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Fitch Takes Rating Actions on Nuveen Maryland Premium Income Municipal Fund MTP Shares

^{Published on 2011-03-07 16:45:36 - 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 Premium Income Municipal Fund (NYSE: NMY), a municipal closed-end fund (CEF) 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 $38,890,700 of MuniFund Term Preferred Shares, series 2016, with a liquidation preference of $10 per share.

Fitch affirms the 'AAA' ratings assigned to:

--$38,775,000 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 March 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 advisor and Nuveen Asset Management, LLC as sub-advisor.

In January 2010 NMY 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 to which 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 Feb. 22, 2011 NMY's pro forma leverage was $89.5 million, or approximately 37% of total assets. Pro forma leverage consisted of approximately $37.9 million of series 2016 MTP Shares (assuming full exercise of the over-allotment option), $38.8 million of currently outstanding series 2015 MTP Shares and $12.8 million of floating-rate certificates of tender option bonds.

As of Feb. 22, 2011 NMY's pro forma asset coverage ratio for total outstanding preferred shares, as calculated in accordance with the Investment Company Act of 1940, was approximately 295%, 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 37%, which was below the maximum leverage ratio of 50% 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 to assess the strength of the structural protections available to the MTP 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 fund's leverage and portfolio composition migrated to the limits of the fund's operating and investment guidelines. For example, Fitch modified portfolio composition by reducing asset credit quality and increasing issuer and industry concentration, increased the fund's total leverage amount and modified leverage composition by changing the amount of tender option bonds leverage and MTP Shares leverage as a percentage of total leverage. 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% of managed assets in 'BBB', 10+ years to maturity bonds and 20% of managed assets in high yield bonds, did the asset coverage of the MTP Shares fall below the 'AAA' threshold, and instead passed at an '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 NMY 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 Premium Income Municipal Fund is a diversified, closed-end management investment company that commenced investment operations on March 18, 1993. 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 normal 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 managed assets may be invested in securities rated below 'BBB', and not more than 10% of the fund's managed 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 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.

Fitch continues to regularly assess the appropriateness of its rating criteria in light of market developments. In particular, Fitch perceives there to be higher risk, on average, for single state CEFs relative to nationally diversified CEFs, particularly with respect to those single state funds invested in states facing budgetary crises. Fitch's rating criteria call for higher asset coverage (lower leverage) for single-state CEFs.

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 Fund Advisors, Inc.

Applicable Criteria and Related Research:

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

--'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:

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

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

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 Fund Debt and Preferred Stock Rating Criteria

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

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