Approximately $1.1 billion preferred shares issued to retire auction rate securities
New York, December 21, 2010 -- Moody's assigned Prime-1 short-term and Aaa long-term
ratings to the Nuveen Variable Rate Demand Preferred Shares ("VRDP")
issued by three closed-end municipal bond funds, including:
• Nuveen Insured California Premium Income Municipal Fund 2,
Inc. (NYSE: NCL) 740 Series 1 VRDP Shares, $74.0
million
Series 1 Variable Rate Demand Preferred Shares Preferred Stock,
Assigned Aaa/P-1
• Nuveen Insured Municipal Opportunity Fund, Inc. (NYSE:
NIO) 6,672 Series 1 VRDP Shares, $667.2 million
Series 1 Variable Rate Demand Preferred Shares Preferred Stock,
Assigned Aaa/P-1
• Nuveen Quality Income Municipal Fund, Inc. (NYSE:
NQU) 3,884 Series 1 VRDP Shares, $388.4 million
Series 1 Variable Rate Demand Preferred Shares Preferred Stock,
Assigned Aaa/P-1
RATING RATIONALE
The short-term ratings, which address Moody's expectation
of timely repayment of liquidation preference of the VRDP in the event
of an optional or mandatory tender, are based upon the VRDP liquidity
purchase agreement provided by JPMorgan Chase Bank, N.A.
for NQU and Citibank, N.A. for NIO and NCL,
the structure of each transaction and credit- worthiness of the
bank providing the liquidity purchase agreement.
Moody's long-term ratings assigned to the Variable Rate Demand
Preferred Shares, which address the funds' ability to honor
optional or mandatory redemptions as well as their ability to meet dividend
obligations, are based upon the funds' current Moody's
strong coverage ratios. In addition, the long-term
ratings factor in the Investment Company Act of 1940 (1940 Act) coverage
ratios that are all substantially in excess of the preferred share obligations,
adherence to conservative asset coverage maintenance provisions,
deleveraging procedures in the event of a coverage ratio breach as well
as the Nuveen's effective portfolio management practices.
Short-Term Ratings Assigned to VRDP Address Credit Quality of Liquidity
Provider and Unconditional Nature of the Liquidity Facility
The Prime-1 ratings reflect Moody's assessment that VRDP
holders will be able to tender their shares unconditionally to the liquidity
provider in a timely manner given the terms of the VRDP liquidity purchase
agreement provided by JPMorgan Chase Bank, N.A. (currently
rated Aaa1/P-1) for NQU and Citibank, N.A.
(currently rated A1/ P-1) for NIO and NCL. The liquidity
provider agrees to purchase the rated shares on any business day with
a 7-day tender notice for sale. As such, Moody's
short-term ratings associated with the VRDP are linked to the creditworthiness
of the liquidity provider and may change whenever the short-term
rating of the bank is changed. The liquidity agreement has no automatic
termination events or conditions precedent to funding, making it
an unconditional agreement to purchase unremarketed shares. The
Prime-1 ratings will expire upon the earlier of the termination
of the VRDP purchase agreement, December 21, 2012 (NQU) and
December 29, 2011 (NCL and NIO).
In addition, Moody's cites the inclusion of mandatory tender
events to address any unscheduled termination of the liquidity agreements.
The occurrence of these events would put in motion a notification process
whereby VRDP holders are apprised of a mandatory tender. Included
in the mandatory tender events are the: (i) downgrade of the liquidity
provider rating to Prime-3; (ii) failure of the fund to pay
scheduled dividends; (iii) breach of an effective leverage covenant
continued for 60-days (if declared a mandatory tender event by
the liquidity provider); (iv) a restructuring event affecting the
liquidity provide; (v) failure of the fund to remit fees to the liquidity
provider for services rendered (if declared a mandatory tender event by
the liquidity provider), (vi) changes to special rate periods,
and (vii) substitution of the liquidity provider. The liquidity
provider also has a mandatory purchase obligation with respect to all
outstanding VRDP shares upon termination of the liquidity agreement.
Once the VRDP shares are tendered to the liquidity provider, either
through an optional or a mandatory tender, or mandatory purchase,
the liquidity provider, which does not have recourse to the fund,
has no automatic termination events or "outs" which would
allow the liquidity provider not to fund. The liquidity provider
and any other holder of VRDP shares benefits from a heightened dividend
rate penalty mechanism that is designed to increase the possibility that
VRDP shares would be remarketed. A penalty rate mechanism linked
to a base rate plus applicable spread systematically increases over time.
The base rate is linked to the long term rating assigned to the VRDP shares
and is subject to a maximum of 15%.
VRDP shareholders will have the option to tender their VRDP shares for
remarketing and purchase on any business day not less than seven days
after delivery of a notice of tender to a tender and paying agent appointed
by the funds, with the consent of the liquidity provider,
at the purchase price. The remarketing agent will use its best
efforts to remarket any VRDP shares so tendered. In the event no
remarketing occurs on or before the relevant purchase date, or VRDP
shares remain unsold pursuant to an attempted remarketing, the tender
and paying agent will deliver all unsold VRDP shares to the liquidity
provider for purchase on such purchase date.
Proceeds from the VRDP Shares issuance will be used to defease and redeem
in full each fund's outstanding Municipal Auction Rate Cumulative
Preferred Shares (MuniPreferred shares). Pending their redemption
following the required notice period, the Aaa ratings assigned to
each fund's MuniPreferred shares are affirmed.
Leverage levels within each of the three funds are expected to remain
at or near current levels. Calculated on a pro-forma basis,
these range between 27% to 33% of managed assets and 40%
to 41%, including exposures to tender option bonds.
Long Term Ratings Assigned to VRDP Aligned with Overcollateralization
of Preferred Shares
NQU, NCL and NIO, with total net assets in the amount of $1.2
billion, $165 million and $2.2 billion,
respectively, each seeks current income exempt from regular Federal
income tax or both federal income tax and California personal income taxes.
Moody's Aaa long-term ratings assigned to the VRDP reflect
each fund's modest leverage, Moody's strong coverage
ratios combined with asset maintenance procedures that require funds to
delever in the event the discounted values of portfolio assets decline
below the preferred shares par amounts. This is in addition to
the limitations and asset coverage testing requirements superimposed by
the Investment Company Act of 1940 which limit leverage in the form of
preferred stock to an asset coverage ratio of 200%. These
guideposts work in tandem to reinforce coverage sufficiency for the VRDP
in connection with the ratings.
In addition, the liquidity profile of each portfolio is consistent
with the collateral discount factors that seek to simulate price declines
in the event of a forced liquidation of assets to meet a mandatory redemption.
In this connection, Moody's historical asset coverage levels
for each fund, since their inception, have not declined below
the Moody's basic maintenance amount threshold of 100% for
Aaa rated instruments with exposure periods of seven weeks. The
credit quality of portfolio assets, with over 94% of portfolio
assets invested in investment grade securities, and strategies to
diversify by issuer and sector, also support the strong asset coverage
levels.
At the same time, 1940 Act asset coverage levels in excess of 200%
have consistently been maintained by each of the funds since the issuance
of the preferred stock. Given these levels of overcollateralization
and the types of assets owned by the funds, the Aaa ratings reflect
Moody's view that the funds are expected to pay full liquidation
preference amounts upon redemption either due to a mandatory or voluntary
redemption by each of the funds, including the distribution of fund
assets upon liquidation. Moody's long-term ratings
also address full and timely payment of dividends, subject to rate
periods that could change from time-to-time due to special-rate
period designations and maximum rate spread under certain circumstances.
That said, Moody's long-term ratings may change if
asset coverage levels decline or in the event that future capital structure
changes that restrict a fund's abilities to meet preferred shares
optional or mandatory redemptions.
At the time of their issuance, asset coverage levels for each of
the funds were, as follows:
Moody's (>100%) 1940 Act (>200%)
Nuveen Quality Income Municipal Fund, Inc. (NQU) 146%
285%
Nuveen Insured California Premium Income Municipal Fund 2, Inc.
(NCL) 144% 323%
Nuveen Insured Municipal Opportunity Fund, Inc. (NIO) 142%
293%
Nuveen Asset Management is the investment adviser for the funds,
responsible for determining each fund's overall investment strategy.
Nuveen Investments and its affiliates had approximately $163 billion
of assets under management as of September 30, 2010, of which
approximately $76.5 billion was in municipal securities.
The ratings assigned to the VRDP are not recommendations to purchase,
hold or sell those shares or their suitability for a particular investor.
Also, Moody's ratings applicable to the preferred stock addresses
the full-liquidation-preference amount paid upon redemption,
either due to a mandatory or voluntary redemption, including the
distribution of the Fund assets upon liquidation. The ratings also
address the full and timely payment of dividends, subject to rate
periods that could change from time to time due to special-rate
period designations and appropriate notices/conventions.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purpose of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Henry Shilling
Senior Vice President
Managed Funds Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Daniel Serrao
Senior Vice President
Managed Funds Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Assigns Aaa/P-1 Ratings to Nuveen Variable Rate Demand Preferred Shares Issued by Three Closed-End Municipal Bond Funds
