NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed and assigned the following ratings to the Variable Rate Demand Preferred Shares (VRDP Shares) and MuniFund Term Preferred Shares (MTP Shares) issued by Nuveen New Jersey Dividend Advantage Municipal Fund (NXJ).
Nuveen New Jersey Dividend Advantage Municipal Fund (NXJ)
--$45,000,000 of VRDP Shares, Series 1, final mandatory redemption on Aug. 3, 2043, affirmed at 'AAA/F1+'. The liquidity provider is The Toronto-Dominion Bank (TD Bank, 'AA-/F1+');
--$144,300,000 of VRDP Shares, Series 2, final mandatory redemption on April 1, 2043, rated 'AAA/F1+'. The liquidity provider is Royal Bank of Canada (RBC, 'AA/F1+');
--$88,600,000 of VRDP Shares, Series 3, final mandatory redemption on April 1, 2043, rated 'AAA/F1+'. The liquidity provider is Royal Bank of Canada (RBC, 'AA/F1+');
--$35,050,000 of MTP Shares, 2.00% Series 2015, term redemption on Nov. 1, 2015, rated 'AAA'.
NXJ is managed by Nuveen Fund Advisors, LLC (NFA) and subadvised by Nuveen Asset Management, LLC (NAM). The rating actions are taken in connection with the fund reorganization described below.
KEY RATING DRIVERS
The short-term ratings of the VRDP Shares of NXJ primarily reflect:
--The credit strength of the VRDP Shares' liquidity provider TD Bank ('AA-/F1+') for the Series 1 and RBC ('AA/F1+) for both the Series 2 and Series 3 VRDP Shares noted above;
--The terms and conditions of the VRDP Shares purchase agreements.
The 'AAA' long-term ratings of the VRDP and MTP Shares primarily reflect:
--Sufficient asset coverage provided to the preferred shares as calculated per NXJ'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 NXJ's operations;
--Both the short- and long-term ratings also reflect the capabilities of NFA as investment advisor and NAM as subadvisor.
FUND REORGANIZATION
Nuveen Investments, Inc. (Nuveen) announced the closing of a fund reorganization on Nov. 10, 2014 whereby target funds Nuveen New Jersey Investment Quality Municipal Fund, Inc. (NQJ), Nuveen New Jersey Premium Income Municipal Fund, Inc. (NNJ) and Nuveen New Jersey Dividend Advantage Municipal Fund 2 (NUJ) were each reorganized into NXJ. As a result of the reorganization, substantially all the assets and liabilities of NQJ, NNJ, and NUJ have become assets and liabilities of NXJ. The reorganization has been approved, as applicable, by the common and preferred shareholders of the acquiring and target funds.
Upon the closing of the reorganization, holders of the VRDP Shares of target funds NQJ and NNJ that were previously rated 'AAA/F1+' by Fitch received, for each VRDP share held immediately prior to the reorganization, one share of a new series of NXJ VRDP Shares having substantially the same terms.
Also upon the closing of the reorganization, holders of the MTP Shares of target fund NUJ that were previously rated 'AAA' by Fitch received, for each MTP share held immediately prior to the reorganization, one share of a new series of NXJ MTP Shares having substantially the same terms. Fitch now marks the VRDP and MTP Shares of NQJ, NNJ, and NUJ as Paid in Full.
FUND PROFILES
NXJ is a closed-end management investment company regulated by the Investment Company Act of 1940. NXJ invests in municipal securities that are exempt from regular federal and New Jersey income taxes. The fund may invest up to 20% of assets in below investment grade and or unrated securities.
FUND LEVERAGE
As of Sept. 30, 2014, NXJ had approximately $1,063 million in assets including the impact of the NQJ, NNJ, and NUJ acquisition on a pro forma consolidated basis. Total leverage on a pro forma consolidated basis consisted of approximately $277.9 million of VRDP Shares, $35.1 million of MTP Shares, and $97.6 million of tender option bond obligations.
ASSET COVERAGE
As of Sept. 30, 2014, asset coverage for the total outstanding preferred shares on a post-reorganization pro forma consolidated basis for NXJ, as calculated in accordance with the Investment Company Act of 1940, was in excess of the minimum asset coverage of 225% required by the governing documents for the MTP and VRDP Shares, as applicable.
As of Sept. 30, 2014, the effective leverage ratio for NXJ, on a post-reorganization pro forma consolidated basis, was 38.6%. This effective leverage ratio is below the 45% maximum effective leverage ratio allowed by the governing documents of the VRDP Shares and the 50% maximum effective leverage ratio allowed by the governing documents of the MTP Shares.
STRUCTURAL PROTECTIONS
Compliance with the asset coverage and effective leverage ratio thresholds is tested periodically. A breach of the asset coverage threshold requires NXJ to redeem sufficient MTP or VRDP Shares to restore compliance. For the MTP Shares, an effective leverage ratio breach requires NXJ to redeem a sufficient number of preferred shares or reduce the amount of tender option bonds (TOBs) in order to restore compliance.
For the VRDP Shares of each series, a breach of the effective leverage ratio is a breach of the fee agreement with liquidity provider, and, at the option of the liquidity provider, may result in mandatory tender of VRDP Shares of the applicable series for remarketing (see VRDP Purchase Obligation section below for additional details). However, in the event of a breach, Fitch expects NXJ to take actions similar to those discussed in the paragraph directly above in order to restore compliance.
Fitch notes that the VRDP and MTP Shares are pari-passu. Therefore MTP investors would benefit from the lower maximum effective leverage ratio on the VRDP Shares in the event of any deleveraging to restore compliance with the 45% maximum effective leverage ratio allowed by the governing documents of the VRDP Shares.
For the asset coverage and effective leverage ratio tests, the total market value exposure periods (i.e. the pre-specified time period allotted for valuation, cure and redemption in the event of a breach) are within the 60 business day guidelines provided in Fitch's criteria.
VRDP PURCHASE OBLIGATION
The short-term rating assigned to the VRDP Shares is directly linked to the short-term creditworthiness of the applicable liquidity provider. The VRDP Shares of each series are supported by a purchase agreement to ensure full and timely repayment of all tendered VRDP Shares of the applicable series plus any accumulated and unpaid dividends. The purchase agreement is unconditional and irrevocable.
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 role of the liquidity provider under the fee agreement relating to the purchase obligation has a scheduled termination date. Subsequent to the scheduled termination date, the fee agreement can be extended with the existing liquidity provider, or a new liquidity provider may be selected. Any future changes to the terms of the fee agreements or any prospective replacement that weakens the structural protections discussed above may have negative rating implications.
STRESS TESTS
Fitch performed various stress tests on the fund to assess the strength of the structural protections available to the VRDP 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 NXJ's leverage and portfolio composition migrated to the outer limits of its operating and investment guidelines.
Only under remote circumstances, such as increasing NXJ's issuer concentration, while simultaneously migrating the portfolios to a mix of 80% 'BBB', 10+ years to maturity bonds and 20% high yield bonds, did the asset coverage available to the VRDP and MTP Shares fall below the 'AAA' long-term rating level, and instead passed at an 'AA' long-term rating level.
Given the highly unlikely nature of the stress scenarios, and the minimal rating impact, Fitch views NXJ's permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' long-term rating.
Short-term ratings assigned to the remarketable VRDP Shares were not subject to the above stress tests as these are linked directly to the short term rating of the liquidity provider.
THE FUND ADVISOR
The investment advisor for NXJ is NFA, a subsidiary of Nuveen. NFA is responsible for NXJ's overall investment strategies and their implementation. The sub-advisor, NAM, is a subsidiary of NFA that oversees the day-to-day operations of NXJ. Nuveen and its affiliates had nearly $231 billion of assets under management as of June 30, 2014.
RATINGS SENSITIVITIES
The ratings assigned to the preferred shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of NXJ, 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 minimum asset coverage and the effective leverage ratio are set forth in the fee agreement relating to the purchase agreement 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 rating assigned to the VRDP Shares of each series may also be sensitive to changes in the financial condition of the liquidity providers. A downgrade of a liquidity provider to 'F2' would result in a downgrade of the short-term ratings of the applicable 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 applicable 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.
NXJ has the ability to assume economic leverage through derivative transactions which may not be captured by the minimum asset coverage test or effective leverage ratio. NXJ 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 NXJ's investment guidelines and could run counter to its 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 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.
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Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Sept. 4, 2014);
--'Global Rating Criteria for Asset-Backed Commercial Paper' (Nov. 7, 2013)';
--'Municipal Closed-End Funds More Exposed to Rising Interest Rates than Corporate CEFs' (Oct. 7, 2014)'.
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=765528
Global Rating Criteria for Asset-Backed Commercial Paper -- Effective November 7, 2013 to October 30, 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721566
Leveraged Closed-End Funds Weather U.S. Rate Shock Scenarios (Impact on Asset Coverage and Ratings Limited Due to Structural Protections)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=784190
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=919395
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