billion of assets under management as of Dec. 31, 2015.

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 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 minimum asset coverage test or effective leverage ratio. The funds do 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 funds' 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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Contacts

Fitch Ratings
Primary Analyst:
Ralph Aurora, +1-212-908-0528
Senior Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Brian Knudsen, +1-646-582-4904
Associate Director
or
Committee Chairperson:
Davie Rodriguez, +1-212-908-0386
Senior Director
or
Media Relations:
Hannah James, +1-646-582-4947
New York
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Ralph Aurora, +1-212-908-0528
Senior Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Brian Knudsen, +1-646-582-4904
Associate Director
or
Committee Chairperson:
Davie Rodriguez, +1-212-908-0386
Senior Director
or
Media Relations:
Hannah James, +1-646-582-4947
New York
hannah.james@fitchratings.com