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19 Aug 2008
Moody's Assigns P-1/Aaa Ratings to Nuveen Variable Rate Demand Preferred Shares Issued by Four Closed-End Municipal Bond Funds
Approximately $500 million in VRDP Shares issued to retire auction rate securities
New York, August 19, 2008 -- Moody's assigned Prime-1 short-term and Aaa long-term
ratings to the Nuveen Variable Rate Demand Preferred Shares ("VRDP")
issued by four closed-end municipal bond funds, including:
Nuveen Dividend Advantage Municipal Fund 2 (NXZ) 1,960 shares,
Nuveen Insured N.Y. Dividend Advantage Municipal
Fund (NKO) 500 shares, $50 million
Nuveen Insured California Tax-Free Advantage Muni Fund (NKX)
355 shares, $35.5 million
Nuveen Insured Premium Income Municipal Fund 2 (NPX) 2,190
shares, $219 million
The short-term ratings, which address Moody's expectation
of timely repayment of liquidation preference of the VRDP Shares in the
event of an optional or mandatory tender, are based upon the VRDP
Shares liquidity purchase agreement provided by Deutsche Bank AG,
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 as well as the Investment Company Act of 1940 (1940
Act) coverage ratios that are all substantially in excess of the preferred
share obligations, the organization of the funds and portfolio investment
Short-Term Ratings Assigned to VRDP Shares Address Credit Quality
of Liquidity Provider and Unconditional Nature of the Liquidity Facility
The Prime-1 ratings reflect Moody's assessment that VRDP
Shares holders will be able to tender their shares unconditionally to
the liquidity provider in a timely manner given the terms of the VRDP
Shares liquidity purchase agreement provided by Deutsche Bank AG (currently
rated Aa1/ P-1), acting through its New York Branch.
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 Shares
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 rating will expire upon
the earlier of the termination of the VRDP Shares purchase agreement or
August 8, 2010.
In addition, Moody's cites the inclusion of mandatory tender
events to address "roll over" risk and any unscheduled termination
of the liquidity agreement. The occurrence of these events would
put in motion a notification process whereby VRDP Shares holders are apprised
of a mandatory tender. Included in the mandatory tender events
are, the following: (i) downgrade of the liquidity provider's
rating below one of the two highest rating categories, (ii) failure
of the fund to pay scheduled dividends, (iii) termination of the
VRDP Shares purchase agreement prior to or at the scheduled termination
date, (iv) an extraordinary corporate event affecting the liquidity
provider, (v) failure on the part of the fund to remit fees to the
liquidity provider for services rendered, (vi) changes to special
rate periods, and (vii) substitution of the liquidity provider.
Once tendered, either through an optional or a mandatory tender,
the liquidity provider, which does not have recourse to the funds,
is obligated to purchase the VRDP Shares. Such obligation is unconditional
and irrevocable. In the event the liquidity provider purchases
VRDP Shares, the liquidity provider is entitled to earn dividends
stepped-up to the full maximum rate, calculated as a spread
to a bank market base rate. This step-up adds compensation
to the liquidity provider and increases the likelihood that the VRDP Shares
will be remarketed.
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 issuance will be used to retire a portion of existing
auction rate shares outstanding within each fund, known also as
"MuniPreferreds." Leverage levels within each of the
four funds is expected to remain at or near 35% of managed assets
after the existing preferreds are refinanced.
Long Term Ratings Assigned to VRDP Shares Aligned with Overcollateralization
of Preferred Shares
Moody's Aaa long-term ratings assigned to the VRDP Shares
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 or applicable redemption
price plus accumulated and projected dividend payments and certain fund
expenses. This is in addition to the limitations and asset coverage
testing requirements superimposed by the Investment Company Act of 1940
that 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 Shares 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 generally not declined
below 1.4 times the Moody's basic maintenance amount.
The credit quality of portfolio assets and investment strategies to diversify
by issuer and sector also support asset coverage levels.
At the same time, 1940 Act asset coverage ratios above 270%
have consistently been maintained by each of the funds since their original
issuance of 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 plus dividends and certain fund expenses upon redemption,
either due to a mandatory or voluntary redemption, 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 rates, under
That said, Moody's long-term ratings may be downgraded
if asset coverage levels decline or in the event future changes to any
of the funds' capital structures are deemed to restrict a fund's
ability to meet preferred share optional or mandatory redemptions.
At the time of their issuance, asset coverage levels for each of
the funds were, as follows:
Moody's (>1.0x) 1940 Act (>2.0 x)
Nuveen Dividend Advantage Municipal Fund 2 (NXZ) 1.63 2.95
Nuveen Insured N.Y. Dividend Advantage Municipal Fund (NKO)
Nuveen Insured California Tax-Free Advantage Muni Fund (NKX) 1.60
Nuveen Insured Premium Income Municipal Fund 2 (NPX) 1.62 2.82
Nuveen Asset Management, a wholly-owned subsidiary of Nuveen
Investments, is the funds' investment adviser, and is
responsible for investing the funds' assets. Nuveen Investments
and its affiliates, including NWS, Tradewinds, Symphony,
Santa Barbara and Rittenhouse, had approximately $158.1
billion of assets under management as of May 31, 2008, of
which $64.1 billion was invested in municipal securities.
The ratings assigned to the VRDP Shares 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 address
the full-liquidation-preference amount paid upon redemption,
either due to a mandatory or voluntary redemption, including the
distribution of 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.
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Senior Vice President
Structured Finance Group
Moody's Investors Service
No Related Data.
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