December 20, 2012 / 10:51 PM / 5 years ago

TEXT-Fitch rates 3 Nuveen muni funds VRDP shares

Dec 20 - Fitch Ratings assigns long-term ratings of 'AAA' and short-term
ratings of 'F1+' to variable rate demand preferred shares (VRDP shares) issued
by three Nuveen municipal closed-end funds (CEF). The funds are managed by
Nuveen Fund Advisors, Inc. (NFA) and subadvised by Nuveen Asset Management, LLC

The rating actions are in connection with each fund's exchange of a previous
series of VRDP Shares for the new series of VRDP Shares. Following the
exchanges, the liquidity provider for the VRDP Shares of each fund changed from
Citibank, N.A. (rated 'A/F1' by Fitch) to Royal Bank of Canada ('AA/F1+'). The
terms of the new series of VRDP Shares are substantially the same as the terms
of the previous series of VRDP Shares.

The rating actions are as follows:

Nuveen California Investment Quality Municipal Fund, Inc. (NQC):
--$105,600,000 of VRDP shares, Series 2, due December 1, 2042, rated 'AAA/F1+'.

Nuveen Pennsylvania Investment Quality Municipal Fund (NQP):
--$112,500,000 of VRDP shares, Series 2, due December 1, 2042, rated 'AAA/F1+'.

Nuveen Pennsylvania Premium Income Municipal Fund 2 (NPY):
--$105,000,000 of VRDP shares, Series 2, due December 1, 2042, rated 'AAA/F1+'.

The previous series of VRDP Shares, series 1, of NQC, NQP, and NPY, are marked
by Fitch as paid in full. At the time of the exchanges, NQC and NPY issued
additional shares of VRDP, series 2, to increase outstanding leverage by $10
million and $5 million, respectively.

The short-term ratings primarily reflect:
--The credit strength of the VRDP shares' liquidity provider, Royal Bank of
--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.

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
governing documents.

The VRDP shares of each fund are supported by a purchase agreement 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 agreement require the liquidity provider to purchase all VRDP shares of the
applicable fund tendered for sale that were not successfully remarketed. The
liquidity provider must also purchase all outstanding VRDP shares of the
applicable fund 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 purchase of VRDP shares pursuant to the purchase agreement 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
liquidity provider.

The liquidity provider's obligation under each purchase agreement has a
scheduled termination date. Fitch expects each purchase agreement to be
subsequently extended, with terms that are substantially similar to the current
purchase agreement.

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
agreement between each fund and the liquidity provider (Minimum VRDP Asset
Coverage test).

The funds have also covenanted with the liquidity provider 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
asset coverage test breaching the required threshold.

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 a mix of 80%
long-term 'BBB' bonds and 20% high yield bonds, did the asset coverage available
to the VRDP 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 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
$ 220 billion of assets under management as of Sept. 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 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 provider.

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. 8, 2012);
--'Municipal CEF Leverage Continues to Evolve' (Nov. 27, 2012)
--'Municipal CEFs Refinance Pre-Crisis ARPS ' (May 3, 2012);
--'Primer: CEF Variable-Rate Demand Preferred Shares' (Oct. 27, 2011).

Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
Global Rating Criteria for Asset-Backed Commercial Paper
Municipal CEF Leverage Continues to Evolve
Municipal CEFs Refinance Pre-Crisis ARPS
Primer: CEF Variable-Rate Demand Preferred Shares (Closed-End Fund VRDPs Target
Short-Term, Money Market Investors)
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