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Fitch Expects to Rate MTP Shares to Be Issued by 3 Nuveen Muni Closed-End Funds 'AAA'

^{Published on 2010-10-05 14:30:45 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings expects to assign 'AAA' ratings to the MuniFund Term Preferred Shares (MTP Shares) expected to be issued by the following funds, all municipal closed-end funds managed by Nuveen Asset Management:

--Nuveen Arizona Dividend Advantage Municipal Fund 2 (NYSE Amex: NKR)

--Nuveen California Dividend Advantage Municipal Fund 2 (NYSE Amex: NVX)

--Nuveen Texas Quality Income Municipal Fund (NYSE: NTX)

A full rating list is shown at the end of the release.

Fitch expects to finalize its ratings on the MTP Shares on the targeted closing dates in October 2010. The main drivers for the expected 'AAA' ratings are the asset coverage provided to the MTP Shares by the funds' portfolios 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 funds' 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 NKR's outstanding Municipal Auction Rate Cumulative Preferred Shares (MuniPreferred shares), while NVX and NTX will use the proceeds to redeem a part of their outstanding MuniPreferred shares. Upon completion of the issuance of MTP Shares the funds are expected to slightly increase overall leverage depending on the extent that the underwriters exercise their over-allotment provisions. Although the exact MTP Shares issuance sizes have not yet been determined, Fitch expects asset coverage levels to be consistent with Fitch's 'AAA' rating level criteria. Should the issuance sizes materially differ from the expectation, this could result in different ultimate rating conclusions than the current expected ratings.

As of Sept. 16, 2010, the funds' pro forma asset coverage ratios for preferred shares, as calculated in accordance with the Investment Company Act of 1940, were in excess of 225%, which is the minimum asset coverage required by the funds' governing documents (Preferred Asset Coverage Test). As of the same date, the funds' pro forma asset coverage ratios for both preferred shares and floating-rate certificates of tender option bonds were in excess of 200%, which is also a minimum asset coverage required by the funds' 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 funds to reduce the affected liabilities in a sufficient amount to restore compliance with the funds' applicable asset coverage test(s).

Fitch views the funds' permitted investments, municipal issuer diversification frameworks 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 funds have the ability to assume economic leverage through derivative transactions which may not be captured by the funds' Preferred Asset Coverage Test or Effective Leverage Test. 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. 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 funds' investment adviser, responsible for the funds' 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 ratings may be sensitive to material changes in the credit quality or market risk profiles of the funds. A material adverse deviation from Fitch guidelines for any key rating driver could cause the ratings 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 web site.

Fitch expects to assign 'AAA' ratings to the following MTP shares:

Nuveen Arizona Dividend Advantage Municipal Fund 2 (NYSE Amex: NKR)

--Up to $19,808,750 of MTP Shares series 2015, with a liquidation preference of $10 per share

Nuveen California Dividend Advantage Municipal Fund 2 (NYSE Amex: NVX)

--Up to $54,924,000 of MTP Shares series 2013, with a liquidation preference of $10 per share

Nuveen Texas Quality Income Municipal Fund (NYSE: NTX)

--Up to $38,180,000 of MTP Shares series 2013, with a liquidation preference of $10 per share

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

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

Applicable Criteria and Related Research:

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

--'Closed-End Funds: Evolving Use of Leverage and Derivatives' dated Sept. 27, 2010;

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

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

Applicable Criteria and 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: Evolving Use of Leverage and Derivatives

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=559525 ]

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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