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Rating Action:

Moody's assigns Aa1/P-1 and Aa1/P-2 ratings to two series of preferred shares issued by Nuveen AMT-Free Municipal Income Fund post merger

Global Credit Research - 03 May 2013

New York, May 03, 2013 -- Moody's Investors Service ("Moody's") has assigned Aa1 long-term ratings and P-1 and P-2 short-term ratings to two series of Variable Rate Demand Preferred (VRDP) shares to be issued by the Nuveen AMT-Free Municipal Income Fund (Ticker: NEA). The preferred shares will be issued in connection with the merger of two municipal national closed-end funds into NEA. Pursuant to the terms of the reorganization, NEA will issue the new preferred shares in exchange for outstanding preferred shares of the two acquired funds.

Deutsche Bank Trust Company Americas (A2/P-1, stable) and Citibank N.A. (A3/P-2, stable) have entered into VRDP Purchase Agreements to provide liquidity support to the VRDP shares. The VRDP shares' short-term ratings are based on the liquidity support from the VRDP Purchase Agreement provider and are therefore linked to the short-term ratings of Deutsche Bank Trust Company Americas and Citibank N.A. The Aa1 long-term ratings of the VRDP shares are based on the fund's pro-forma adjusted leverage, portfolio profile, and fixed charge coverage as calculated by Moody's, combined with an assessment of the VRDP shares' relative priority of claim.

The newly assigned ratings for the VRDP series are listed below, along with their corresponding VRDP shares:

2,190 Series 1 Variable Rate Demand Preferred Shares (VRDP) with a liquidation preference of $100,000 per share, for a total of $219.0 million, mandatory redemption June 1st, 2040; Deutsche Bank Trust Company Americas, Aa1/P-1

1,309 Series 2 Variable Rate Demand Preferred Shares (VRDP) with a liquidation preference of $100,000 per share, for a total of $130.9 million, mandatory redemption December 1st, 2040; Citibank N.A., Aa1/P-2

Moody's has also affirmed the Aa1 ratings assigned to the MuniFund Term Preferred (MTP) Shares and Variable MuniFund Term Preferred (VMTP) Shares currently outstanding in the acquiring fund. These include:

8,300,000 MTP Shares 2.85% Series 2015 with a per share liquidation preference of $10 per share and a total liquidation value of $83.0 million. Term redemption date February 1, 2015.

676 VMTP Shares Series 2014 with a per share liquidation preference of $100,000 per share and a total liquidation value $67.6 million. Term redemption date August 1, 2014.

RATINGS RATIONALE

Short-Term Ratings

Summary

The short-term ratings are based upon the VRDP Purchase Agreements provided by Deutsche Bank Trust Company Americas and Citibank N.A. respectively, which ensure that VRDP holders will be able to tender their shares unconditionally based on each bank's support as liquidity provider.

The VRDP shares issued by NEA were exchanged for previously outstanding VRDP shares with the Nuveen Premium Income Municipal Opportunity Fund (Ticker: NPX) and Nuveen Premier Municipal Opportunity Fund, Inc. (Ticker: NIF). Upon the completion of the exchange, the old VRDP shares will be terminated and their ratings withdrawn.

Credit Discussion

The liquidity providers agree to purchase any rated VRDP shares of the applicable series that have been tendered for and not successfully remarketed on the seventh day after notice of tender. The VRDP Purchase Agreements have no automatic termination events or conditions precedent to funding, making them unconditional agreements to purchase un-remarketed shares. The Prime-1 (Series 1) and Prime-2 (Series 2) ratings of the VRDP shares are fully linked to the rating of the liquidity providers (Deutsche Bank Trust Company Americas and Citibank N.A., respectively) and are dependent on the validity of the VRDP Purchase Agreements which are scheduled to terminate as of August 29, 2013 and December 12, 2013, respectively, subject to further extension thereafter as provided in the agreement.

VRDP shareholders have the option to tender their VRDP shares for remarketing and purchase seven business days after providing notice to the tender and paying agent. Additionally, VRDP shares are subject to mandatory tender for remarketing upon the occurrence of mandatory tender events, which include: (a) failure of the fund to pay scheduled dividends; (b) downgrade of the liquidity provider rating to a certain level; (c) failure of the fund to remit fees to the liquidity provider for services rendered (if declared a mandatory tender event by the liquidity provider); (d) occurrence of an extraordinary corporate event; (e) substitution of the liquidity provider; (f) designation of a special rate period, and (g) breach of an effective leverage covenant continued for 60-days (if declared a mandatory tender event by the liquidity provider). If the remarketing agent is unable to sell any or all of the tendered shares submitted by VRDP shareholders pursuant to either a mandatory tender event or an optional tender, the tender and paying agent will deliver all unsold VRDP shares to the Liquidity Provider for the applicable series for purchase on such purchase date.

In addition to optional tenders and mandatory tenders, the VRDP Purchase Agreement includes mandatory purchase events to address "roll over" risk of its stated maturity and any unscheduled termination of the VRDP Purchase Agreement.

Each Liquidity Provider has a mandatory purchase obligation with respect to all outstanding VRDP shares of the applicable series upon termination of the VRDP Purchase Agreement and to the extent that an alternate VRDP Purchase Agreement is not put in place. The occurrence of any mandatory purchase events would begin a process whereby all VRDP holders of the applicable series would be notified of a mandatory purchase event and their VRDP shares subject to purchase by the liquidity provider.

Long Term Ratings

The long-term Aa1 rating actions, affirmed to the MTP and VMTP shares, and assigned to the VRDP shares, are based on the following key rating factors derived from the pro-forma NEA portfolio, as of March 31, 2013, with gross assets of about $1.872 billion and 36% leverage:

Adjusted Leverage

The fund's pro-forma risk adjusted asset coverage ratio, at 169% of the Aaa standard for that metric, is very strong and the risk of an Investment Company of 1940 Act (1940 Act) breach is low based on the portfolio's historic volatility and leverage. As calculated by Moody's, the fund's equity cushion (the difference of the 1940 Act maximum leverage threshold of 50% and actual leverage) is sufficient to absorb 4.3 times the standard deviation of the fund's asset volatility over the past five years. This result is consistent with a score of Aaa for this metric.

Portfolio Profile

The funds' portfolio profiles, which capture the credit quality and liquidity of the fund's holdings, reflect the strong credit quality of municipal holdings among many states that are invested across various general obligations, tax obligations, revenue bonds, pre-refunded bonds as well as other security types. The fund has a weighted average credit quality of A1.

Fixed Charge Coverage

The long-term ratings of the VRDP shares are further supported by 9.2x fixed charge coverage ratios, calculated on a trailing one year basis, evidencing the strong capacity on the part of NEA to meet periodic dividend payments from recurring earnings. The fund's coverage ratios are consistent with a score of Aa for this metric.

Relative Priority of Claim

In addition to assessing the key rating factors described above, Moody's considers the priority of claim of a fund's specific security types and any other qualitative factors relevant to the fund's credit profile. In the case of preferred securities, which is the instrument class associated with these ratings, a one-notch downward adjustment from the rating suggested by the key factors is made to reflect the weaker position of investors holding preferred stock relative to those holding senior unsecured debt obligations.

The methodologies used in this rating were "Moody's Methodology for Rating Securities Issued by U.S. Closed-End Funds" published in May 2012, and "Applying Global Joint Default Analysis to Letter of Credit Backed Transactions in the U.S. Public Finance Sector" published in October 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Michael DeCavalcante, CFA, FRM
Analyst
Managed Investments Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Yaron Ernst
MD - Managed Investments
Managed Investments Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Aa1/P-1 and Aa1/P-2 ratings to two series of preferred shares issued by Nuveen AMT-Free Municipal Income Fund post merger
No Related Data.

 

© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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