Fitch Rates & Affirms Preferred Shares of Nuveen Michigan Quality Income Muni Fund on Merger
Fitch Ratings assigns 'AAA' long-term ratings to one series of MuniFund Term Preferred Shares (MTP shares) and one series of Variable Rate MuniFund Term Preferred Shares (VMTP shares) issued by Nuveen Michigan Quality Income Municipal Fund (NUM) in connection with the fund reorganization described below. Fitch also affirms the 'AAA' rating assigned to one existing series of VMTP shares of NUM in connection with the transactions described below. NUM is a municipal closed-end fund (CEF) managed by Nuveen Fund Advisors, LLC. (NFA) and subadvised by Nuveen Asset Management, LLC (NAM).
Fitch takes the following rating actions:
--$87,900,000 of VMTP Shares, Series 2014, due Aug. 1, 2014, affirmed at 'AAA';
--$16,313,000 of MTP Shares, 2.30% Series 2015, due Dec. 1, 2015, rated 'AAA';
--$53,900,000 of VMTP Shares, Series 2014 #1, due Aug. 1, 2014, rated 'AAA'.
As approved by common and preferred shareholders of all three funds, NUM acquired substantially all the assets and liabilities of Nuveen Michigan Dividend Advantage Municipal Fund (NZW) and Nuveen Michigan Premium Income Municipal Fund, Inc. (NMP) (the acquired funds).
Upon the closing of the reorganization, holders of MTP shares of NZW received, in exchange for each MTP share held immediately prior to the reorganization, one MTP share of a new series of NUM (the acquiring fund) having substantially identical terms. Fitch rated the old series of MTP shares of NZW 'AAA' and now marks the series as Paid in Full.
Also, upon the closing of the reorganization, holders of VMTP shares of NMP received, in exchange for each VMTP share held immediately prior to the reorganization, one VMTP share of a new series of NUM (the acquiring fund) having substantially identical terms. Fitch rated the old series of VMTP shares of NMP 'AAA' and now marks the series as Paid in Full.
Immediately prior to the reorganization, NUM will change its name from Nuveen Michigan Quality Income Municipal Fund, Inc. to Nuveen Michigan Quality Income Municipal Fund. NUM will also change its domicile from a Minnesota corporation to a Massachusetts business trust.
KEY RATING DRIVERS
The 'AAA' long-term ratings primarily reflect:
--Sufficient asset coverage provided to the VMTP shares and MTP shares as calculated per the fund's overcollateralization (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 fund's operations;
--The capabilities of NFA as investment advisor and NAM as subadvisor.
As of Nov. 30, 2012, the fund's pro forma asset coverage ratio for total outstanding preferred shares, as calculated in accordance with the Investment Company Act of 1940, was in excess of the minimum asset coverage of 225% required by the fund's governing documents (Preferred Shares Asset Coverage Test).
As of the same date, the fund's pro forma effective leverage ratio was below the 50% and 45% maximum leverage ratio allowed by the fund's governing documents for the MTP shares and VMTP shares, respectively (Effective Leverage Test).
In the event of asset coverage declines, the fund's governing documents will require the fund to reduce leverage in order to restore compliance with the test(s) breaching the required threshold(s).
Fitch performed various stress tests on the fund to assess the strength of the structural protections available to the VMTP shares and MTP 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 fund's leverage and portfolio composition migrated to the outer limits of the fund's operating and investment guidelines.
Only under remote circumstances, such as increasing the fund's issuer concentration, while simultaneously migrating the portfolio to a mix of 80% long-term 'BBB' bonds and 20% high yield bonds, did the asset coverage available to the VMTP shares and MTP shares fall below the 'AAA' threshold, and instead passed at an 'AA' rating level.
Given the highly unlikely nature of the stress scenarios, and the minimal rating impact, Fitch views the fund's permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' rating.
The fund is a closed-end management investment company regulated by the Investment Company Act of 1940. The fund currently invests primarily in investment-grade quality municipal bonds.
NFA, a subsidiary of Nuveen Investments, is the fund's investment advisor, responsible for the fund's overall investment strategy and its implementation. NAM is a subsidiary of NFA and oversees the day-to-day operations of the fund. Nuveen Investments and its affiliates had approximately $220 billion of assets under management as of Sept. 30, 2012.
The ratings assigned to the VMTP shares and MTP shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the fund, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
The fund has the ability to assume economic leverage through derivative transactions which may not be captured by the fund's Preferred Shares Asset Coverage test or Effective Leverage Ratio. The fund does not currently engage in derivative activities and does not envision engaging in material amounts of such activity in the future. In fact, such activity is limited by the fund's investment guidelines and could run counter to the fund's investment objectives of achieving tax-exempt income. Material derivative exposure in the future could have potential negative rating implications if it adversely affects asset coverage available to rated VMTP shares and MTP shares.
For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end funds, 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);
--'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:
Municipal CEFs Refinance Pre-Crisis ARPS
Municipal Closed-End Funds Diversify Funding and Moderate Rollover Risk
2013 Outlook: Closed-End Funds
Rating Closed-End Fund Debt and Preferred Stock
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