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Fitch Rates VMTP Shares Issued by Nuveen Premium Income Municipal Fund, Inc. 'AAA'

^{Published on 2011-02-25 10:40:44 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has assigned an 'AAA' rating to the following securities issued by Nuveen Premium Income Municipal Fund, Inc. (NYSE: NPI), a municipal closed-end fund managed by Nuveen Fund Advisors, Inc. and sub-advised by Nuveen Asset Management, LLC:

--$402,400,000 of Variable Rate MuniFund Term Preferred Shares, series 2014, with a liquidation preference of $100,000 per share (VMTP Shares), due March 1, 2014.

The closing date for the VMTP Shares was Feb. 24, 2011. The fund will use the net proceeds from the sale of the VMTP Shares to fully redeem the outstanding Municipal Auction Rate Cumulative Preferred (MuniPreferred) Shares and will slightly increase overall leverage. The VMTP Shares are variable-rate preferred stock with a three-year term, and were privately placed.

The 'AAA' rating is based on asset coverage provided to the VMTP Shares by the fund's portfolio, structural protections afforded by mandatory deleveraging 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 advisor and Nuveen Asset Management, LLC as sub-advisor.

As of Jan. 27, 2011 the fund's pro forma leverage was approximately $583.5 million, or 43% of total assets. Pro forma leverage consists of $402.4 million of series 2014 VMTP Shares and $181.1 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 approximately 305%, which is in excess of the minimum asset coverage of 225% required by the fund's governing documents (Preferred Asset Coverage Test). As of the same date, the fund's pro forma effective leverage ratio for both preferred shares and floating-rate certificates of tender option bonds was 43%, which is below the maximum leverage ratio of 45% required by the fund's governing documents (Effective Leverage Test). Should the Preferred Asset Coverage Test decline below its threshold amount or the Effective Leverage Test increase above its threshold amount, the governing documents' mandatory redemption provisions will require the fund to reduce the leverage in a sufficient amount to restore compliance with the applicable overcollateralization test(s).

Fitch performed various stress tests on the fund to assess the strength of the structural protections available to the VMTPs 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 VMTP 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 VMTPs 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 the rated VMTP Shares.

Nuveen Premium Income Municipal Fund, Inc. is a diversified, closed-end management investment company that commenced investment operations on July 18, 1988. The fund's investment objectives include providing a high level of current income exempt from regular federal income tax. The fund pursues its objectives, under normal circumstances, by investing substantially all of its assets in a diversified portfolio of investment grade quality tax-exempt municipal securities.

Nuveen Fund Advisors, Inc. is the fund's investment advisor, responsible for the fund's overall investment strategy and its implementation. Nuveen Asset Management, LLC is a wholly owned subsidiary of Nuveen Fund Advisors, Inc. and 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 $197 billion of assets under management as of Dec. 31, 2010.

As described above, the rating assigned to the VMTP Shares 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 Fund Advisors, Inc.

Applicable Criteria and Related Research:

--'Tax-Exempt Closed-End Funds Weather Price Declines', dated Feb. 2, 2011

--'Fitch Launches 'CEF Updates' for Closed-End Funds', 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 Fund Debt and Preferred Stock Rating Criteria', dated Aug. 17, 2009.

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: Redemptions Provide Some Liquidity to Illiquid ARPS Market

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

Tax-Exempt Closed-End Funds Weather Price Declines (Asset Coverage Remains Strong)

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=601825 ]

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