NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND
Fitch Ratings has affirmed the long-term ratings (LTRs) assigned to the Variable Rate Demand Preferred Shares (VRDP shares), MuniFund Preferred Shares (MFP shares), Adjustable Rate MuniFund Term Preferred Shares (AMTP shares) and Taxable Fund Preferred Shares (TFP shares) issued by 18 closed-end funds (CEFs) managed by
Fitch has also affirmed the short-term ratings (STRs) assigned to the VRDP shares issued by eight municipal CEFs and the TFP Shares in Variable Rate Demand mode issued by two taxable CEFs.
KEY RATING DRIVERS
The ratings are supported by:
Suf?cient asset coverage provided to the preferred shares as calculated per each fund's over-collateralization (OC) tests;
Structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines;
The legal and regulatory parameters that govern each fund's operations.
The STRs of the VRDP shares and TFP shares in Variable Rate Demand Mode of the applicable series of the applicable fund primarily reflect:
The credit strength of the VRDP and TFP shares' in Variable Rate Demand Mode liquidity providers;
The terms and conditions of the VRDP and TFP shares in Variable Rate Demand Mode purchase agreements.
Both the LTRs and STRs reflect the capabilities of
FUND PROFILES
The funds are closed-end management investment companies regulated by the Investment Company Act of 1940 (the 1940 Act). The municipal CEFs invest a significant portion of their total assets in securities whose income is exempt from federal income taxes (for national funds) and both federal and applicable state income taxes (for single state funds). The municipal CEFs vary in the maximum amount of high-yield securities they are allowed to invest in per their investment policies and typically invest a significant portion of their total assets in securities rated at least investment grade.
However, Fitch notes the approximately 54% level of unrated and below-investment-grade exposure based on Fitch's classifications of
Taxable fund
LEVERAGE
As of
In a TOB transaction, the funds transfer municipal bonds into a trust that issues two types of securities: short-term floating rate securities sold to third-party investors, and residual inverse floating rate interests, which are issued to the fund that provides the municipal bond collateral to the TOB trust. Cash received from the sale of the short-term floating rating securities can be used by each fund to purchase additional fund assets.
In a reverse repo agreement, the fund borrows cash from a counterparty, and, in exchange, the fund provides securities as collateral for the borrowed cash along with an agreement to repurchase the collateral from the counterparty at a specified future date.
SUBORDINATION RISK AND REFINANCING RISK
Although the TOBs, bank borrowings and reverse repos create a degree of subordination risk for the preferred share investors, Fitch believes the risk is manageable. The rights of these creditors to receive payments of principal and interest are fully secured by the collateral of the applicable fund and are senior to the rights of holders of the rated preferred shares to receive dividends and other distributions upon liquidation. The Fitch net OC test quantifies subordination risk by assessing asset coverage to the rated obligations after first repaying liabilities that are senior in the capital structure. All
Fitch believes there is minimal refinancing risk associated with the
DERIVATIVES
Derivative usage is limited and prudent. As of the
PREFERRED SHARE ASSET COVERAGE
As of the review date, the funds' asset coverage ratios for total outstanding preferred shares, as calculated in accordance with the 1940 Act, was in excess of the minimum asset coverage of 225% required by the funds' governing documents.
As of the review date, the funds' effective leverage ratios were below the 45% maximum leverage ratio allowed by the funds' governing documents for the MFP, AMTP, VRDP and TFP shares.
As of the review date, each fund's asset coverage ratios, as calculated in accordance with Fitch total and net OC tests per the assigned rating levels were in excess of 100%. In these tests, rating level-specific stressed discount factors as described in Fitch's CEF criteria are applied to the individual assets in a fund's portfolio. In turn, the discounted value of the portfolio provides the OC available to the fund's rated liabilities.
Fitch notes the 'AA' rated municipal funds preferred shares and the 'A' taxable funds preferred shares pass the Fitch OC tests at their assigned rating levels with adequate cushions to the 100% Fitch OC test threshold. NMZ, the sole municipal fund with 'A'-rated preferred shares, passes the Fitch OC tests at the assigned rating level of 'A'.
PREFERRED SHARE STRUCTURAL PROTECTIONS
In the event of asset coverage declines, the funds' governing documents require the funds to reduce leverage in order to restore compliance with the applicable asset coverage test.
For VRDP, MFP, AMTP, and TFP shares, failure to cure a breach of the minimum asset coverage requirement by the allotted cure date results in mandatory redemption of sufficient preferred shares to restore compliance. To facilitate redemption, the fund will deposit sufficient funds with a third-party tender and paying agent. The time allowed for the funds to restore compliance is consistent with Fitch's criteria guideline.
For MFP, AMTP, and VRDP shares under a Special Rate Period (SRP) without a liquidity provider, a breach of the effective leverage ratio threshold requires the fund to redeem a sufficient number of preferred shares, and/or reduce the amount of tender option bonds (TOBs) the fund has outstanding in order to restore compliance. The time allowed for the funds to restore compliance is consistent with Fitch's criteria guideline.
For TFP, MFP, and VRDP shares not under SRP with a liquidity provider, a breach of the effective leverage ratio is a breach of the fee agreement with the applicable liquidity provider, and at the option of the applicable liquidity provider, may result in mandatory tender of the preferred shares of the applicable series for remarketing (see the Purchase Obligation section below for additional details). However, in the event of a breach, Fitch expects the fund to reduce leverage in order to restore compliance. The allotted time to restore compliance to the effective leverage ratio test is consistent with Fitch's criteria guideline.
PURCHASE OBLIGATION
The STRs assigned to the VRDP or TFP shares in Variable Rate Demand Mode of each applicable series are directly linked to the short-term creditworthiness of the associated liquidity provider. These preferred shares are each supported by a purchase agreement to ensure full and timely repayment of all tendered preferred shares plus any accumulated and unpaid dividends. The purchase agreements are unconditional and irrevocable.
The purchase agreements require the applicable liquidity provider to purchase all preferred shares of the applicable series tendered for sale that were not successfully remarketed. The liquidity provider must also purchase all outstanding preferred 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 liquidity provider's role under the fee agreement relating to the purchase obligation for each applicable series has a scheduled termination date. Prior to the scheduled termination date, the fee agreement can be extended to a new scheduled termination date, or a new liquidity provider may be selected. Any future changes to the terms of the fee agreement that weaken the structural protections discussed above may have negative rating implications.
SPECIAL RATE PERIOD
For VRDP shares under SRP, the VRDP shares will not be remarketed pursuant to optional or mandatory tender events and are not supported by a liquidity provider.
At the conclusion of the SRP for the VRDP shares of each applicable series, the applicable fund may mutually elect to extend the SRP with the holders of the VRDP shares of each applicable series or enter into a new SRP with those holders or different qualified parties. Alternatively, the fund at that time may seek to appoint a liquidity provider and a remarketing agent for the VRDP shares, and designate the subsequent rate period and following rate periods as minimum rate periods. In this case, the VRDP shares of the applicable series will be remarketable securities, available for purchase by qualified third- party investors.
If the rate periods subsequent to the SRP for the VRDP shares now under SRP are designated as minimum rate periods, the applicable fund will appoint a liquidity provider and a remarketing agent for the VRDP shares. In this event, the VRDP shares would be expected to benefit from an unconditional and irrevocable purchase obligation similar to other Fitch-rated VRDP shares issued by Nuveen CEFs. Under these circumstances, Fitch would expect to assign a STR to VRDP shares of the applicable series based on the STR of the applicable liquidity provider designated at that time.
STRESS TESTS
Fitch performed a stress test on the funds in order to assess the strength of the structural protections available to the preferred shares compared with the stresses outlined in Fitch's closed-end fund rating criteria. This test provided for a one rating notch downgrade for each security held in the portfolio relative to the unstressed base case. The stress applied caused the model results to remain consistent with the assigned rating levels. Fitch notes that the assigned rating level is 'AA' for all funds except NMZ, JPC and NPFD, which pass at the assigned rating level of 'A'.
Based on this analysis as well as document review, Fitch views each fund's permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with the assigned rating levels.
INVESTMENT MANAGER
NFA, an indirect subsidiary of
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Rating upgrades are not currently envisioned for the 'AA' rated preferred shares issued by the municipal funds as Fitch's CEF criteria caps CEF ratings at 'AA';
Rating upgrades are not currently envisioned for the 'A' rated TFP shares issued by the taxable funds as these funds invest primarily in securities that receive no model credit at the 'AA' rating level;
Although it is not expected by Fitch, NMZ could potentially be upgraded to 'AA' if over a sustained period it reduces leverage or reallocates its portfolio to lower discount factor assets to the extent necessary to pass the Fitch OC tests at the 'AA' level.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The ratings may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the funds' assets, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause Fitch to downgrade the ratings;
Certain terms relevant to key TFP, VRDP, AMTP or MFP structural protections, including minimum asset coverage and the effective leverage ratio, are set forth in the applicable transaction documents for these securities. Any future changes to the documents or future modes that weaken the structural protections may have negative rating implications;
The assigned STRs may also be sensitive to changes in the financial condition of the applicable liquidity provider. A downgrade of a liquidity provider to 'F2' would result in a downgrade of the STR to 'F2', absent other mitigants. A downgrade below 'F2', on the other hand, would not necessarily result in a downgrade of the STR given the features in the transactions that would result in a mandatory tender of the preferred shares for remarketing or purchase by the liquidity provider in the event of a failed remarketing;
The ratings could be downgraded if asset coverage cushions erode as a result of market volatility, or if Fitch believes the assets the funds invest in are unlikely to retain suf?cient liquidity and price stability at the current rating stress levels. Fitch deems the level of future market value decline the funds would have to experience to incur a sustained breach in Fitch OC Test coverage as unlikely as Fitch believes the funds would delever or alter the portfolio composition toward lower discount factor assets to the extent needed to cause the rated securities to maintain passing Fitch OC Test margins at the assigned rating level. Based on portfolio composition as of the review date, NMZ can withstand a 13% market value decline, the 'AA' rated municipal funds can withstand at least a 17% market value decline and the 'A' rated taxable funds can withstand at least a 21% market value decline before breaching a Fitch OC Test.
SOURCES OF INFORMATION
The sources of information used to assess this rating were the public domain and
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
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