NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AAA' long-term ratings and 'F1' short-term ratings assigned to variable rate demand preferred shares (VRDP shares) issued by two municipal closed-end funds managed by Nuveen Fund Advisors, LLC (NFA) and subadvised by Nuveen Asset Management, LLC (NAM) as follows:
Nuveen Investment Quality Municipal Fund, Inc. (NQM):
--Up to $236,800,000 of VRDP shares, series 1, due May 1, 2041, affirmed at 'AAA/F1'. The liquidity provider is Barclays Bank PLC ('A/F1').
Nuveen Select Quality Municipal Fund, Inc. (NQS):
--Up to $267,500,000 of VRDP shares, series 1, due May 1, 2041, affirmed at 'AAA/F1'. The liquidity provider is Barclays Bank PLC ('A/F1').
The affirmations take into consideration the expected issuance on May 23, 2013 of additional $25,000,000 and $15,000,000 of VRDP shares of the same series as the currently outstanding series 1 VRDP shares of NQM and NQS, respectively. The additional VRDP shares have identical terms and belong to the same series as the original VRDP shares of each of the funds. Prior to the issuance series 1 VRDP shares of NQM and NQS total $211,800,000 and $252,500,000, respectively.
KEY RATING DRIVERS
The 'F1' short-term ratings primarily reflect:
--The credit strength of Barclays Bank PLC (rated 'A/F1' by Fitch), as liquidity provider;
--The terms and conditions of the VRDP shares purchase agreements (purchase agreements).
The 'AAA' long-term ratings primarily reflect:
--Sufficient asset coverage provided to the VRDP shares as calculated per the funds' 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 funds' operations;
--Both the short- and long-term ratings also reflect the capabilities of NFA as investment advisor and NAM as subadvisor.
TENDER AND REMARKETING
The VRDP shares benefit from a feature giving investors the right to tender the securities with a seven-day notice for remarketing. The VRDP shares are also subject to a mandatory tender for remarketing upon the occurrence of certain events, such as non-payment of dividends by the fund, among others. VRDP shares that are unsuccessfully remarketed are purchased by the liquidity provider.
The VRDP shares have an approximately 28-year mandatory redemption date and pay an adjustable dividend rate set weekly by the remarketing agent. Should a remarketing be unsuccessful, the dividend rate will reset to a maximum rate as defined in the governing documents.
PURCHASE OBLIGATION
The VRDP shares are supported by purchase agreements to ensure full and timely repayment of the liquidation preference amount plus any accumulated and unpaid dividends to holders upon occurrence of certain events. The agreements require the liquidity provider to purchase all VRDP shares of the applicable fund tendered for sale that were not successfully remarketed. The liquidity provider must also purchase all outstanding VRDP shares of the applicable fund if the fund has not obtained an alternate purchase agreement prior to the termination of the purchase agreement being replaced or following the downgrade of the liquidity provider's rating below 'F2' (or equivalent).
The purchase of VRDP shares pursuant to the purchase agreements is unconditional and irrevocable, and as such the short-term ratings assigned to the VRDP shares are directly linked to the short-term creditworthiness of the liquidity provider.
The liquidity provider's obligations under the purchase agreements have scheduled termination dates. Fitch expects the purchase agreements to be subsequently extended, with terms that are substantially similar to the current purchase agreements.
ASSET COVERAGE
The funds' asset coverage ratios for the VRDP shares, as calculated in accordance with the Investment Company Act of 1940, were in excess of the minimum asset coverage threshold of 225% currently set by the terms of the fee agreements between the funds and the liquidity provider (Minimum VRDP Asset Coverage test).
The funds have also covenanted with the liquidity provider to maintain the Effective Leverage Ratio for both VRDP shares and floating-rate certificates of tender option bonds below 45% (or 46% if the increase in the ratio is due exclusively to asset market value volatility). The funds' Effective Leverage Ratios are currently below 45%.
In the event of asset coverage declines, the funds' governing documents will require the funds to reduce leverage in order to restore compliance with the asset coverage test breaching the required threshold.
STRESS TESTS
Fitch performed various stress tests on the funds to assess the strength of the structural protections available to the VRDP 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 funds' leverage and portfolio composition migrated to the outer limits of their operating and investment guidelines.
Only under remote circumstances, such as increasing the funds' issuer concentration, while simultaneously migrating the portfolios to a mix of 80% long-term 'BBB' bonds and 20% high yield bonds, did the asset coverage available to the VRDP 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 funds' permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' rating.
THE FUNDS
The funds are closed-end management investment companies regulated by the Investment Company Act of 1940. The funds currently invest primarily in investment grade quality municipal bonds.
NFA, a subsidiary of Nuveen Investments, is the funds' investment advisor, responsible for the funds' overall investment strategies and their implementation. NAM is a subsidiary of NFA and oversees the day-to-day operations of the funds. Nuveen Investments and its affiliates had approximately $224 billion of assets under management as of March 31, 2013.
RATINGS SENSITIVITY
The ratings assigned to the VRDP shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the funds, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
Certain terms of the Minimum VRDP Asset Coverage test and Effective Leverage Ratio are set in the fee agreements relating to the purchase agreements, which are renewed on a periodic basis. Changes to these terms that weaken the tests may have negative rating implications.
The short-term ratings assigned to the VRDP shares may also be sensitive to changes in the financial condition of the liquidity providers. A downgrade of the liquidity providers to 'F2' would result in a downgrade of the short-term ratings of the VRDP shares to 'F2,' absent other mitigants. A downgrade below 'F2', on the other hand, would not necessarily result in a downgrade of the short-term rating of the VRDP shares, given the acceleration features in the transactions that would result in a mandatory tender of the VRDPs for purchase by the liquidity providers.
The funds have the ability to assume economic leverage through derivative transactions which may not be captured by the funds' Minimum VRDP Asset Coverage test or Effective Leverage Ratio. The funds do not currently engage in derivative activities and do not envision engaging in material amounts of such activity in the future. In fact, such activity is limited by the funds' investment guidelines and could run counter to the funds' investment objectives of achieving tax-exempt income. Material derivative exposures in the future could have potential negative rating implications if it adversely affects asset coverage available to rated VRDP shares.
For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end fund, 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 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);
--'Global Rating Criteria for Asset-Backed Commercial Paper' (Nov. 8, 2012);
--'Strong Performance Driving Investment in MLP Closed-End Funds' (April 2013);
--'2013 Outlook: Closed-End Funds' (Dec. 14, 2012);
--'Municipal CEF Leverage Continues to Evolve' (Nov. 27, 2012).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686101
Global Rating Criteria for Asset-Backed Commercial Paper
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=692299
Strong Performance Driving Investment in MLP Closed-End Funds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706501
2013 Outlook: Closed-End Funds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696831
Municipal CEF Leverage Continues to Evolve
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695685
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791703
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