Published: July 25, 2011
Fitch Rates Issued by Nuveen Dividend Advantage Municipal Fund 2 'AAA/F1+'
NEW YORK - (BUSINESS WIRE) - Fitch Ratings assigns 'AAA' long-term ratings and 'F1+' short-term
ratings to variable rate demand preferred shares (VRDP shares) issued by
Nuveen Dividend Advantage Municipal Fund 2, a municipal closed-end fund
managed by Nuveen Fund Advisors, Inc (NFA) and subadvised by Nuveen
Asset Management, LLC (NAM):
--$196,000,000 of VRDP shares, series 2, mandatory redemption date of
June 1, 2040, with a liquidation preference of $100,000 per share.
KEY RATING DRIVERS
The 'F1+' short-term ratings reflect:
--The credit strength of Deutsche Bank AG (rated 'AA-/F1+', Rating
Outlook Negative by Fitch) as liquidity provider. The liquidity provider
is obligated to repurchase VRDP shares following an unsuccessful
remarketing as well as following mandatory purchase events.
--The terms and conditions of the liquidity purchase agreement.
--The sufficiency of asset coverage as calculated per the fund's Minimum
VRDP Asset Coverage tests and Effective Leverage Ratios.
--The parameters for redemption of the VRDP shares by the fund should
the shares be purchased and continue to be held by the liquidity
provider for a continuous period of six months.
The 'AAA' long-term ratings reflect:
--Sufficient asset coverage provided to the VRDP shares by the fund's
managed assets as calculated per the fund's Minimum VRDP Asset Coverage
tests and Effective Leverage Ratios.
--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 are also based on the
capabilities of NFA as investment advisor and NAM as subadvisor.
TENDER AND REMARKETING
The VRDP shares have an unconditional demand feature giving investors
the right to tender the securities with a seven-day notice, for
remarketing. VRDP shares that are unsuccessfully remarketed are
purchased by the liquidity provider, Deutsche Bank AG.
The VRDP shares have a 30-year final mandatory redemption date and pay
an adjustable dividend rate set through weekly remarketings by the
remarketing agent, Citigroup Global Markets Inc. (or any subsequent
replacement). Should a remarketing be unsuccessful, the dividend rate
will reset to a maximum rate.
The Bank of New York Mellon (rated 'AA-/F1+' by Fitch) serves as the
tender and paying agent and will tender and deliver any VRDP shares that
could not be re-marketed to the liquidity provider and notify the
holders of VRDP shares of non-renewal and termination of the purchase
agreement, among other duties.
PURCHASE OBLIGATION
Each of the VRDP shares is 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 agreement unconditionally requires Deutsche Bank AG to
purchase at liquidation preference plus accumulated but unpaid dividends
all VRDP shares tendered for sale that were not successfully remarketed
on a revolving basis, or all outstanding VRDP shares prior to the
termination of the liquidity agreement if the fund has not obtained an
alternate liquidity agreement prior to termination..
The purchase of 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 the purchase agreement
currently expires on Sept. 1, 2011. Fitch expects the purchase agreement
to be extended through Aug. 31, 2012, with terms that are substantially
the same as in the current purchase agreement.
In addition, the VRDP shares are subject to mandatory tender if the
short-term rating of the liquidity provider is downgraded below 'F2' (or
its equivalent), or if the fund is unable to make a scheduled payment of
dividends, among others.
LEVERAGE
The fund had managed assets of approximately $620.5 million and leverage
of approximately $243.8 million at July 14, 2001, with an effective
leverage ratio of 39%. Leverage consisted of approximately $196 million
of VRDP shares and $47.8 million of floating rate certificates of tender
option bonds.
ASSET COVERAGE
The fund's asset coverage ratio for the VRDP shares, as calculated in
accordance with the Investment Company Act of 1940, was approximately
312%. This is in excess of the minimum asset coverage threshold of 225%
currently set by the terms of the liquidity agreement (Minimum VRDP
Asset Coverage test). The fund's transactional documents require the
fund to reduce its leverage within 60 calendar days by a sufficient
amount to restore coverage if Minimum VRDP Asset Coverage declines below
the 225% threshold amount.
The fund has also covenanted with the liquidity provider to maintain an
Effective Leverage Ratio for both VRDP shares and floating-rate
certificates of tender option bonds lower than 45% (or 46% if the
increase in the ratio is due exclusively to asset market value
volatility). The fund will cause a breach of the Effective Leverage
Ratio to be cured within 10 business days unless the requirement is
waived by the liquidity provider.
STRESS TESTS
Fitch performed various stress tests on the fund to assess the strength
of the structural protections available to the VRDP 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 its operating and investment guidelines.
Under the stress tests asset coverage available to the VRDP shares fell
below the 'AAA' threshold and instead passed at an 'AA' rating level
only under remote circumstances. For example, increasing tender option
bond leverage to half of the fund's overall leverage, while
simultaneously migrating the portfolio to 80% 'BBB', 10+ years to
maturity bonds and 20% high yield bonds.
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.
FUND PROFILE
The fund is a closed-end management investment company regulated by the
Investment Company Act of 1940. The fund seeks to provide current income
exempt from regular federal income tax and to enhance portfolio value.
The fund invests primarily in investment grade municipal bonds.
THE ADVISOR
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 $212 billion of assets under management as of April 30,
2011.
RATINGS SENSITIVITY
The ratings assigned to the VRDP 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 VRDP Asset Coverage test and Effective
Leverage Ratio are set in the liquidity and fee agreements. Changes to
these terms that weaken the Minimum VRDP Asset Coverage test or
Effective Leverage Ratio may have negative rating implications.
The short-term ratings assigned to the VRDP shares may 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 ratings of the VRDP
shares. Acceleration features in the transaction in this case would
result in full takeout of the VRDPs via a mandatory tender of the VRDP
shares for purchase by the liquidity provider.
The fund has the ability to assume economic leverage through derivative
transactions which may not be captured by the fund's Minimum VRDP Asset
Coverage tests or Effective Leverage Ratios. 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 objective 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
VRDP 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'.
The sources of information used to assess this rating were the public
domain and Nuveen Fund Advisors.
Applicable Criteria and Related Research:
--'Closed-End Fund Debt and Preferred Stock Rating Criteria' (Aug. 17,
2009);
--'Global Rating Criteria for Asset-Backed Commercial Paper' (Nov. 30,
2010);
--'Tax-Exempt CEFs Change Leverage (June 17, 2011);
--'Tax-Exempt Closed-End Fund Weather Price Declines' (Feb. 2, 2011);
--'Closed-End Fund: Evolving Use of Leverage and Derivatives' (Sept. 27,
2010);
--'Closed-End Fund: Redemptions Provide Some Liquidity to Illiquid ARPS
Market' (Aug. 31, 2010).
Applicable Criteria and Related Research:
Closed-End Fund Debt and Preferred Stock Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462492
Global Rating Criteria for Asset-Backed Commercial Paper
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=577965
Tax-Exempt CEFs Change Leverage (ARPS Balances Reduced; New Securities
Provide Flexibility)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637110
Tax-Exempt Closed-End Funds Weather Price Declines (Asset Coverage
Remains Strong)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=601825
Closed-End Funds: Evolving Use of Leverage and Derivatives
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=559525
Closed-End Funds: Redemptions Provide Some Liquidity to Illiquid ARPS
Market
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=552106
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 Ratings
Primary Analyst:
Greg Fayvilevich,
+1-212-908-9151
Associate Director
One State Street Plaza
New
York, NY 10004
or
Secondary Analyst:
Ian Rasmussen,
+1-212-908-0232
Senior Director
or
Committee Chairperson:
Roger
Merritt, +1-212-908-0636
Managing Director
or
Media
Relations:
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com
Additional
information is available at 'www.fitchratings.com'.
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