N@N

Fitch Takes Rating Actions on Nuveen Maryland Dividend Advantage Municipal Fund 3 MTP Shares

^{Published on 2011-01-18 11:55:23 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings expects to assign 'AAA' ratings to MuniFund Term Preferred Shares (MTP Shares) to be issued by Nuveen Maryland Dividend Advantage Municipal Fund 3 (AMEX: NWI), a municipal closed-end fund managed by Nuveen Fund Advisors, Inc. and subadvised by Nuveen Asset Management, LLC. Fitch has also affirmed the 'AAA' ratings assigned to currently outstanding MTP Shares issued by the fund.

Fitch expects to assign 'AAA' ratings to:

--Up to $17,670,900 of MuniFund Term Preferred Shares, series 2016, with a liquidation preference of $10 per share.

Fitch affirms the 'AAA' ratings assigned to:

--$20,700,000 of MuniFund Term Preferred Shares, 2.65% series 2015, with a liquidation preference of $10 per share.

Fitch expects to finalize its ratings on the series 2016 MTP Shares on the targeted closing date in January 2011. The main drivers for the expected and affirmed ratings are the asset coverage provided to the MTP Shares by the fund's portfolio, 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 Fund Advisors, Inc. as investment adviser and its affiliated subadviser, Nuveen Asset Management, LLC.

In January 2010, the fund used the proceeds from the issuance of series 2015 MTP Shares to partially redeem Municipal Auction Rate Cumulative Preferred Shares (MuniPreferred shares). The net proceeds from the sale of the series 2016 MTP Shares will be used to redeem in full the fund's remaining outstanding MuniPreferred shares and to slightly increase the fund's overall leverage. The increase in overall leverage depends on the extent that the underwriters exercise their over-allotment option. Although the exact issuance size of series 2016 MTP Shares 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 different ultimate rating conclusions than the current expected ratings.

As of Jan. 10, 2011 Nuveen Maryland Dividend Advantage Municipal Fund 3's pro forma leverage was $44.1 million also approximately 38% of total assets. Pro forma leverage consisted of approximately $17.7 million of series 2016 MTP Shares (assuming full exercise of the over-allotment option), $20.7 million of currently outstanding series 2015 MTP Shares and $5.7 million of floating-rate certificates of tender option bonds.

As of the same date, the fund's pro forma asset coverage ratio for total outstanding 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 ratio required by the fund's governing documents (Effective Leverage Test). Should either of these asset coverage tests decline below their minimum threshold amounts, the governing documents' mandatory redemption provisions will require the fund to reduce the leverage in a sufficient amount to restore compliance with the applicable asset coverage test(s).

Fitch performed various stress tests on the fund to assess the strength of the structural protections available to the MTPs compared to the rating stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where the fund's leverage and portfolio composition migrated to the outer limits of the fund's operating and investment guidelines. For example, Fitch modified the fund's leverage amount and composition, in terms of tender option bond leverage versus MTP leverage, and portfolio composition, in terms of credit quality and issuer and industry concentration. Only under remote circumstances, such as increasing tender option bond leverage to half of the fund's overall leverage, while simultaneously migrating the portfolio to 80% 'BBB', 10+ years to maturity bonds and 20% high yield bonds, did the asset coverage available to the MTPs fall below the 'AAA' threshold, and instead passed at a 'AA' rating level. Given the highly unlikely nature of these stress scenarios, combined with their minimal rating impact, 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 an 'AAA' rating.

Fitch notes 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 rated MTP Shares.

Nuveen Maryland Dividend Advantage Municipal Fund 3 is a diversified, closed-end management investment company that commenced investment operations on Sept. 25, 2002. The fund's investment objectives include providing current income exempt from regular federal and Maryland income tax. The fund pursues these objectives, under normal circumstances, by investing at least 80% of managed assets in such tax-exempt municipal securities. Furthermore, under circumstances, the fund invests at least 80% of managed assets in investment grade quality municipal securities, at the time of purchase, or unrated securities judged to be of comparable quality by Nuveen Asset Management, LLC. Not more than 20% of the fund's assets may be invested in securities rated below 'BBB', and not more than 10% of the fund's assets may be invested in securities rated below 'B-', by Fitch or of comparable quality, at the time of purchase.

Nuveen Fund Advisors, Inc. is the fund's investment adviser, responsible for the implementation of the fund's investment strategy and its implementation. Nuveen Asset Management, LLC oversees the day-to-day operations of the fund. Nuveen Fund Advisors, Inc. is a wholly owned subsidiary of Nuveen Investments. Founded in 1898, Nuveen Investments and its affiliates had approximately $163 billion of assets under management as of Sept. 30, 2010. Nuveen Asset Management, LLC is a wholly owned subsidiary of Nuveen Fund Advisors, Inc.

As described above, the rating may be sensitive to material changes in the leverage composition, credit quality of portfolio assets or market risk profile of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch. 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 ].

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.

Applicable Criteria and Related Research:

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

--'Fitch Launches 'CEF Updates' for Closed-End Fund's, dated Nov. 8, 2010;

--'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: 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 ]

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 ]

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. 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.