Fitch Ratings affirms the ratings of 'AAA/F1+' assigned to certain series of variable rate demand preferred shares (VRDP shares) issued by four Nuveen municipal closed-end funds (CEF). The funds are managed by Nuveen Fund Advisors, LLC (NFA) and subadvised by Nuveen Asset Management, LLC (NAM).
The affirmations are in connection with the substitution of the liquidity support providers to the VRDP shares, from Deutsche Bank AG ('A+/F1+') to Deutsche Bank Trust Company Americas (DBTCA, 'A+/F1+'), effective March 29, 2013. The terms of the new purchase and fee agreements are substantially the same as the terms of the agreements being substituted.
The long-term ratings of the VRDP shares are not affected by the replacement of the liquidity providers, and remain unchanged. The short-term ratings of the VRDP Shares reflect the short-term ratings of the respective liquidity providers to the VRDP shares.
The rating affirmations are as follows:
Nuveen Municipal Market Opportunity Fund, Inc. (NMO):
--$350,900,000 of VRDP shares, series 1, due March 1, 2040, affirmed at 'AAA/F1+'.
Nuveen New York Performance Plus Municipal Fund, Inc. (NNP):
--$89,000,000 of VRDP Shares, Series 1, due March 1, 2040, affirmed at 'AAA/F1+'.
Nuveen California Municipal Market Opportunity Fund, Inc. (NCO):
--$49,800,000 of VRDP Shares, Series 1, due March 1, 2040, affirmed at 'AAA/F1+'.
Nuveen California AMT-Free Municipal Income Fund (NKX):
--$42,700,000 of VRDP Shares, Series 3, due March 1, 2040, affirmed at 'AAA/F1+'.
If the short-term rating of Deutsche Bank AG changes before March 29, 2013, the short-term ratings of the VRDP shares will change accordingly. Starting March 29, 2013, the short-term ratings of the VRDP shares will reflect the short-term rating of DBTCA, as the liquidity provider.
NKX, in addition to series 3 of VRDP shares referenced above, has three additional series of VRDP shares outstanding, series 2, 4, and 5. These three series are not reviewed at this time, as the liquidity providers to these series are not being replaced. The ratings of these series are unchanged.
KEY RATING DRIVERS
The short-term ratings primarily reflect:
--The credit strength of the VRDP shares' liquidity providers.
--The terms and conditions of the VRDP shares purchase agreements (purchase agreements).
The 'AAA' long-term ratings primarily reflect:
--Sufficient asset coverage provided to the VRDP shares as calculated per the funds' over-collateralization (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 funds' 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 purchase agreements 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 agreements require the applicable liquidity provider to purchase all VRDP shares of the applicable series tendered for sale that were not successfully remarketed. The applicable liquidity provider must also purchase all outstanding VRDP shares of the applicable series if the funds have not obtained alternate purchase agreements prior to the termination of the purchase agreements being replaced or following the downgrade of the applicable liquidity provider's rating below 'F2' (or equivalent).
The purchase of VRDP shares pursuant to the purchase agreements 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 associated liquidity providers.
The liquidity providers' obligations under the purchase agreements have scheduled termination dates. Fitch expects the purchase agreements to be subsequently extended, with terms that are substantially similar to the current purchase agreements.
The funds' asset coverage ratios for the VRDP shares, as calculated in accordance with the Investment Company Act of 1940, were in excess of the minimum asset coverage threshold of 225% currently set by the terms of the fee agreements between the funds and the liquidity providers (Minimum VRDP Asset Coverage test).
The funds have also covenanted with the liquidity providers to maintain Effective Leverage Ratios 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 funds' Effective Leverage Ratios are currently below 45%.
In the event of asset coverage declines, the funds' governing documents will require the funds to reduce leverage in order to restore compliance with the OC test(s) breaching the required threshold(s).
Fitch performed various stress tests on the funds 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 funds' leverage and portfolio composition migrated to the outer limits of the funds' operating and investment guidelines.
Only under remote circumstances, such as increasing the funds' issuer concentration, while simultaneously migrating the portfolios 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 a 'AA' rating level.
Given the highly unlikely nature of the stress scenarios, and the minimal rating impact, Fitch views the funds' permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' rating.
The funds are closed-end management investment companies regulated by the Investment Company Act of 1940. The funds currently invest primarily in investment grade quality municipal bonds.
NFA, a subsidiary of Nuveen Investments, is the funds' investment advisor, responsible for the funds' overall investment strategies and their implementation. NAM is a subsidiary of NFA and oversees the day-to-day operations of the funds. 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 funds, 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 Asset Coverage test and Effective Leverage Ratio are set in the fee agreements relating to the purchase 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 providers. A downgrade of the liquidity providers 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 VRDP shares, given the acceleration features in the transactions that would result in a mandatory tender of the VRDPs for purchase by the liquidity providers.
The funds have the ability to assume economic leverage through derivative transactions which may not be captured by the funds' Minimum VRDP Asset Coverage test or Effective Leverage Ratio. 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 objectives 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 Closed-End Funds Diversify Funding and Moderate Rollover Risk' (Oct. 11, 2012);
--'Municipal CEFs Refinance Pre-Crisis ARPS' (May 3, 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 Closed-End Funds Diversify Funding and Moderate Rollover Risk
Municipal CEFs Refinance Pre-Crisis ARPS