NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a long-term rating of 'AAA' to the variable rate demand preferred shares (VRDP shares) issued by Nuveen Dividend Advantage Municipal Income Fund (NVG). NVG is managed by Nuveen Fund Advisors, LLC (NFA) and subadvised by Nuveen Asset Management, LLC (NAM).
Fitch has assigned a long-term rating of 'AAA' to:
--$201,000,000 of VRDP shares, 2,010 series 1 VRDP shares, final mandatory redemption date Dec. 1, 2043.
NVG will use the proceeds of the preferred share issuance to fully refinance outstanding munifund term preferred shares (MTP shares) and outstanding variable rate munifund term preferred shares (VMTP shares). Fitch expects the proceeds of the newly issued preferred shares to be deposited irrevocably in an escrow account with the MTP and VMTP shares redemption agent pending notification requirements to the MTP and VMTP shareholders and accordingly the issuance of new VRDP preferred shares will not adversely affect the ratings of the MTP and VMTP shares while they remain outstanding. The amount deposited with the redemption agent will equal the notional value of the MTP and VMTP shares and any accumulated and unpaid dividends. When the notification period has passed, the outstanding MTP and VMTP shares are expected to be redeemed using the escrowed preferred share proceeds and then marked paid in full by Fitch.
The NVG VRDP shares have a 30-year final mandatory redemption date.
KEY RATING DRIVERS
The 'AAA' long-term ratings primarily reflect:
--Sufficient asset coverage provided to the preferred shares as calculated per the fund's over-collateralization (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.
SPECIAL RATE PERIOD FOR NVG VRDPs
The newly issued VRDP shares of NVG are subject to a special rate period of approximately three years (until December 2016), commencing on the closing date (the Special Rate Period). During the Special Rate Period, the VRDP shares are not subject to optional or mandatory tender events and will not be remarketed by a remarketing agent pursuant to such events and are not supported by a liquidity provider.
After December 2016, the fund may mutually elect to extend the Special Rate Period with the holders of the NVG VRDP shares or enter into a new Special Rate Period with those holders or a different qualified party. Alternatively, the fund at that time may seek to appoint a liquidity provider and a remarketing agent and designate the subsequent rate period and following rate periods as minimum rate periods, in which the VRDP shares will be remarketable securities, available for purchase by qualified third party investors.
FUTURE REMARKETINGS FOR NVG VRDPs
After December 2016, if as described above, the subsequent rate period and following rate periods are designated as minimum rate periods and the fund has appointed a liquidity provider and a remarketing agent, these VRDP shares would be expected to benefit from an unconditional and irrevocable purchase obligation (see PURCHASE OBLIGATION below) by a liquidity provider to be designated at that time, upon optional or mandatory tender events, similar to other Fitch-rated VRDP shares issued by Nuveen closed-end funds. In this event, Fitch would expect to assign a short-term rating to the VRDP shares based on the rating of the then designated liquidity provider.
PURCHASE OBLIGATION
The NVG VRDP shares are being sold initially to a single purchaser and are expected to be held by the purchaser, and perhaps a limited number of other institutional investors, during the entire three-year Special Rate Period. No remarketings will occur during that time and no liquidity provider has been designated. However, as noted above, if the Special Rate Period is not extended or renewed, it is expected that the fund would appoint a liquidity provider and remarketing agent at that time. The VRDP shares would then be remarketable securities, subject to tender for remarketing on seven days notice by investors and benefitting from an unconditional and irrevocable purchase obligation of the liquidity provider if the VRDP shares cannot be successfully remarketed. In this event, Fitch would expect to assign a short-term rating to the VRDP shares based on the rating of the then designated liquidity provider.
ASSET COVERAGE
The fund's 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 VRDP shares Notice of Special Rate Period (Minimum Asset Coverage test).
The VRDP shares Notice of Special Rate Period also require the fund to maintain an Effective Leverage Ratio for both preferred 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 fund's Effective Leverage Ratios is currently below 45%.
In the event of asset coverage declines, the VRDP shares Notice of Special Rate Period will require the fund to reduce leverage in order to restore compliance with the asset coverage test breaching the required threshold.
PREFERRED SHARE STRUCTURAL PROTECTIONS
Compliance with the asset coverage requirement is tested every thirty days and compliance with the effective leverage ratio requirement is tested daily. Failure to cure an asset coverage breach by the Asset Coverage Cure Date results in an Asset Coverage Mandatory Redemption. Failure to cure an effective leverage ratio breach by the Effective Leverage Ratio Cure Date results in an Effective Leverage Ratio Mandatory Redemption.
In the event of an asset coverage breach, subsequent to the Asset Coverage Cure Date the fund shall deposit sufficient funds with the Tender and Paying Agent for the redemption of a sufficient number of Preferred Shares to restore asset coverage compliance. The exposure period to market risk for the VRDP shares in the event of a mandatory redemption due to an asset coverage breach is 53 days, consistent with Fitch's 60 day criteria guideline.
In the event of an effective leverage ratio breach subsequent to the Effective Leverage Ratio Cure Date the fund shall (a) deposit sufficient funds with the Tender and Paying Agent for the redemption of a sufficient number of Preferred Shares to restore effective leverage ratio compliance, (b) engage in transactions involving or relating to the floating rate securities not owned by the fund and/or the inverse floating rate securities owned by the fund, including the purchase, sale or retirement of these securities to restore effective leverage ratio compliance, or (c) engage in a combination of these approaches in order to restore effective leverage ratio compliance. The exposure period to market risk for the VRDP shares in the event of a mandatory redemption due to an effective leverage ratio breach is 41 days, consistent with Fitch's 60 day criteria guideline.
STRESS TESTS
Fitch performed various stress tests on the fund to assess the strength of the structural protections available to the preferred shares compared to the 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 portfolios to a mix of 80% long-term 'BBB' bonds and 20% high yield bonds, did the asset coverage available to the preferred shares fall below the 'AAA' threshold, and instead passed at a '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
NVG is a closed-end management investment company regulated by the Investment Company Act of 1940. NVG 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 strategies and their implementation. NAM is a subsidiary of NFA and oversees the day-to-day operations of the fund. Nuveen Investments and its affiliates had approximately $215 billion of assets under management as of Sept. 30, 2013.
RATINGS SENSITIVITY
The ratings assigned to the preferred 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.
Certain terms of the Minimum Asset Coverage Test and the Effective Leverage Ratio Requirement are set forth in the Notice of Special Rate Period. This document is expected to govern the transaction until December 2016. At the end of the Special Rate Period, certain terms of the transaction, including these structural protections, are subject to renegotiation. Any changes to structural protections that weaken asset coverage or effective leverage ratio tests may have negative rating implications.
The fund has the ability to assume economic leverage through derivative transactions which may not be captured by the fund's Minimum 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 exposures in the future could have potential negative rating implications if it adversely affects asset coverage available to rated preferred 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. 14, 2013);
--'Global Rating Criteria for Asset-Backed Commercial Paper' (Nov. 7, 2013);
--'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:
Rating Closed-End Fund Debt and Preferred Stock
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716220
Global Rating Criteria for Asset-Backed Commercial Paper
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721566
Municipal Closed-End Funds Diversify Funding and Moderate Rollover Risk
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=691173
Municipal CEFs Refinance Pre-Crisis ARPS
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677576
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=811843
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