Fitch Ratings has assigned 'AAA' ratings to Variable Rate MuniFund Term Preferred Shares (VMTP Shares) issued by Nuveen Intermediate Duration Municipal Term Fund, a municipal high-yield closed-end fund managed by Nuveen Fund Advisors, LLC. (NFA) and subadvised by Nuveen Asset Management, LLC (NAM):
Nuveen Intermediate Duration Municipal Term Fund (NID):
--$175,000,000 of VMTP shares, series 2016, due March 1, 2016, rated 'AAA'.
KEY RATING DRIVERS
The 'AAA' ratings are based on asset coverage provided to the VMTP shares by the fund's portfolio and structural protections afforded by mandatory deleveraging provisions in the event of asset coverage declines. Also supporting the 'AAA' ratings are the legal and regulatory parameters that govern the fund's operations and the capabilities of NFA as investment advisor and NAM as subadvisor.
As of Jan. 25, 2013, 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 (Minimum Asset Coverage Test).
Also as of the same date, the fund's pro forma effective leverage ratio was below the maximum leverage ratio of 45% allowed by the fund's governing documents (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).
The fund's investment guidelines allow it to invest up to 50% of assets in non-investment grade quality municipal bonds. Fitch views these securities as exhibiting greater volatility than investment grade municipal bonds, and therefore assigns them greater risk weights. The greater risk-weighting of this portfolio (compared to funds that invest in investment grade municipal bonds) lowers the levels of cushion of the fund's asset coverage tests compared to the stresses outlined in Fitch's criteria at the 'AAA' rating level.
Fitch performed various stress tests on the fund to assess the strength of the structural protections available to the VMTP 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. Fitch assumed in this analysis that the fund will not deviate materially from its current leverage ratios. Fitch also assumed that the fund will continue to maintain issuer diversification greater than Fitch's issuer diversification framework.
Only under certain circumstances, such as increasing the fund's state and sector concentration while simultaneously migrating the portfolio to a mix of 50% long-term 'BBB' bonds and 50% high yield bonds, did the asset coverage available to the VMTP Shares fall below the 'AAA' threshold, and instead passed at an 'AA' rating level.
Given the 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 can invest up to 50% of assets in municipal securities that at the time of purchase are rated below investment grade quality or that are unrated but judged to be of comparable quality by NAM.
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 $219 billion of assets under management as of Dec. 31, 2012.
The ratings assigned to the VMTP shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the fund (as described above). In particular, increases in the fund's issuer concentration may put negative pressure on the ratings. A material adverse deviation from Fitch guidelines for any key rating driver could prompt Fitch to downgrade the ratings.
Additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end fund is available in the criteria referenced below, available 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.
Opt-in to receive Fitch's forthcoming research on closed-end fund: http://forms.fitchratings.com/forms/FAMCEFOptinform
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 CEF Leverage Continues to Evolve' (Nov. 27, 2012);
--'Municipal Closed-End Fund Diversify Funding and Moderate Rollover Risk' (Oct. 11, 2012)).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
2013 Outlook: Closed-End Funds
Municipal CEF Leverage Continues to Evolve
Municipal Closed-End Funds Diversify Funding and Moderate Rollover Risk
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