N@N

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

^{Published on 2011-07-15 13:45:29 - Market Wire}
 

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

--$87,900,000 of Variable Rate MuniFund Term Preferred Shares (VMTP Shares), series 2014, with a liquidation preference of $100,000 per share, due Aug. 1, 2014.

KEY RATING DRIVERS:

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 NFA as investment advisor and NAM as sub-advisor.

LEVERAGE:

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

As of June 30, 2011, the fund's pro forma leverage was approximately $99.5 million, or 38% of the total assets of $262.2 million. Pro forma leverage consisted of $87.9 million of series 2014 VMTP Shares and $11.6 million of floating-rate certificates of tender option bonds.

ASSET COVERAGE:

As of June 30, 2011, 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 293%, 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 38%, 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).

STRESS TESTS:

Fitch performed various stress tests on the fund to assess the strength of the structural protections available to the VRDP 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 outer limits of its operating and investment guidelines.

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 VRDP 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 consistent with an 'AAA' rating.

FUND PROFILE:

Nuveen Michigan Quality Income Municipal Fund, Inc. is a diversified, closed-end management investment company that commenced investment operations in 1991. The fund's investment objectives include providing current income exempt from regular federal and Michigan income tax.

The fund pursues its objectives, under normal market conditions, by investing at least 80% of managed assets in such tax-exempt municipal securities. Furthermore, the fund invests at least 80% of managed assets in investment grade quality securities, at the time of purchase, or unrated securities judged to be of comparable quality by NAM. 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.

THE ADVISOR:

NFA is the fund's investment advisor, responsible for the fund's overall investment strategy and its implementation. NAM is a wholly owned subsidiary of NFA and oversees the day-to-day operations of the fund. NFA is a subsidiary of Nuveen Investments. Founded in 1898, Nuveen Investments and its affiliates had approximately $212 billion of assets under management as of April 30, 2011.

RATING SENSITIVITY:

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.

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 NFA.

Applicable Criteria and Related Research:

--'Tax-Exempt CEFs Change Leverage', (June 17, 2011);

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

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

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

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

Applicable Criteria and Related Research:

Tax-Exempt CEFs Change Leverage (ARPS Balances Reduced; New Securities Provide Flexibility)

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637110 ]

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: 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 Fund Debt and Preferred Stock Rating Criteria

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

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.