Aug 30 - Fitch Ratings confirms the ratings of 'AAA/F1+' assigned to certain
series of variable-rate demand preferred shares (VRDP shares) issued by four
Nuveen municipal closed-end funds (CEFs). The funds are managed by Nuveen Fund
Advisors, Inc. (NFA) and subadvised by Nuveen Asset Management, LLC (NAM).
The rating actions are in connection with the substitution of the liquidity
support providers to the VRDP shares, from Deutsche Bank AG (rated 'A+/F1+' by
Fitch) to Deutsche Bank Trust Company Americas (DBTCA, 'A+/F1+'), effective Aug.
30, 2012. The terms of the new purchase and fee agreements are substantially the
same as the terms of the agreements being substituted.
The long-term ratings of the VRDP shares are not affected by the replacement of
the liquidity providers, and remain unchanged. The short-term ratings of the
VRDP Shares reflect the short-term ratings of the respective liquidity providers
to the VRDP shares.
The rating confirmations are as follows:
Nuveen California AMT-Free Municipal Income Fund (NKX):
--$35,500,000 of VRDP shares, series 2, due June 1, 2040, confirmed at
Nuveen Dividend Advantage Municipal Fund 2 (NXZ):
--$196,000,000 of VRDP Shares, Series 2, due June 1, 2040, confirmed at
Nuveen Premium Income Municipal Opportunity Fund (NPX):
--$219,000,000 of VRDP Shares, Series 2, due June 1, 2040, confirmed at
Nuveen New York Dividend Advantage Municipal Income Fund (NKO):
--$50,000,000 of VRDP Shares, Series 2, due June 1, 2040, confirmed at
NKX, in addition to series 2 of VRDP shares referenced above, has three
additional series of VRDP shares outstanding, series 3, 4, and 5. These three
series are not being reviewed at this time, as the liquidity providers to these
series are not being replaced. The ratings of these series are unchanged.
KEY RATING DRIVERS
The short-term ratings primarily reflect:
--The credit strength of the VRDP shares' liquidity providers;
--The terms and conditions of the VRDP shares purchase agreements (purchase
The 'AAA' 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.
TENDER AND REMARKETING
The VRDP shares benefit from a feature giving investors the right to tender the
securities with a seven-day notice for remarketing. The VRDP shares are also
subject to a mandatory tender for remarketing upon the occurrence of certain
events, such as non-payment of dividends by the fund, among others. VRDP shares
that are unsuccessfully remarketed are purchased by the liquidity provider.
The VRDP shares have a 30-year mandatory redemption date and pay an adjustable
dividend rate set weekly by the remarketing agent. Should a remarketing be
unsuccessful, the dividend rate will reset to a maximum rate as defined in the
The VRDP shares are supported by purchase agreements to ensure full and timely
repayment of the liquidation preference amount plus any accumulated and unpaid
dividends to holders upon occurrence of certain events. The agreements require
the applicable liquidity provider to purchase all VRDP shares of the applicable
series tendered for sale that were not successfully remarketed. The applicable
liquidity provider must also purchase all outstanding VRDP shares of the
applicable series if the funds have not obtained alternate purchase agreements
prior to the termination of the purchase agreements being replaced or following
the downgrade of the applicable liquidity provider's rating below 'F2' (or
The purchase of VRDP shares pursuant to the purchase agreements is unconditional
and irrevocable, and as such the short-term ratings assigned to the VRDP shares
are directly linked to the short-term creditworthiness of the associated
The liquidity providers' obligations under the purchase agreements have
scheduled termination dates. Fitch expects the purchase agreements to be
subsequently extended, with terms that are substantially similar to the current
The funds' asset coverage ratios for the VRDP 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 fee
agreements between the funds and the liquidity providers (Minimum VRDP Asset
The funds have also covenanted with the liquidity providers to maintain
Effective Leverage Ratios for both VRDP shares and floating-rate certificates of
tender option bonds below 45% (or 46% if the increase in the ratio is due
exclusively to asset market value volatility). The funds' Effective Leverage
Ratios are currently below 45%.
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 OC
test(s) breaching the required threshold(s).
Fitch performed various stress tests on the funds to assess the strength of the
structural protections available to the VRDP shares 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' 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 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.
NFA, a subsidiary of Nuveen Investments, is the funds' investment advisor,
responsible for the funds' overall investment strategies and their
implementation. NAM is a subsidiary of NFA and oversees the day-to-day
operations of the funds. Nuveen Investments and its affiliates had approximately
$212 billion of assets under management as of June 30, 2012.
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 ratings to be lowered by Fitch.
Certain terms of the Minimum VRDP Asset Coverage test and Effective Leverage
Ratio are set forth in the fee agreements relating to the purchase agreements,
which are renewed on a periodic basis. Changes to these terms that weaken the
tests 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 providers. A downgrade of
the liquidity providers 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 acceleration features in the
transactions that would result in a mandatory tender of the VRDPs for purchase
by the liquidity providers.
The funds have the ability to assume economic leverage through derivative
transactions which may not be captured by the funds' Minimum VRDP 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 VRDP shares.Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 15, 2012);
--'Global Rating Criteria for Asset-Backed Commercial Paper' (Nov. 10, 2011);
--'Municipal CEFs Refinance Pre-Crisis ARPS ' (May 3, 2012);
--'2012 Outlook: Closed-End Fund Leverage' (Dec. 19, 2011);
--'Closed-End Funds: Derivatives Under Review' (Nov. 16, 2011);
--'Primer: CEF Variable-Rate Demand Preferred Shares' (Oct. 27, 2011).
Applicable Criteria and Related Research:
2012 Outlook: Closed-End Fund Leverage
Municipal CEFs Refinance Pre-Crisis ARPS
Global Rating Criteria for Asset-Backed Commercial Paper
Rating Closed-End Fund Debt and Preferred Stock
Primer: CEF Variable-Rate Demand Preferred Shares (Closed-End Fund VRDPs Target
Short-Term, Money Market Investors)
Closed-End Funds: Derivatives Under Review (Increased Use and Limited
Transparency Are Key Considerations)