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Fitch Rates the VRDP Shares of 4 Nuveen Muni Funds 'AAA/F1+'

^{Published on 2011-05-06 18:01:14 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has assigned 'AAA' long-term ratings and 'F1+'short-term ratings to variable rate demand preferred shares (VRDPs) issued by the following municipal closed-end funds managed by Nuveen Fund Advisors, Inc and subadvised by Nuveen Asset Management, LLC:

Nuveen Premier Municipal Income Fund, Inc. (NYSE: NPF)

--$127,700,000 of VRDPs, series 1, due May 2041, with a liquidation preference of $100,000 per share;

Nuveen Premium Income Municipal Fund 2, Inc. (NYSE: NPM)

--$489,500,000 of VRDPs, series 1, due May 2041, with a liquidation preference of $100,000 per share;

Nuveen Investment Quality Municipal Fund, Inc. (NYSE: NQM)

--$211,800,000 of VRDPs, series 1, due May 2041, with a liquidation preference of $100,000 per share;

Nuveen Select Quality Municipal Fund, Inc. (NYSE: NQS)

--$252,500,000 of VRDPs, series 1, due May 2041, with a liquidation preference of $100,000 per share;

The 'F1+' short-term ratings reflect:

--The credit strength of Barclays Bank PLC (rated 'AA-/F1+', Rating Outlook Stable by Fitch) as liquidity provider, and its obligation to repurchase VRDPs following an unsuccessful remarketing upon optional or mandatory shareholder tender, as well as following mandatory purchase events;

--The integrity of the terms and legal structure of the liquidity purchase agreement;

--The sufficiency of asset coverage as calculated per the funds' Minimum VRDP Asset Coverage Tests and Effective Leverage Ratios;

--The parameters for repayment of the VRDPs by the funds should the shares be purchased and continue to be held by the liquidity provider for a continuous period of six months.

The 'AAA' long-term ratings reflect:

--Sufficient asset coverage provided to the VRDPs by the funds' managed assets as calculated per the funds' Minimum VRDP Asset Coverage Tests and Effective Leverage Ratios;

--The 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;

--Both the short- and long-term ratings are also based on the capabilities of Nuveen Fund Advisors, Inc. as investment adviser and its affiliated subadviser, Nuveen Asset Management, LLC.

The VRDPs are have a 30-year final mandatory redemption date and pay an adjustable dividend rate set through weekly remarketings by the remarketing agent Barclays Capital Inc. (or any subsequent replacement). The VRDPs have an unconditional demand feature allowing investors the right to tender the securities on a weekly basis, or upon occurrence of certain tender events, to the liquidity provider (Barclays Bank PLC or any subsequent replacement). Should a remarketing be unsuccessful, the dividend rate will reset to a maximum rate formula calculated by multiplying the greater of SIFMA Municipal Swap Index or LIBOR by an Applicable Percentage (based on the long-term ratings then assigned to the VRDPs) plus an Applicable Spread (based on the lapsed time of failed remarketings). The Bank of New York Mellon (rated 'AA-/F1+' by Fitch) serves as the tender and paying agent, and as such, will, tender and deliver non-clearing VRDPs from holders to the liquidity provider, and notify the holders of VRDPs of non-renewal and termination of the purchase agreement, among other duties. The remarketing agent will post the weekly rate result on Bloomberg.

The proceeds from the sale of the VRDPs are expected to be used to redeem in full the funds' outstanding Municipal Auction Rate Cumulative Preferred Shares (ARPS).

As of April 4, 2011, the funds had the following assets and pro forma leverage outstanding:

--NPF: managed assets of approximately $395 million and leverage of approximately $193 million, with an effective leverage ratio of 43%. Pro forma leverage consisted approximately of $127.7 million of VRDPs and $192.5 million of floating rate certificates of tender option bonds;

--NPM: managed assets of approximately $1,450 million and leverage of approximately $650 million, with an effective leverage ratio of 42%. Pro forma leverage consisted approximately of $489.5 million of VRDPs and $160.5 million of floating rate certificates of tender option bonds;

--NQM: managed assets of approximately $700 million and leverage of approximately $313 million, with an effective leverage ratio of 40%. Pro forma leverage consisted approximately of $211.8 million of VRDPs and $101.2 million of floating rate certificates of tender option bonds;

--NQS: managed assets of approximately $696 million and leverage of approximately $325 million, with an effective leverage ratio of 42%. Pro forma leverage consisted approximately of $252.5 million of VRDPs and $72.3 million of floating rate certificates of tender option bonds.

Each of the VRDPs is supported by a purchase agreement to ensure full and timely repayment of the liquidation preference amount plus any accumulated and unpaid dividends to holders upon occurrence of certain events. Pursuant to each of the agreements, Barclays Bank PLC unconditionally agrees to purchase all VRDPs tendered for sale that were not successfully remarketed on a revolving basis, or upon mandatory purchase events described in the transaction documents. The purchase of VRDPs pursuant to the purchase agreement unconditional and irrevocable, and as such, the short-term ratings assigned to the VRDPs are directly linked to the short-term creditworthiness of the associated liquidity provider.

The liquidity provider's obligation under the purchase agreement has an intitial term of 364 days. If the purchase agreement is not renewed and a replacement liquidity provider is not found 15 days prior to the agreement's expiration date, a mandatory purchase event will occur and the liquidity provider will be obligated to purchase all outstanding VRDPs on the business day prior to the expiration date of the purchase agreement. In addition, the VRDPs for a given fund are subject to mandatory tender if the short-term rating of the liquidity provider is downgraded below 'F2' by Fitch or equivalent, if the fund is unable to make a scheduled payment of dividends, or if the fund is unable to cure a breach to the Effective Leverage Ratio within 60 days, among others.

At the time of issuance, each fund's pro forma asset coverage ratio for the VRDPs, as calculated in accordance with the Investment Company Act of 1940, was in excess of 225%, which is the current minimum asset coverage threshold set by the terms of the liquidity agreement (Minimum VRDP Asset Coverage Test). Should the Minimum Asset Coverage Test decline below its threshold amount, the governing documents' mandatory redemption provisions would require the affected fund to reduce the leverage in a sufficient amount to restore coverage within approxamately 60 calendar days. The funds have also individually covenanted with the liquidity provider to maintain an Effective Leverage Ratio for both VRDPs and floating-rate certificates of tender option bonds lower than 45% (or 46% if the increase in the ratio is due exclusively to asset market value volatility). The funds will cause a breach of the Effective Leverage Ratio to be cured within 10 business days.

Fitch notes that funds' mandatory redemption provisions for the VRDPs also include asset coverage ratios, as calculated in accordance with the Fitch total and net overcollateralization tests per the 'AAA' rating guidelines outlined in Fitch's applicable criteria. However, because the funds are able to cure any failure of such tests by taking actions to remove or change the required level of asset coverage following a breach, as opposed to undertaking a mandatory redemption, Fitch did not view these tests as providing additional structural protections for the VRDPs beyond those outlined in the Minimum VRDP Asset Coverage Tests and Effective Leverage Ratios.

Fitch performed various stress tests on the funds to assess the strength of the structural protections available to the VRDPs compared to the rating stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where the funds' leverage and portfolio composition migrated to the outer limits of their operating and investment guidelines. For example, Fitch modified each fund's leverage amount and composition, in terms of tender option bond leverage versus VRDP 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 each 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 VRDPs 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 funds' permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms (as set forth under the Minimum Asset Coverage Test and Effective Leverage Ratio) as consistent with an 'AAA' rating.

Furthermore, the funds have the ability to assume economic leverage through derivative transactions which may not be captured by the funds' Minimum Asset Coverage Tests or Effective Leverage Ratios. 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 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 VRDPs.

For purposes of monitoring asset coverage, Fitch will deem VRDPs to be outstanding until shares are redeemed by the fund. Put another way, Fitch will continue to include as fund leverage any VRDPs that have failed their remarketing and are held by the liquidity provider. This is intended to reflect the fact that such issuance still remains an obligation of the fund. Each fund is expected to redeem VRDPs that have been purchased by the liquidity provider under its purchase obligation if such shares have been held by the liquidity provider for a continuous period of six months. During this period, the fund will instruct their custodian to segregate eligible portfolio assets into a sub-account as to ensure that at the conclusion of the six month period, the sub-account will accumulate assets with a market value equal to at least 110% of the liquidation preference of VRDPs held by the liquidity provider. Fitch expects to maintain long- and short-term ratings on VRDPs purchased by the liquidity provider during this period, at which point both ratings will address the funds' structural protections and available asset coverage as opposed to the purchase obligation of the liquidity provider.

The funds are diversified, closed-end management investment companies regulated by the Investment Company Act of 1940. The funds seek to provide current income exempt from regular federal income tax and to enhance portfolio value relative to the municipal bond market by investing in tax-exempt municipal securities that the investment adviser believes are underrated or undervalued or that represent municipal market sectors that are undervalued. Under normal circumstances, the funds expect to invest at least 80% in assets that are rated at least 'BBB' by Fitch or equivalent.

Nuveen Fund Advisors, Inc. is the funds' investment advisor, responsible for the fund's overall investment strategy and its implementation. Nuveen Asset Management, LLC is a wholly owned subsidiary of Nuveen and oversees the day-to-day operations of the fund. Nuveen 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.

The ratings, assigned to the VRDPs, may be sensitive to material changes in the leverage composition, credit quality of portfolio assets or market risk profile of the funds. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch. Given that the funds covenant to the Minimum Asset Coverage Test and Effective Leverage Ratio in their respective liquidity agreements, if the liquidity agreement changes such that the terms of these two tests are modified or are no longer required, Fitch would re-evaluate the structural protections of the VRDPs, which may have negative rating implications. Furthermore, the short-term ratings assigned to the VRDPs may be sensitive to changes in the financial condition of the liquidity provider. For example, absent other mitigants, a downgrade of the liquidity provider to 'F1' would result in a downgrade of the short-term rating of the VRDPs to 'F1'. A downgrade below 'F2', on the other hand, would not necessarily result in a downgrade of the short-term rating of the VRDPs, given the acceleration features in the transaction which would result in a mandatory tender of the VRDPs for purchase by the liquidity provider.

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 Investments.

Applicable Criteria and Related Research:

--'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;

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

--'Global Rating Criteria for Asset-Backed Commercial Paper' (Nov. 30, 2010).

Applicable Criteria and Related Research:

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 ]

Closed-End Fund Debt and Preferred Stock Rating Criteria

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

Global Rating Criteria for Asset-Backed Commercial Paper

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=577965 ]

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