Fitch Affirms Preferred Shares Issued by 3 First American Closed-End Funds

Wed Apr 23, 2014 3:12pm EDT

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(The following statement was released by the rating agency) NEW YORK, April 23 (Fitch) Fitch Ratings affirms all long-term ratings assigned to Variable Rate MuniFund Term Preferred Shares (VMTP shares) issued by three closed-end funds managed by U.S. Bancorp Asset Management, Inc. (USBAM) and subadvised by Nuveen Fund Advisors, LLC (NFA) and Nuveen Asset Management LLC (NAM). Fitch affirms the following ratings on the VMTP shares noted below: Minnesota Municipal Income Portfolio Inc. (MXA) --$31,100,000 of aggregate liquidation preference of VMTP shares, Series 2017, term redemption on May 1, 2017, at 'AAA'. American Municipal Income Portfolio Inc. (XAA) --$43,500,000 of aggregate liquidation preference of VMTP shares, Series 2017, term redemption on May 1, 2017, at 'AAA'. First American Minnesota Municipal Income Fund II, Inc. (MXN) --$13,000,000 of aggregate liquidation preference of VMTP shares, Series 2017, term redemption on May 1, 2017, at 'AAA'. 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; --The capabilities of USBAM as investment advisor and NFA and NAM as subadvisors. ASSET COVERAGE As of April 15, 2014, the funds' asset coverage ratios for the above noted VMTP shares, as calculated in accordance with the Investment Company Act of 1940, were in excess of the minimum asset coverage threshold of 225% currently set by the terms of the VMTP shares. As of the same date, the Effective Leverage Ratios were below the 45% maximum leverage ratio allowed by the funds' governing documents (46% if the increase in the ratio is due exclusively to asset market value volatility) for the VMTP shares. In the event of asset coverage declines, the funds' governing documents will require the funds to reduce leverage in order to restore compliance with the asset coverage test breaching the required threshold. STRUCTURAL PROTECTIONS Compliance with the asset coverage and effective leverage ratio requirements are tested daily. Failure to cure an asset coverage breach by the Asset Coverage Cure Date results in an Asset Coverage Mandatory Redemption. Failure to cure an Effective Leverage Ratio breach by the Effective Leverage Ratio Cure Date results in an Effective Leverage Ratio Mandatory Redemption. In the event of an asset coverage breach, subsequent to the Asset Coverage Cure Date each fund shall deposit sufficient funds with the Redemption and Paying Agent for the redemption of a sufficient number of VMTP shares to restore asset coverage compliance. The exposure period to market risk for the preferred shares in the event of a mandatory redemption due to an asset coverage breach is 45 days, consistent with Fitch's 60 day criteria guideline. In the event of an effective leverage ratio breach, subsequent to the Effective Leverage Ratio Cure Date each fund shall (a) deposit sufficient funds with the Redemption and Paying Agent for the redemption of a sufficient number of VMTP shares to restore effective leverage ratio compliance, (b)engage in transactions involving or relating to the floating rate securities not owned by the Fund and/or the inverse floating rate securities owned by the Fund, including the purchase, sale or retirement of these securities to restore effective leverage ratio compliance, or (c) engage in a combination of these approaches in order to restore effective leverage ratio compliance. The exposure period to market risk for the preferred shares in the event of a mandatory redemption due to an effective leverage ratio breach is 41 days, consistent with Fitch's 60 day criteria guideline. STRESS TESTS Fitch performed various stress tests on the funds to assess the strength of the structural protections available to the VMTP 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 the funds' operating and investment guidelines. Only under remote circumstances, such as increasing the funds' 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 a '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 FUNDS The funds are closed-end management investment companies regulated by the Investment Company Act of 1940. The funds currently invest primarily in investment grade quality municipal bonds. THE ADVISER USBAM, a subsidiary of U.S. Bank National Association, manages the funds' assets and serves as the funds' administrator. NAM along with its parent NFA each serves as investment sub-advisor to the fund pursuant to separate investment sub-advisory agreements with USBAM. NAM makes investment decisions for the funds, places purchase and sale orders. NFA provides certain other services to the funds, including assisting in the supervision of the funds' investment program, risk monitoring, managing the forms and level of leverage employed by each fund and assisting with pricing of the funds' portfolio securities. 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 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. The funds have the ability to assume economic leverage through derivative transactions which may not be captured by the funds' Asset Coverage test or Effective Leverage Ratio. The funds do not currently engage in derivative activities 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 the funds' investment objectives 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 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'. Contact: Primary Analyst Ralph Aurora Senior Director +1-212-908-0528 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Greg Fayvilevich Director +1-212-908-9151 Committee Chairperson Ian Rasmussen Senior Director +1-212-908-0232 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@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: here Applicable Criteria and Related Research: --'Fitch: Minimal Impact on Nuveen CEFs from TIAA Acquisition' (April 15, 2014); --'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 14, 2013); --'Global Rating Criteria for Asset-Backed Commercial Paper' (Nov. 8, 2012); --'Municipal Closed-End Funds Diversify Funding and Moderate Rollover Risk' (Oct. 11, 2012); --'Municipal CEFs Refinance Pre-Crisis ARPS' (May 3, 2012). Applicable Criteria and Related Research: Rating Closed-End Fund Debt and Preferred Stock here Global Rating Criteria for Asset-Backed Commercial Paper here Municipal Closed-End Funds Diversify Funding and Moderate Rollover Risk here Municipal CEFs Refinance Pre-Crisis ARPS here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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.

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