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Fitch Rates VMTP Shares Issued by Nuveen Arizona Premium Income Muni Fund 'AAA'

^{Published on 2011-07-29 12:06:15 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings assigns an 'AAA' long-term rating to variable rate MuniFund term preferred shares (VMTP shares) issued by Nuveen Arizona Premium Income Municipal Fund, Inc. (NYSE: NAZ), a municipal closed-end fund managed by Nuveen Fund Advisors, Inc (NFA) and subadvised by Nuveen Asset Management, LLC (NAM):

--$28,000,000 of VMTP shares, series 2014, mandatory redemption date of Aug 1, 2014, with a liquidation preference of $100,000 per share.

The fund's auction rate preferred stock has been redeemed in full through the issuance of the VMTP shares.

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. Fitch's rating on the VMTP shares only speaks to the credit risk of the security and not to potential liquidity in the secondary market.

LEVERAGE
The fund had managed assets of approximately $89.2 million as of July 8, 2011. Following the issuance of the VMTP shares, the fund will have total leverage of approximately $30.1 million and an effective leverage ratio of 34%. Pro forma leverage consists of $28 million of VMTP shares and $2.1 million of floating rate certificates of tender option bonds.

ASSET COVERAGE
The fund's pro forma asset coverage ratio for total outstanding preferred shares, as calculated in accordance with the Investment Company Act of 1940, is approximately 319%, which is in excess of the minimum asset coverage of 225% required by the fund's governing documents (Preferred Asset Coverage Test).

The fund's pro forma effective leverage ratio for both preferred shares and floating-rate certificates of tender option bonds was 34%, 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 require the fund to reduce 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 VMTP 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.

Under the stress tests, asset coverage available to the VMTP shares fell below the 'AAA' threshold and instead passed at an 'AA' rating level only under remote circumstances; for example, 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.

Given the highly unlikely nature of the stress scenarios, and the 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
The fund is a closed-end management investment company regulated by the Investment Company Act of 1940. The fund seeks to provide current income exempt from regular federal, Arizona individual income taxes and to enhance portfolio value.

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

RATINGS 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 Nuveen Fund Advisors.

Applicable Criteria and Related Research:
--'Closed-End Fund Debt and Preferred Stock Rating Criteria', (Aug. 17, 2009);
--'Tax-Exempt CEFs Change Leverage (June 17, 2011);
--'Tax-Exempt Closed-End Fund Weather Price Declines' (Feb. 2, 2011);
--'Closed-End Fund: Evolving Use of Leverage and Derivatives' (Sept. 27, 2010);
--'Closed-End Fund: Redemptions Provide Some Liquidity to Illiquid ARPS Market', (Aug. 31, 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 ]
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 ]

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