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Fitch Expects to Rate Nuveen Pennsylvania Dividend Advantage Muni Fund 2's MTP Shares 'AAA'

^{Published on 2010-09-08 12:26:19 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings expects to assign an 'AAA' rating to the MuniFund Term Preferred Shares (MTP Shares) expected to be issued by Nuveen Pennsylvania Dividend Advantage Municipal Fund 2 (NYSE: NVY) as follows:

--Up to $27,255,000 of MTP Shares series 2015, with a liquidation preference of $10 per share.

Fitch expects to finalize its rating on the MTP Shares on the targeted closing date in September 2010. The main drivers for the expected 'AAA' rating are the asset coverage provided to the MTP Shares by the fund's portfolio of assets that is consistent with Fitch criteria, 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 and the capabilities of Nuveen Asset Management as investment advisor.

The net proceeds from the sale of MTP Shares will be used to redeem in full the fund's outstanding Municipal Auction Rate Cumulative Preferred Shares (MuniPreferred shares). Upon completion of the issuance of MTP Shares the fund is expected to slightly increase overall leverage depending on the extent that the underwriters exercise their over-allotment provision. Although the exact MTP Shares issuance size has not yet been determined, Fitch expects asset coverage levels to be consistent with Fitch's 'AAA' rating level criteria. Should the issuance size materially differ from the expectation, this could result in a different ultimate rating conclusion than the current expected rating.

As of Aug. 18, 2010, the fund's pro forma asset coverage ratio for preferred shares, as calculated in accordance with the Investment Company Act of 1940, was in excess of 225%, which is the minimum asset coverage required by the fund's governing documents (Preferred Asset Coverage Test). As of the same date, the fund's pro forma asset coverage ratio for both preferred shares and floating-rate certificates of tender option bonds was in excess of 200%, which is also a minimum asset coverage required by the fund's governing documents (Effective Leverage Test). Should either of the asset coverage tests decline below their minimum threshold amounts, the governing documents' mandatory redemption mechanisms will require the fund to reduce the affected liabilities in a sufficient amount to restore compliance with the fund's applicable asset coverage test(s).

Fitch views the fund's permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms (as set forth under the Preferred Asset Coverage Test and Effective Leverage Test) as consistent with Fitch 'AAA' rating level criteria.

Fitch would also note that the fund has the ability to assume economic leverage through derivative transactions which may not be captured by the fund's Preferred Asset Coverage Test or Effective Leverage Test. The fund does not currently engage in derivative activities and does 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 the fund's investment objective of achieving tax-exempt income. Should material derivative exposure be utilized in the future, this could have potential negative rating implications if it adversely affects asset coverage available to the rated MTP Shares.

Nuveen Asset Management is the fund's investment adviser, responsible for the fund's overall investment strategy and its implementation. Nuveen Asset Management is a wholly owned subsidiary of Nuveen Investments. Founded in 1898, Nuveen Investments and its affiliates had approximately $150 billion of assets under management as of June 30, 2010.

The rating may be sensitive to material changes in the credit quality or market risk profile of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating to be lowered by Fitch. For additional information about Fitch closed-end fund ratings guidelines, please review the criteria referenced below, which can be found on Fitch's website.

Additional information is available at '[ www.fitchratings.com ]'.

The sources of information used to assess this rating were the public domain and Nuveen Asset Management.

Related Research:

--'Closed-End Funds: Redemptions Provide Some Liquidity to Illiquid ARPS Market' (Aug. 31, 2010)

--'Closed-End Funds: Fitch Clarifies Criteria for Make-Whole Amounts and Other Prepayment Obligations' (March 18, 2010).

--'Closed-End Fund Debt and Preferred Stock Rating Criteria' (Aug. 17, 2009).

Related Research:

Closed-End Fund Debt and Preferred Stock Rating Criteria

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462492 ]

Closed-End Funds: Fitch Clarifies Criteria for Make-Whole Amounts and Other Prepayment Obligations

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504986 ]

Closed-End Funds: Redemptions Provide Some Liquidity to Illiquid ARPS Market

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=552106 ]

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