Fitch Ratings has assigned 'AA' long-term ratings to
The MFP shares final mandatory redemption is
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;
Structural protections afforded by mandatory deleveraging provisions in the event of asset coverage declines;
Legal and regulatory parameters that govern the fund's operations;
The capabilities of
THE RE-FINANCING
NVG will use the net proceeds from the issuance of the Series C MFP Shares to partially redeem a total of
VARIABLE RATE REMARKETED MODE
Upon issuance, the MFP shares will be placed in a Variable Rate Remarketed Mode (VRRM). During the VRRM, beneficial owners of the VRRM-MFP Shares have the right to tender their VRRM-MFP Shares for remarketing by a remarketing agent on seven days' notice, but are not supported by a liquidity provider. If any tendered VRRM-MFP Shares are not successfully remarketed, all of the VRRM-MFP Shares will be placed in a failed remarketing period. During this time, the dividends will be payable at a step-up dividend rate. If a failed remarketing period shall continue for 365 days from the tender date, NVG will redeem all outstanding VRRM-MFP Shares. If, prior to the end of such period, the remarketing agent successfully remarkets the VRRM-MFP Shares, the remarketing agent will resume setting the regular dividend rate.
FUTURE MODES
NVG, at its option, may designate a new Mode for the MFP Shares. In such an event, NVG will provide notice not more than 45 calendar days and not less than 10 business days prior to the change. All outstanding Series C MFP Shares will be subject to mandatory tender for Mode-change remarketing. If a new Mode is put in place, Fitch will re-evaluate the structure.
FUND PROFILE
NVG is a closed-end management investment company regulated by the Investment Company Act of 1940 (the Act). The fund's investment objectives are to provide current income exempt from regular federal income tax and federal alternative minimum tax applicable to individuals, and to enhance portfolio value relative to the municipal bond market by investing in tax-exempt municipal bonds that NFA, as investment advisor, believes are underrated or undervalued or that represent municipal market sectors that are undervalued. By investment policy, NVG may invest up to 55% of its managed assets in municipal securities rated at the time of investment 'BBB' and below, or that are unrated but judged to be of comparable quality.
ASSET COVERAGE
As of today's date, the asset coverage ratio for NVG, as calculated in accordance with the Act, is in excess of the asset coverage requirement threshold of 225% required by the fund's governing documents.
As of today's date, the effective leverage ratio for NVG is below the 45% maximum effective leverage ratio allowed by the governing documents of the fund's preferred shares.
PREFERRED SHARE STRUCTURAL PROTECTIONS
In the event of asset coverage declines, the governing documents for the MFP Shares require NVG to reduce leverage in order to restore compliance with the applicable asset coverage test. Asset coverage and effective leverage ratio compliance are tested daily for the MFP Shares.
For MFP Shares under the VRRM, failure to cure a breach of the 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 criteria guideline.
Under the terms of the MFP Shares under the VRRM, a breach of the effective leverage ratio requirement threshold requires the fund to redeem a sufficient number of preferred shares, and/or reduce the amount of tender option bonds the fund has outstanding in order to restore compliance. The time allowed for the fund to restore compliance is consistent with Fitch's criteria guideline.
STRESS TESTS
The Fitch OC tests are not referenced in the NVG preferred share transaction documents, so Fitch performed a stress test on the fund 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 relative to the unstressed base case. After applying the stress test, the fund continued to pass the 'AA' Fitch OC Test.
Based on the stress test results, as well as document review, Fitch views the 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 MFP Shares, as Fitch criteria effectively caps closed end fund ratings at 'AA';
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The ratings assigned to the MFP Shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the fund, as described above;
Certain
A material adverse deviation from Fitch guidelines for any key rating driver could result in Fitch downgrading the ratings;
Certain terms relevant to key 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.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
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