Fitch Rates VRDP Shares Issued by Nuveen California AMT-Free Municipal Income Fund 'AAA/F1'

NEW YORK--()--Fitch Ratings has assigned a 'AAA/F1' rating to the following Series 6 Variable Rate Demand Preferred Shares (VRDP Shares) issued by Nuveen California AMT-Free Municipal Income Fund (NKX):

--$105,000,000 of VRDP Shares, Series 6, final mandatory redemption on June 1, 2046. The liquidity provider is Sumitomo Mitsui Banking Corporation (rated 'A', Outlook Negative/'F1' by Fitch).

In addition, Fitch has affirmed the long- and short-term ratings for the following preferred shares issued by NKX:

--$35,500,000 of VRDP Shares, Series 2, final mandatory redemption on June 1, 2040, at 'AAA/F1'. The liquidity provider is Deutsche Bank Trust Company Americas ('A-/F1');

--$42,700,000 of VRDP Shares, Series 3, final mandatory redemption on March 1, 2040, at 'AAA/F1+'. The liquidity provider is The Toronto-Dominion Bank ('AA-/F1+');

--$109,000,000 of VRDP Shares, Series 4, final mandatory redemption on Dec. 1, 2040, at 'AAA/F1'. The liquidity provider is Citibank, N.A. ('A+/F1');

--$104,400,000 of VRDP Shares, Series 5, final mandatory redemption on June 1, 2041, at 'AAA/F1+'. The liquidity provider is Toronto-Dominion Bank ('AA-/F1+');

--$36,000,000 of aggregate liquidation preference of Institutional MuniFund Term Preferred Shares (iMTP Shares), series 2018, term redemption on July 1, 2018 at 'AAA'.

NKX 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 NKX;

--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 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.

FUND PROFILE

NKX is a closed-end management investment company regulated by the Investment Company Act of 1940 (the Act). The fund invests in municipal securities that are exempt from regular federal income tax, AMT tax and California State income tax. The fund may invest up to 20% of assets in below investment-grade and/or unrated securities judged by NFA to be of comparable quality. As of May 31, 2016, NKX's total investment exposure (i.e. total assets under management including assets purchased using leverage) was about $1.2 billion.

FUND LEVERAGE

NKX's total leverage on May 31, 2016 consisted of about $328 million of preferred shares and about $41 million of tender option bonds (TOBs) and effective leverage was about 32%. Total leverage as of May 31, 2016 does not include the $105 million of newly issued Series 6 VRDP Shares, which is the primary reason effective leverage for the fund has increased from its May 31, 2016 level to about 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 iMTP Shares and monthly for the VRDP Shares. Compliance with the Effective Leverage Ratio is tested daily for all preferred shares.

For VRDP and iMTP 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.

For the iMTP 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 fund to restore compliance is consistent with Fitch's 60 business day criteria guideline.

The governing documents of the VRDP Shares 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 details). However, for as long as the iMTP shares are outstanding, the fund is required to take such action to restore compliance in the event of an Effective Leverage Ratio breach.

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 Series 2, 3, 4 and 5 VRDP Shares are each supported by an applicable purchase agreement to ensure full and timely repayment of all tendered VRDP Shares of the applicable series plus any accumulated and unpaid dividends. The Series 6 VRDP Shares are supported by a standby letter of credit (LOC) and purchase agreement to ensure full and timely repayment of all tendered Series 6 VRDP Shares. The purchase agreements in the case of the Series 2-5 VRDP Shares, and the standby LOC and purchase agreement in the case of the Series 6 VRDP Shares, are unconditional and irrevocable.

In the case of the Series 2-5 VRDP Shares, the applicable 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 short-term rating below 'F2' (or equivalent).

In the case of the Series 6 VRDP Shares, the standby LOC and purchase agreement provides for a standby LOC issued by Sumitomo to the Tender and Paying Agent for the account of and in favor of the Holders and/or Beneficial Owners of the Series 6 VRDP Shares to fund the purchase of VRDP Shares tendered for sale that were not successfully remarketed, or to fund the purchase of all outstanding VRDP Shares if NKX has not obtained a replacement liquidity provider prior to the termination of the standby LOC and purchase agreement, or following the downgrade of Sumitomo's short-term rating below 'F2' (or equivalent).

The liquidity provider's role under the fee agreement relating to the purchase obligation (in the case of the Series 2-5 VRDP Shares) or the funding and purchase obligation (in the case of the Series 6 VRDP Shares) 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 of each series, 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.

The short-term ratings assigned to the VRDP Shares of each series may also be sensitive to changes in the financial condition of the applicable liquidity provider. A downgrade of the liquidity provider to 'F2' would result in a downgrade of the short-term ratings of the VRDP Shares of the applicable series 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 applicable 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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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, CFA, +1-212-908-0386
Senior Director
or
Media Relations, New York
Hannah James, +1-646-582-4947
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, CFA, +1-212-908-0386
Senior Director
or
Media Relations, New York
Hannah James, +1-646-582-4947
hannah.james@fitchratings.com