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Rating Action:

Moody's Assigns P-1/Aaa Ratings to Nuveen Variable Rate Demand Preferred Shares Issued by Four Closed-End Municipal Bond Funds

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, $196 million

• 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 practices.

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 certain circumstances.

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) 1.50 2.90

Nuveen Insured California Tax-Free Advantage Muni Fund (NKX) 1.60 2.87

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.

New York
Martin Duffy
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Henry Shilling
Senior Vice President
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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