Fitch Ratings affirms the 'AAA' long-term ratings and 'F1' short-term ratings assigned to variable rate demand preferred shares (VRDP shares) issued by Nuveen California Performance Plus Municipal Fund, Inc. (NCP), a municipal closed-end fund managed by Nuveen Fund Advisors, LLC (NFA) and subadvised by Nuveen Asset Management, LLC (NAM) as follows:
--$91,000,000 of VRDP shares, series 1, due Dec. 1, 2040, affirmed at 'AAA/F1'.
The affirmation follows the issuance of additional $10,000,000 of the currently outstanding series 1 VRDP shares. The additional VRDP shares have identical terms and belong to the same series as the original VRDP shares. Following the issuance series 1 VRDP shares now total $91,000,000.
KEY RATING DRIVERS
The 'F1' short-term rating primarily reflects:
--The credit strength of Citibank, N.A. (rated 'A/F1' by Fitch), as liquidity provider;
--The terms and conditions of the VRDP shares purchase agreement (purchase agreement).
The 'AAA' long-term rating primarily reflects:
--Sufficient asset coverage provided to the VRDP shares as calculated per the fund's overcollateralization (OC) tests;
--The 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;
--Both the short- and long-term ratings also reflect the capabilities of NFA as investment advisor and NAM as subadvisor.
TENDER AND REMARKETING
The VRDP shares benefit from a feature giving investors the right to tender the securities with a seven-day notice for remarketing. The VRDP shares are also subject to a mandatory tender for remarketing upon the occurrence of certain events, such as non-payment of dividends by the fund, among others. VRDP shares that are unsuccessfully remarketed are purchased by the liquidity provider.
The VRDP shares have a 30-year mandatory redemption date and pay an adjustable dividend rate set weekly by the remarketing agent. Should a remarketing be unsuccessful, the dividend rate will reset to a maximum rate as defined in the governing documents.
The VRDP shares are 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. The agreement requires the liquidity provider to purchase all VRDP shares tendered for sale that were not successfully remarketed. The liquidity provider must also purchase all outstanding VRDP shares if the fund has not obtained an alternate purchase agreement prior to the termination of the purchase agreement being replaced or following the downgrade of the liquidity provider's rating below 'F2' (or equivalent).
The purchase of VRDP shares pursuant to the purchase agreement is unconditional and irrevocable, and as such the short-term ratings assigned to the VRDP shares are directly linked to the short-term creditworthiness of the liquidity provider.
The liquidity provider's obligations under the purchase agreement have scheduled termination dates. Fitch expects the purchase agreement to be subsequently extended, with terms that are substantially similar to the current purchase agreement.
The fund's asset coverage ratio for the VRDP shares, as calculated in accordance with the Investment Company Act of 1940, was in excess of the minimum asset coverage threshold of 225% currently set by the terms of the fee agreement between the fund and the liquidity provider (Minimum VRDP Asset Coverage test).
The fund has also covenanted with the liquidity provider to maintain the Effective Leverage Ratio for both VRDP shares and floating-rate certificates of tender option bonds below 45% (or 46% if the increase in the ratio is due exclusively to asset market value volatility). The fund's Effective Leverage Ratio is currently below 45%.
In the event of asset coverage declines, the fund's governing documents will require the fund to reduce leverage in order to restore compliance with the asset coverage test breaching the required threshold.
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 the fund's issuer concentration, while simultaneously migrating the portfolio to a mix of 80% long-term 'BBB' 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 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.
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 and California income taxes and to enhance portfolio value. The fund currently invests primarily in investment grade quality municipal bonds.
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 $219 billion of assets under management as of Dec. 31, 2012.
The ratings assigned to the VRDP shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the fund, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
Certain terms of the Minimum VRDP Shares Asset Coverage Test and Effective Leverage Ratio are set in the liquidity and fee agreements, which are renewed on a periodic basis. Changes to these terms that weaken the tests may have negative rating implications.
The short-term ratings assigned to the VRDP shares may also be sensitive to changes in the financial condition of the liquidity provider. A downgrade of the liquidity provider to 'F2' would result in a downgrade of the short-term ratings of the VRDP shares to 'F2,' absent other mitigants. 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 that would result in a mandatory tender of the VRDPs for purchase by the liquidity provider.
The fund has the ability to assume economic leverage through derivative transactions which may not be captured by the fund's Minimum VRDP Asset Coverage Test or Effective Leverage Ratio. 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. Material derivative exposures in the future could have potential negative rating implications if it adversely affects asset coverage available to rated VRDP shares.
For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end fund, 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 ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
The sources of information used to assess this rating were the public domain and Nuveen Fund Advisors.
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Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 15, 2012);
--'Global Rating Criteria for Asset-Backed Commercial Paper' (Nov. 8, 2012);
--'2013 Outlook: Closed-End Funds' (Dec. 14, 2012);
--'Municipal CEF Leverage Continues to Evolve' (Nov. 27, 2012).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
Global Rating Criteria for Asset-Backed Commercial Paper
2013 Outlook: Closed-End Funds
Municipal CEF Leverage Continues to Evolve