News Column

Fitch Rates & Affirms Preferred Shares of Nuveen Pennsylvania Investment Quality Muni Fund on Merger

February 10, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings takes the following rating actions on the Variable Rate Demand Preferred Shares (VRDP shares) and MuniFund Term Preferred Shares (MTP shares) issued by Nuveen Pennsylvania Investment Quality Municipal Fund (NQP) in connection with the fund reorganizations described below:

--$105,000,000 of VRDP Shares, Series 3, final mandatory redemption on Dec. 1, 2042, rated 'AAA/F1+'. The liquidity provider is Royal Bank of Canada (RBC, 'AA/F1+').

--$23,190,000 of MTP Shares, 2.10% series 2015 term redemption on Nov. 1, 2015, rated 'AAA'.

--24,550,000 of MTP Shares, 2.15% series 2015 term redemption on Nov. 1, 2015, rated 'AAA'.

--$112,500,000 of VRDP Shares, Series 2, final mandatory redemption on Dec. 1, 2042, affirmed at 'AAA/F1+'. The liquidity provider is RBC ('AA/F1+').

The fund is managed by Nuveen Fund Advisors, LLC (NFA) and subadvised by Nuveen Asset Management, LLC (NAM).

KEY RATING DRIVERS

The short-term ratings of the VRDP shares primarily reflect:

--The credit strength of the liquidity provider for the NQP VRDP shares-- RBC ('AA/F1+').

--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 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.

--Both the short- and long-term ratings also reflect the capabilities of NFA as investment advisor and NAM as subadvisor.

FUND REORGANIZATIONS

As approved by common and preferred shareholders of each fund with respect to the reorganizations, upon closing of the reorganizations, which occurred prior to the open of business on Feb. 10, 2014, NQP has acquired substantially all the assets and liabilities of Nuveen Pennsylvania Premium Income Municipal Fund 2 (NPY), Nuveen Pennsylvania Dividend Advantage Municipal Fund (NXM), and Nuveen Pennsylvania Dividend Advantage Municipal Fund 2 (NVY).

Upon the closing of the reorganizations, holders of VRDP shares of NPY received, in exchange for each VRDP share held immediately prior to the reorganizations, one VRDP share of a new series of NQP (the acquiring fund) having substantially identical terms. Fitch will mark the old series of VRDP shares of NPY as Paid in Full.

Also upon the closing of the reorganizations, holders of MTP shares of NXM and NVY received, in exchange for each MTP share held immediately prior to the reorganizations, one MTP share of a new series of NQP (the acquiring fund) having substantially identical terms. Fitch will mark the old series of MTP shares of NXM and NVY as Paid in Full.

VRDP TENDER AND REMARKETING

The VRDP shares of each series benefit from a feature giving investors the right to tender the securities with a seven-day notice for remarketing. These VRDP shares are also subject to a mandatory tender for remarketing upon the occurrence of certain events, such as non-payment of dividends on the applicable series by the fund, among others. VRDP shares that are unsuccessfully remarketed are purchased by the liquidity provider.

The Series 2 VRDP shares and the Series 3 VRDP shares each have a final mandatory redemption date of Dec. 1, 2042. Both series pay an adjustable dividend rate set weekly by the remarketing agent. Should a remarketing be unsuccessful, the dividend rate for the applicable series will reset to a maximum rate as defined in the governing documents.

VRDP PURCHASE OBLIGATION

The VRDP shares of each series are supported by a purchase agreement 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 VRDP purchase agreement requires the liquidity provider to purchase all VRDP shares of the applicable series tendered for sale that were not successfully remarketed. The liquidity provider must also purchase all outstanding VRDP shares of the applicable series 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 the VRDP shares pursuant to the purchase agreement 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 associated liquidity provider. The liquidity provider's obligation under each purchase agreement has a scheduled termination date. Fitch expects each purchase agreement to be subsequently extended, with terms that are substantially similar to the current purchase agreement.

PREFERRED SHARE ASSET COVERAGE

The fund's asset coverage ratios as of Dec. 31, 2013 for the above noted VRDP and MTP 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 preferred shares, and with respect to the VRDP Shares, the fee agreement between the fund and the liquidity provider for each series (Minimum Asset Coverage test).

As of the same date, the fund's effective leverage ratio was below the 45% maximum leverage ratio (46% if a leverage ratio breach is due to a decline in market value) allowed by the fund's governing documents or fee agreements for the VRDP shares and the 50% maximum leverage ratio allowed by the governing documents for the MTP shares.

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 asset coverage test breaching the required threshold.

PREFERRED SHARE STRUCTURAL PROTECTIONS

Compliance with the asset coverage requirement is tested daily for the MTP shares and monthly for the VRDP shares. Compliance with the effective leverage ratio requirement is tested daily for the MTP shares and the VRDP shares. 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 case of the MTP shares, and results in a breach of the fee agreements with the liquidity provider and, if so determined by the liquidity provider, a mandatory tender for remarketing, in the case of the VRDP shares.

In the event of an asset coverage breach, subsequent to the Asset Coverage Cure Date the fund shall deposit sufficient funds with the Redemption 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 preferred shares in the event of a mandatory redemption due to an asset coverage breach ranges between 45 and 54 days, consistent with Fitch's 60 day criteria guideline.

In the event of an effective leverage ratio breach, in the case of the MTP shares, subsequent to the Effective Leverage Ratio Cure Date the fund shall (a) deposit sufficient funds with the Redemption 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. Fitch expects the fund to take similar actions in the event of an effective leverage ratio breach in the case of the VRDP shares. The exposure period to market risk for the preferred shares in the event of a mandatory redemption due to an effective leverage ratio breach ranges between 11 and 45 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 migrating the portfolios to a mix of 80% long-term 'BBB', 10+ years to maturity 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

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 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 relevant to key VRDP structural protections, including the Minimum Asset Coverage Test and the Effective Leverage Ratio are set forth in the fee agreements relating to the purchase agreements and are renewed on a periodic basis. Any future changes to these terms that weaken the structural protections 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 provider. A downgrade of the liquidity provider 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 features in the transactions that would result in a mandatory tender of the VRDP shares for remarketing, or purchase by the liquidity provider in the event of a failed remarketing.

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 do 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 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 sources of information used to assess this rating were the public domain and Nuveen Fund Advisors.

Opt-in to receive Fitch's forthcoming research on closed-end funds:

http://pages.fitchemail.fitchratings.com/FAMCEFBlankOptin/

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. 8, 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:

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=820174

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings, Inc.

Primary Analyst (NXM and NVY)

Ralph Aurora

Senior Director

+1-212-908-0528

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Primary Analyst (NQP and NPY)

Greg Fayvilevich

Director

+1-212-908-9151

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Russ Thomas

Director

+1-312-368-3189

or

Committee Chairperson

Ian Rasmussen

Senior Director

+1-212-908-0232

or

Media Relations:

Brian Bertsch, New York, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Business Wire


Story Tools