Fitch Ratings has placed the 'F1' short-term ratings of the
below Variable Rate Demand Preferred Shares (VRDP Shares) issued by
three Nuveen closed-end funds on Rating Watch Negative. The
placement on Rating Watch Negative is in connection with the recent
rating action placing Deutsche Bank's short-term rating on Rating
Watch Negative (Deutsche Bank Trust Company Americas: 'A-/F1',
Rating Watch Negative). The short-term ratings of the VRDP shares
are directly linked to the short-term rating of Deutsche Bank as
the liquidity provider to the VRDP shares, as described in the VRDP
Purchase Obligation section below. For more information on the
recent rating action taken on Deutsche Bank placing the Short-Term
IDR on Rating Watch Negative please see 'Fitch Places Deutsche Bank
on Rating Watch Negative', dated Nov. 3, 2016.
The VRDP shares' long-term ratings of 'AAA' are not affected,
and no rating actions are being taken with respect to the long-term
ratings. The funds are managed by Nuveen Fund Advisors, LLC (NFA)
and subadvised by Nuveen Asset Management, LLC (NAM).
Nuveen AMT-Free Quality Municipal Income Fund (NEA)
--$219,000,000 of VRDP Shares, Series 1, final mandatory
redemption on June 1, 2040, Short-Term rating of F1 placed on RWN.
The liquidity provider is Deutsche Bank Trust Company Americas
('A-/F1', Rating Watch Negative)
Nuveen California AMT-Free Municipal Income Fund (NKX)
--$35,500,000 of VRDP Shares, Series 2, final mandatory
redemption on June 1, 2040, Short-Term rating of F1 placed on RWN.
The liquidity provider is Deutsche Bank Trust Company Americas
('A-/F1', Rating Watch Negative)
Nuveen New York AMT-Free Municipal Income Fund (NRK)
--$50,000,000 of VRDP Shares, Series 4, final mandatory
redemption on June 1, 2040, Short-Term rating of F1 placed on RWN.
The liquidity provider is Deutsche Bank Trust Company Americas
('A-/F1', Rating Watch Negative).
KEY RATING DRIVERS
The long-term ratings primarily reflect:
--Sufficient asset coverage provided to the preferred shares as
calculated per the over-collateralization (OC) tests of the
funds;
--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.
The short-term ratings primarily reflect:
--The credit strength of the liquidity provider for each series
of VRDP Shares;
--The terms and conditions of the VRDP Shares purchase
agreements.
Both the short- and long-term ratings reflect the capabilities
of NFA as investment advisor and NAM as subadvisor.
FUND PROFILES
NEA is a closed-end management investment company regulated by
the Investment Company Act of 1940 (the Act). The fund's investment
mandate allows the fund to invest up to 35% of assets in municipal
securities rated 'BBB' or below, including below investment-grade
securities or unrated securities of comparable quality. As of Oct.
30, 2016, NEA's total investment exposure (i.e. total assets under
management including assets purchased using leverage) was
approximately $6.4 billion.
NKX is a closed-end management investment company regulated by
the Investment Company Act of 1940 (the Act). The fund invests in
municipal securities that are exempt from regular federal income
tax, AMT tax and California State income tax. The fund may invest
up to 20% of assets in below investment-grade and/or unrated
securities judged by NFA to be of comparable quality. As of Oct.
31, 2016, NKX's total investment exposure (i.e. total assets under
management including assets purchased using leverage) was
approximately $1.2 billion.
NRK is a closed-end management investment company regulated by
the Investment Company Act of 1940. The fund invests in municipal
securities that are exempt from regular federal, New York State and
New York City income taxes. The fund may invest up to 20% of assets
in below investment grade and or unrated securities judged by NFA
to be of comparable quality. As of Oct. 31, 2016, NRK's total
investment exposure (i.e. total assets under management including
assets purchased using leverage) was about $2.1 billion.
FUND LEVERAGE
NEA's total leverage on Oct. 31, 2016 consisted of about $2.1
billion of preferred shares and about $344 million of tender option
bonds and NEA's effective leverage ratio was approximately 37%.
NKX's total leverage on Oct. 31, 2016 consisted of approximately
$433 million of preferred shares and approximately $41 million of
tender option bonds and NKX's effective leverage ratio was
approximately 38%.
NRK's total leverage on Oct. 31, 2016 consisted of about $743
million of preferred shares and about $47 million of tender option
bonds and NRK's effective leverage ratio was approximately 38%.
ASSET COVERAGE
As of Sept. 30, 2016, each fund's asset coverage ratio, as
calculated in accordance with the Act, is in excess of the minimum
asset coverage threshold of 225% required by the fund's governing
documents.
As of Sept. 30, 2016, each fund's effective leverage ratio is
below the 45% maximum effective leverage ratio allowed by the
governing documents of the preferred shares issued by the fund.
PREFERRED SHARE STRUCTURAL PROTECTIONS
In the event of asset coverage declines, each fund's governing
documents require the fund to reduce leverage in order to restore
compliance with the applicable asset coverage test.
Minimum Asset Coverage compliance is tested monthly for the VRDP
Shares. Compliance with the Effective Leverage Ratio is tested
daily for the VRDP 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/redemption and paying agent. The time allowed
for the fund to restore compliance is consistent with Fitch's 40 to
60 business day criteria guideline.
The governing documents of the VRDP Shares do not require
mandatory deleveraging in the event of a breach of the Effective
Leverage Ratio. Rather, the documents state that 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 VRDP Shares
of the applicable series for remarketing (see the VRDP Purchase
Obligation section below for details).
VRDP PURCHASE OBLIGATION
The short-term ratings assigned to the VRDP Shares of each
series are directly linked to the short-term creditworthiness of
the associated liquidity provider. The VRDP Shares are supported by
a purchase agreement to ensure full and timely repayment of all
tendered VRDP Shares 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 liquidity provider's role under the fee agreement relating
to the purchase obligation for each 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 weakens the structural protections
discussed above may have negative rating implications.
STRESS TESTS
Fitch performed various stress tests on the funds in order 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 its operating
and investment guidelines.
For NKX and NRK, only under remote circumstances, such as
increasing leverage to 45% while simultaneously increasing issuer
concentration and migrating the portfolio 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 rated preferred shares fall below
the 'AAA' threshold and instead passed at an 'AA' rating level.
For NEA, asset coverage available to the preferred shares fell
below the 'AAA' threshold, and instead passed at the 'AA' rating
level only under remote circumstances, such as increasing the
fund's leverage to 45% as well as increasing issuer concentration
while simultaneously migrating the portfolio to a level of 55% high
yield bonds, above the highest allowable under NEA's investment
mandate.
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 a 'AAA'
rating.
THE ADVISORS
NFA, a subsidiary of Nuveen Investments, is the investment
advisor for the funds. NFA is responsible for the funds' overall
investment strategies and their implementation. NAM is a subsidiary
of NFA and oversees the day-to-day operations of the funds. Nuveen
Investments and its affiliates had approximately $244.7 billion of
assets under management as of Sept. 30, 2016.
RATING SENSITIVITIES
The ratings assigned to the preferred shares may be sensitive to
material changes in the leverage level or 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.
For the VRDP Shares of each series, certain terms relevant to
key VRDP structural protections, including asset coverage and
effective leverage are set forth in the fee agreements relating to
the purchase agreements and are renewed on a periodic basis. Any
future changes to 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. Fitch
expects to resolve Deutsche Bank's Rating Watch Negative at the
latest after the bank's first quarter 2017 (1Q17) earnings are
published. Any material change in Deutsche Bank's Short-Term Issuer
Default Rating may affect the short-term ratings of the VRDP
shares.
The funds have the ability to assume economic leverage through
derivative transactions which may not be captured by the minimum
asset coverage test or effective leverage ratio. The funds do not
currently engage in speculative derivative activity and do not
envision engaging in material amounts of such activity in the
future. In fact, such activity is limited by the funds' investment
guidelines and could run counter to their investment objective of
achieving tax-exempt income. Material derivative exposures in the
future could have potential negative rating implications if they
adversely affect asset coverage available to rated preferred
shares.
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
Rating Closed-End Funds and Market Value Structures (pub. 09 Sep
2016)
https://www.fitchratings.com/site/re/886753
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