PROPOSAL NO. 2REORGANIZATION OF THE
TARGET FUND INTO THE ACQUIRING FUND
The following
is a summary of certain information contained elsewhere in this Proxy Statement with respect to the proposed Reorganization and is qualified in its entirety by reference to the more complete information contained in this Proxy Statement and in the
appendices thereto. Shareholders should read the entire Proxy Statement carefully. Certain capitalized terms used but not defined in this summary are defined elsewhere in this Proxy Statement.
Background and Reasons for the Reorganization
The Board of Nuveens municipal closed-end funds has approved a series of mergers of municipal closed-end funds, including the
reorganization of the Target Fund into the Acquiring Fund. Each Board has determined that the Reorganization would be in the best interests of its Fund. Each Funds Board considered the Reorganization as part of a broad initiative to
rationalize the product offerings of Nuveen funds and eliminate overlapping products. The Acquiring Fund and the Target Fund have similar investment objectives and policies, and substantially similar portfolio compositions. The proposed
Reorganization is intended to result in lower total expenses per common share (excluding the costs of leverage) due to economies of scale resulting from the larger size of the combined fund and to enhance the secondary trading market for common
shares of the Acquiring Fund as a result of the greater share volume of the combined fund. In order for the Reorganization to occur, each Fund must obtain the requisite shareholder approvals as well as certain consents, confirmations and/or waivers
from various third parties, including rating agencies with respect to outstanding preferred shares. Because the closing of the Reorganization is contingent on the Target Fund and the Acquiring Fund satisfying (or obtaining the waiver of) their
respective closing conditions, it is possible that the Reorganization will not occur, even if shareholders of your Fund approve the Reorganization and your Fund satisfies all of its closing conditions. If the requisite shareholder approvals are not
obtained, each Funds Board may take such actions as it deems in the best interest of its Fund including conducting additional solicitations with respect to the proposals or continuing to operate the Fund as a stand-alone fund. For a fuller
discussion of the Boards considerations regarding the approval of the Reorganization, see Proposal No. 2Information About the ReorganizationReasons for the Reorganization.
Material Federal Income Tax Consequences of the Reorganization
As a condition to closing, the Funds will receive an opinion of Vedder Price P.C., subject to certain representations, assumptions and
conditions, substantially to the effect that the proposed Reorganization will qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the Code). In addition, K&L Gates LLP, as
special tax counsel to the Acquiring Fund, will deliver an opinion to the Acquiring Fund, subject to certain representations, assumptions and conditions, substantially to the effect that the Acquiring Fund VMTP Shares received in the Reorganization
by holders of the VMTP Shares of the Target Fund will qualify as equity in the Acquiring Fund for federal income tax purposes. Accordingly, it is expected that neither Fund will recognize gain or loss for federal income tax purposes as a direct
result of the Reorganization. It is also expected that preferred shareholders of the Target Fund who receive preferred Acquiring Fund shares pursuant to the Reorganization will recognize no gain or loss for federal income tax purposes. To the
22
extent that Target Fund portfolio securities are sold in connection with the Reorganization, the Target Fund may realize gains or losses. Gains from such sales will be taxable to preferred
shareholders of the Target Fund to the extent such amounts are required to be allocated to distributions received by preferred shareholders of the Target Fund. However, since the Target Funds current portfolio composition is substantially
similar to that of the Acquiring Fund, it is not currently expected that any significant portfolio sales will occur solely in connection with the Reorganization (less than 5% of the assets of the Target Fund).
Comparison of the Acquiring Fund and the Target Fund
General.
The Acquiring Fund and the Target Fund are closed-end management investment companies. Each Fund
is a diversified management investment company. Set forth below is certain comparative information about the organization, capitalization and operation of the Funds.
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Organization
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Fund
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Organization
Date
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State of
Organization
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Entity Type
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Acquiring Fund
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October 8, 2003
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Massachusetts
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business trust
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Target Fund
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September 13, 2007
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Massachusetts
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business trust
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CapitalizationCommon
Shares
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Fund
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Authorized
Shares
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Shares
Outstanding
(1)
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Par Value
Per Share
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Preemptive,
Conversion
or Exchange
Rights
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Rights to
Cumulative
Voting
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Exchange
on which
Common
Shares are
Listed
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Acquiring Fund
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Unlimited
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31,336.775
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$
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0.01
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None
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None
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NYSE MKT
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Target Fund
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Unlimited
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18,899.837
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$
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0.01
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None
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None
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NYSE
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(1)
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As of March 18, 2013.
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Upon the closing of the Reorganization, it is expected that the common shares of the Acquiring Fund will continue to be listed on the
NYSE MKT.
The Acquiring Fund currently has outstanding 510 VMTP Shares, with a par value of $0.01 per share and a liquidation
preference of $100,000 per share, which will remain outstanding following the completion of the Reorganization. The Target Fund has outstanding 360 VMTP Shares, with a par value of $0.01 per share and a liquidation preference of $100,000 per share.
VMTP Shares are entitled to one vote per share. All preferred shares of the Acquiring Fund, including preferred shares to be issued in connection with the Reorganization, will rank equal to each other and with the Acquiring Funds existing
outstanding preferred shares as to the payment of dividends and as to the distribution of assets in the event of the Acquiring Funds liquidation. In addition, the preferred shares of the Acquiring Fund, including the preferred shares of the
Acquiring Fund to be issued in connection with the Reorganization, will be senior in priority to the Acquiring Funds common shares as to the payment of dividends and the distribution of assets in the event of the Acquiring Funds
liquidation.
Investment Objectives and Policies.
The Funds have similar investment objectives
and policies. The Acquiring Funds primary investment objective is to provide high current income exempt from regular federal income tax. The Acquiring Funds secondary investment objective is to seek attractive total return consistent
with its primary objective. Similarly, the Target Funds primary
23
investment objective is to provide attractive income exempt from regular federal income tax. The Target Funds secondary investment objective is to seek additional return.
Under normal circumstances, each Fund invests its assets, including assets attributable to preferred shares and the principal amount of
any borrowings (Managed Assets), in a portfolio of municipal securities that pay interest that is exempt from regular federal income tax. It is a fundamental policy of each Fund that its investment in municipal securities paying interest
that is exempt from regular federal income tax will, under normal circumstances, comprise at least 80% of the Funds Managed Assets. Under normal circumstances, each Fund expects to be fully invested (at least 95% of its Managed Assets) in such
tax-exempt municipal securities. Up to 30% of each Funds Managed Assets may be invested in municipal securities that pay interest that is taxable under the federal alternative minimum tax applicable to individuals. Each Fund seeks to achieve
its investment objectives by investing in municipal securities that the Adviser believes are underrated and undervalued.
Each
Fund invests at least 50% of its Managed Assets in investment-grade-quality municipal securities. A security is considered investment-grade quality if it is rated within the four highest grades (Baa or BBB or better by Moodys Investors
Service, Inc. (Moodys), Standard & Poors Corporation, a division of The McGraw-Hill Companies (S&P), or Fitch Ratings (Fitch)) by all nationally recognized statistical rating organizations
(NRSROs) that rate such security, or if it is unrated but judged to be of comparable quality by the Adviser.
Each
Fund may invest up to 50% of its Managed Assets in municipal securities that at the time of investment are rated below investment grade. Below-investment-grade-quality municipal securities include those municipal securities that are rated investment
grade by one or more NRSRO but rated below investment grade by at least one NRSRO. No more than 5% of the Acquiring Funds Managed Assets and, with respect to the Target Fund, 10% of its Managed Assets, may be invested in municipal securities
rated below B3/B- or that are unrated but judged to be of comparable quality by the Adviser. This means that each Fund may invest in municipal securities that are involved in bankruptcy or insolvency proceedings or are experiencing other financial
difficulties at the time of acquisition (such securities are commonly referred to as distressed securities). Municipal securities of below-investment-grade quality are regarded as having predominately speculative characteristics with respect to
capacity to pay interest and repay principal and are commonly referred to as junk bonds. The relative percentages of the value of the investments attributable to investment-grade municipal securities and to below-investment-grade municipal
securities could change over time as a result of rebalancing of each Funds assets by the Adviser, market value fluctuations, issuance of additional shares and other events. If a municipal security satisfies the ratings requirements described
above at the time of purchase, a Fund will not be required to dispose of the security upon a downgrade.
Each Fund may also
invest in securities of other open- or closed-end investment companies that invest primarily in municipal securities of the types in which the Fund may invest directly. In addition, each Fund may purchase municipal securities that are additionally
secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies that provide such credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for insured obligations may reduce a Funds income. Each Fund may use any insurer, regardless of its rating. A municipal security with an insurance feature will be deemed to have the
rating of its insurer. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the Funds common shares.
24
Each Fund may enter into certain derivative instruments in pursuit of its investment
objectives, including to seek to enhance return, to hedge some of the risk of the Funds investments in municipal securities or a substitute for a position in the underlying asset. Such instruments include financial futures contracts, swap
contracts (including interest rate and credit default swaps), options on financial futures, options on swap contracts or other derivative instruments. A Fund may not enter into a futures contract or related options or forward contracts if more than
30% of the Funds net assets would be represented by futures contracts or more than 5% of the Funds net assets would be committed to initial margin deposits and premiums on futures contracts or related options.
Each Fund may invest up to approximately 15% of its Managed Assets in inverse floating rate securities. Inverse floating rate securities
represent a leveraged investment in the underlying municipal bond deposited. Inverse floating rate securities offer the opportunity for higher income than the underlying bond, but will subject the Fund to the risk of lower or even no income if
short-term interest rates rise sufficiently. By investing in an inverse floating rate security rather than directly in the underlying bond, the Fund will experience a greater increase in its common share net asset value if the underlying municipal
bond increases in value, but will also experience a correspondingly larger decline in its common share net asset value if the underlying bond declines in value.
Each Fund may borrow money for the repurchase of its shares or for temporary or emergency purposes, such as for the payment of dividends or the settlement of portfolio transactions. During temporary
defensive periods and in order to keep the Funds cash fully invested, each Fund may deviate from its investment objectives and invest up to 100% of its net assets in short-term investments including high-quality, short-term securities that may
be either tax-exempt or taxable. Each Fund intends to invest in taxable short-term investments only in the event that that suitable tax-exempt short-term investments are not available at reasonable prices and yields.
Credit Quality.
A comparison of the credit quality (as a percentage of total investment exposure to
municipal bonds, which includes the leveraged effect of the Funds investments in tender option bond trusts) of the respective portfolios of the Acquiring Fund and the Target Fund, as of October 31, 2012, is set forth in the table below.
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Credit Rating
(1)
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Acquiring
Fund
(2)
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Target
Fund
(2)
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Combined
Fund Pro
Forma
(3)
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AAA/U.S. Guaranteed
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1
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%
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%
(3)
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%
(3)
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AA
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34
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%
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25
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%
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31
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%
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A
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10
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%
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18
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%
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13
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%
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BBB
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13
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%
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17
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%
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15
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%
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BB or Lower
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11
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%
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11
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%
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11
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%
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N/R
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31
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%
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29
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%
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30
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%
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TOTAL
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100
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%
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100
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%
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100
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%
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(1)
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Ratings shown are the highest rating given by one of the following national rating agencies: Standard & Poors Corporation, a division of The McGraw-Hill
Companies (S&P), Moodys Investors Service, Inc. (Moodys) or Fitch, Inc. (Fitch). Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC, CC and D are
below-investment grade ratings. Certain bonds backed by U.S. Government or agency securities are regarded as having an implied rating equal to the rating of such securities. Holdings designated N/R are not rated by these national rating agencies.
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25
(2)
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Excluding investments in derivatives.
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(3)
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Reflects the effect of the Reorganization.
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(4)
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Rounds to less than 1%.
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Leverage.
Each Fund may utilize the following forms of leverage: (a) portfolio investments that have
the economic effect of leverage, including but not limited to investments in futures, options and inverse floating rate securities, (b) bank borrowings; and (c) the issuance of preferred shares. On December 21, 2012, each of the
Acquiring Fund and the Target Fund terminated a senior committed secured 364-day revolving line of credit with its custodian bank and paid the full outstanding balance, including accrued interest and fees. In conjunction with terminating these
borrowings, the Acquiring Fund and the Target Fund issued $51 million and $36 million of VMTP Shares, respectively, as a new form of leverage. As a result, each Fund currently engages in leverage through the issuance of preferred shares and the use
of inverse floaters. Certain important ratios related to each Funds use of leverage for the last three fiscal years for which financial statements are available are set forth below:
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Acquiring Fund
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2012
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2011
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2010
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Asset Coverage Ratio
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905.15
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%
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746.18
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%
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441.53
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%
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Regulatory Leverage Ratio
(1)
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11.05
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%
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13.40
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%
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22.65
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%
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Effective Leverage Ratio
(2)
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33.90
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%
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34.75
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%
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31.15
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%
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Target Fund
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2012
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2011
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2010
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Asset Coverage Ratio
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793.24
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%
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669.79
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%
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689.54
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%
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Regulatory Leverage Ratio
(1)
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12.61
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%
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14.93
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%
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14.50
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%
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Effective Leverage Ratio
(2)
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33.41
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%
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36.88
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%
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29.82
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%
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(1)
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Regulatory leverage consists of preferred shares or debt issued by the Fund. Both of these are part of a Funds capital structure. Regulatory leverage is sometimes
referred to as 1940 Act Leverage and is subject to asset coverage limits set forth in the 1940 Act.
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(2)
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Effective leverage is a Funds effective economic leverage, and includes both regulatory leverage and the leverage effects of certain derivative investments in the
Funds portfolio. Currently, the leverage effects of Tender Option Bond (TOB) inverse floater holdings, in addition to any regulatory leverage, are included in effective leverage ratios.
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Board Members and Officers.
The Funds have the same Board Members and officers. The management of the
Funds, including general supervision of the duties performed by the Adviser under an investment management agreement between the Adviser and each Fund (an Investment Management Agreement), is the responsibility of its Board. Each Fund
currently has ten (10) trustees, one (1) of whom is an interested person (as defined in the 1940 Act) and nine (9) of whom are not interested persons (the independent trustees). The names and business addresses
of the Board Members and officers of the Funds and their principal occupations and other affiliations during the past five years are set forth under Proposal No. 1Board Nominees/Board Members.
Investment Adviser
. The Adviser, Nuveen Fund Advisors, is the investment adviser to each Fund and is
responsible for overseeing each Funds overall investment strategy, including the use of leverage, and its implementation. Nuveen Fund Advisors also is responsible for the ongoing monitoring of the sub-adviser to the Funds, managing each
Funds business affairs and providing certain clerical, bookkeeping and other administrative services to the Funds. Nuveen Fund Advisors is located at 333 West Wacker Drive, Chicago, IL 60606.
26
The Adviser, a registered investment adviser, is a wholly-owned subsidiary of Nuveen
Investments. Founded in 1898, Nuveen Investments and its affiliates had approximately $220 billion in assets under management as of September 30, 2012. On November 13, 2007, Nuveen Investments was acquired by investors led by Madison
Dearborn Partners, LLC (the MDP Acquisition).
Nuveen Fund Advisors has selected its affiliate, Nuveen Asset
Management, LLC (Nuveen Asset Management or the Sub-Adviser), located at 333 West Wacker Drive, Chicago, IL 60606, to serve as a sub-adviser to each of the Funds, pursuant to a sub-advisory agreement between Nuveen Fund
Advisors and Nuveen Asset Management (the Sub-Advisory Agreement). Nuveen Asset Management oversees day-to-day operations and manages the investment of the Funds assets on a discretionary basis, subject to the supervision of Nuveen
Fund Advisors. Pursuant to the sub-advisory agreement, Nuveen Asset Management will be compensated for the services it provides to the Funds with a portion of the management fee Nuveen Fund Advisors receives from the Fund. Nuveen Fund Advisors and
Nuveen Asset Management retain the right to reallocate investment advisory responsibilities and fees between themselves in the future.
Each Fund is dependent upon services and resources provided by its Adviser, and therefore the Advisers parent, Nuveen Investments. Nuveen Investments significantly increased its level of debt in
connection with the MDP Acquisition. While Nuveen Investments believes that monies generated from operations and cash on hand will be adequate to fund debt service requirements, capital expenditures and working capital requirements for the
foreseeable future, there can be no assurance that Nuveen Investments business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable Nuveen Investments to pay its
indebtedness (with scheduled maturities beginning in 2014) or to fund its other liquidity needs. Nuveen Investments believes that potential adverse changes to its overall financial position and business operations would not adversely affect its or
its affiliates portfolio management operations and would not otherwise adversely affect its ability to fulfill its obligations to the Funds under the Investment Management Agreements.
Unless earlier terminated as described below, each Funds Investment Management Agreement with Nuveen Fund Advisors will remain in
effect until August 1, 2013. Each Investment Management Agreement continues in effect from year to year so long as such continuation is approved at least annually by: (1) the Board of Trustees or the vote of a majority of the outstanding
voting securities of the Fund; and (2) a majority of the trustees who are not interested persons of any party to the Investment Management Agreement, cast in person at a meeting called for the purpose of voting on such approval. Each Investment
Management Agreement may be terminated at any time, without penalty, by either the Fund or Nuveen Fund Advisors upon 60 days written notice, and is automatically terminated in the event of its assignment as defined in the 1940 Act.
Pursuant to each Investment Management Agreement, each Fund has agreed to pay an annual management fee for the overall advisory and
administrative services and general office facilities provided by Nuveen Fund Advisors. The Funds management fee consists of two componentsa complex-level component, based on the aggregate amount of all eligible fund assets managed by
Nuveen Fund Advisors, and a specific fund-level component, based only on the amount of Managed Assets within such Fund. This pricing structure enables the Funds shareholders to benefit from growth in assets within each individual fund as well
as from growth of complex-wide assets managed by Nuveen Fund Advisors.
27
The annual fund-level fee for each Fund, payable monthly, is calculated according to the
following schedule:
Management Fee Schedule for the Acquiring Fund and the Target Fund
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Average Daily Managed Assets*
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Fund-Level
Fee Rate
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For the first $125 million
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0.5500
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%
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For the next $125 million
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0.5375
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%
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For the next $250 million
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0.5250
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%
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For the next $500 million
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0.5125
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%
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For the next $1 billion
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0.5000
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%
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For managed assets over $2 billion
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0.4750
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%
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The management fee compensates the Adviser for overall investment advisory and administrative services
and general office facilities. Each Fund pays all of its other costs and expenses of its operations, including compensation of its Board Members (other than those affiliated with the Adviser), custodian, transfer agency and dividend disbursing
expenses, legal fees, expenses of independent auditors, expenses of repurchasing shares, expenses of issuing any preferred shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any. For the services provided pursuant to an investment sub-advisory agreement, Nuveen Fund Advisors pays Nuveen Asset Management a fee, payable monthly, equal to 46.6667% of the management fee (net of
applicable breakpoints, waivers and reimbursements) paid by the Funds to Nuveen Fund Advisors.
Due to the increased size of
the combined fund, the effective fund-level fee rate as a percentage of average daily Managed Assets for the combined fund is expected to be lower than the current effective fund-level fee rate for each of the Funds. While the effective fund-level
management fee rate as a percentage of net assets applicable to common shares is expected to be higher for the Acquiring Fund, the total annual expenses for the Acquiring Fund are expected to be lower. Each Fund also pays a complex-level fee to
Nuveen Fund Advisors, which is payable monthly and is in addition to the fund-level fee. The complex-level fee is based on the aggregate daily amount of eligible assets for all Nuveen sponsored funds in the U.S., as stated in the table below. As of
October 31, 2012, the complex-level fee rate for each of these Funds was 0.1691%.
The annual complex-level fee for each
Fund, payable monthly, is calculated according to the following schedule:
Complex-Level Fee Rates
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Complex-Level Managed Asset Breakpoint Level
*
|
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Effective Rate
at Breakpoint
Level
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$55 billion
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0.2000
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%
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$56 billion
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0.1996
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%
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$57 billion
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0.1989
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%
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$60 billion
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0.1961
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%
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$63 billion
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0.1931
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%
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$66 billion
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0.1900
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%
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$71 billion
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|
0.1851
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%
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28
|
|
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Complex-Level Managed Asset Breakpoint Level
*
|
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Effective Rate
at Breakpoint
Level
|
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$76 billion
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|
|
0.1806
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%
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$80 billion
|
|
|
0.1773
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%
|
$91 billion
|
|
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0.1691
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%
|
$125 billion
|
|
|
0.1599
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%
|
$200 billion
|
|
|
0.1505
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%
|
$250 billion
|
|
|
0.1469
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%
|
$300 billion
|
|
|
0.1445
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%
|
*
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For the fund-level and complex-level fees, managed assets include closed-end fund assets managed by the Adviser that are attributable to financial leverage. For these
purposes, financial leverage includes the funds use of preferred stock and borrowings and certain investments in the residual interest certificates (also called inverse floating rate securities) in tender option bond (TOB) trusts, including
the portion of assets held by a TOB trust that has been effectively financed by the trusts issuance of floating rate securities, subject to an agreement by the Adviser as to certain funds to limit the amount of such assets for determining
managed assets in certain circumstances. The complex-level fee is calculated based upon the aggregate daily managed assets of all Nuveen Funds that constitute eligible assets. Eligible assets do not include assets attributable to
investments in other Nuveen Funds or assets in excess of a determined amount (originally $2 billion) added to the Nuveen Fund complex in connection with Nuveen Fund Advisors assumption of the management of the former First American Funds
effective January 1, 2011.
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A discussion of the basis for the Boards most recent approval of each
Funds Investment Management Agreement and the Sub-Advisory Agreement is included in the Funds Annual Report for the fiscal year ended October 31, 2012.
Portfolio Management.
Subject to the supervision of Nuveen Fund Advisors, Nuveen Asset Management is responsible for execution of specific investment strategies and
day-to-day investment operations. Nuveen Asset Management manages the Funds using a team of analysts and a portfolio manager that focuses on a specific group of funds. John V. Miller, CFA, is the portfolio manager of the Acquiring Fund and the
Target Fund. Additional information regarding the portfolio managers compensation, other accounts managed and ownership of securities is contained in the Reorganization SAI. Mr. Miller has been the portfolio manager for the Acquiring Fund
since its inception in 2003 and has been involved in the management of the Target Fund since its inception in 2007. He assumed full portfolio management responsibility for the Target Fund in 2010. Mr. Miller will continue to manage the
Acquiring Fund upon completion of the Reorganization.
Mr. Miller is currently a portfolio manager for several funds. He
joined Nuveens investment management team as a credit analyst in 1996, with three prior years of experience in the municipal market with a private account management firm. He has been responsible for analysis of high yield credits in the
utility, solid waste and energy related sectors. Mr. Miller is a Managing Director of Nuveen (since 2007), and Co-Head of Fixed Income of Nuveen Asset Management (since 2011). He was previously an analyst with C.W. Henderson & Assoc.,
a municipal bond manager for private accounts. Mr. Miller earned a B.A. in economics and political science from Duke University, an M.A. in economics from Northwestern University and an M.B.A. in finance with honors from the University of
Chicago. He holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of Chicago. He manages 10 Nuveen-sponsored investment companies, with a total of approximately $14.27 billion under management as
of December 31, 2012.
29
Comparative Risk Information
Because the Funds have similar investment strategies, the principal risks of each Fund are similar. Each Fund is subject to credit risk,
interest rate risk and other risks of investing primarily in a portfolio of municipal securities. Each Fund is subject to the risks associated with the use of inverse floating rate securities and the issuance of preferred shares. The principal risks
of investing in the Acquiring Fund are described in more detail in the Memorandum attached as Appendix B to this Proxy Statement. An investment in the Target Fund is also subject to each of these principal risks.
Comparative Expense Information
The purpose of the comparative fee table is to assist you in understanding the various costs and expenses of investing in shares of the Funds. The information in the table reflects the fees and expenses
for each Funds fiscal year ended October 31, 2012, as adjusted as described in footnote 1 below, the pro-forma expenses for the 12 months ended October 31, 2012, for the combined fund. The figures in the Example are not necessarily
indicative of past or future expenses, and actual expenses may be greater or less than those shown. The Funds actual rates of return may be greater or less than the hypothetical 5% annual return shown in the Example.
Comparative Fee Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquiring
Fund
(1)
|
|
|
Target
Fund
(2)
|
|
|
Combined
Fund Pro
Forma
(3)
|
|
Annual Expenses (as a percentage of net assets applicable to common shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Fees
|
|
|
1.01
|
%
|
|
|
1.10
|
%
|
|
|
1.03
|
%
|
Fees on VMTP Shares and Interest and Related Expenses from Inverse Floaters
(4)
|
|
|
0.22
|
%
|
|
|
0.23
|
%
|
|
|
0.22
|
%
|
Other Expenses
|
|
|
0.19
|
%
|
|
|
0.17
|
%
|
|
|
0.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Annual Expenses
|
|
|
1.42
|
%
|
|
|
1.50
|
%
|
|
|
1.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Stated as percentages of average net assets attributable to Common Shares for the fiscal year ended October 31, 2012, adjusted to reflect the expiration of the Fee
and Expense Reimbursement Agreement on November 30, 2011, the termination of the borrowing arrangement with the custodian bank on December 21, 2012 and the issuance of $51 million of Variable Rate MuniFund Term Preferred Shares on that
same date, and to exclude the expenses incurred during the 12-month period for dividend disbursing agent fees associated with Auction Rate Preferred Shares that are no longer outstanding.
|
(2)
|
Stated as percentages of average net assets attributable to Common Shares for the fiscal year ended October 31, 2012, adjusted to reflect the termination of the
borrowing arrangement with the custodian bank on December 21, 2012 and the issuance of $36 million of Variable Rate MuniFund Term Preferred Shares on that same date.
|
(3)
|
The Combined Fund Pro Forma figures reflect the impact of applying the Acquiring Funds fund-level management fee rates to the Combined Fund Pro Forma and the
anticipated reduction of certain duplicative expenses eliminated as a result of the Reorganization. Combined Fund Pro Forma expenses do not include the expenses to be borne by the Funds in connection with the Reorganization, which are estimated to
be $50,000 (0.01%) for the Acquiring Fund and $620,000 (0.28%) for the Target Fund.
|
(4)
|
Fees on VMTP Shares assumes annual dividends paid, as well as the amortization of offering costs. Interest and Related Expenses from Inverse Floaters
includes interest expense that arises because accounting rules require the Fund to treat interest paid by trusts issuing certain inverse floating rate investments held by the
|
30
|
Fund as having been paid (indirectly) by the Fund. Because the Fund also recognizes a corresponding amount of interest income (also indirectly), the Funds net asset value, net investment
income, and total return are not affected by this accounting treatment. The actual fees on VMTP Shares and interest and Related Expenses from Inverse Floaters incurred in the future may be higher or lower.
|
Example
: The following examples illustrate the expenses that a common shareholder would pay on a $1,000
investment that is held for the time periods provided in the table. The examples assume that all dividends and other distributions are reinvested and that Total Annual Expenses remain the same. The examples also assume a 5% annual return. The
examples should not be considered a representation of future expenses. Actual expenses may be greater or lesser than those shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
Acquiring Fund
|
|
$
|
14
|
|
|
$
|
45
|
|
|
$
|
78
|
|
|
$
|
170
|
|
Target Fund
|
|
$
|
15
|
|
|
$
|
47
|
|
|
$
|
82
|
|
|
$
|
179
|
|
Combined Fund Pro Forma
|
|
$
|
14
|
|
|
$
|
45
|
|
|
$
|
77
|
|
|
$
|
169
|
|
Comparative Performance Information
Comparative total return performance for the Funds for periods ended October 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Annual Total Return
on Net Asset Value
|
|
|
Average Annual Total Return
on Market Value
|
|
Fund (Inception Date)
|
|
One
Year
|
|
|
Five
Years
|
|
|
Since
Inception
|
|
|
One
Year
|
|
|
Five
Years
|
|
|
Since
Inception
|
|
Acquiring Fund (11/19/03)
|
|
|
24.55
|
%
|
|
|
6.23
|
%
|
|
|
7.36
|
%
|
|
|
29.84
|
%
|
|
|
6.45
|
%
|
|
|
7.18
|
%
|
Target Fund (11/15/07)
|
|
|
24.56
|
%
|
|
|
N/A
|
|
|
|
6.29
|
%
|
|
|
27.09
|
%
|
|
|
N/A
|
|
|
|
5.29
|
%
|
Average Annual Total Return on Net Asset Value is the combination of changes in common share net asset
value, reinvested dividend income at net asset value and reinvested capital gains distributions at net asset value, if any. The last dividend declared in the period, which is typically paid on the first business day of the following month, is
assumed to be reinvested at the ending net asset value. The actual reinvestment price for the last dividend declared in the period may often be based on the Funds market price (and not its net asset value), and therefore may be different from
the price used in the calculation. Average Annual Total Return on Market Value is the combination of changes in the market price per share and the effect of reinvested dividend income and reinvested capital gains distributions, if any, at the
average price paid per share at the time of reinvestment. The last dividend declared in the period, which is typically paid on the first business day of the following month, is assumed to be reinvested at the ending market price. The actual
reinvestment for the last dividend declared in the period may take place over several days, and in some instances it may not be based on the market price, so the actual reinvestment price may be different from the price used in the calculation. Past
performance information is not necessarily indicative of future results.
Because
the Funds have similar investment strategies, the principal risks of each Fund are similar. The principal risks of investing in the Acquiring Fund, including risks inherent in investing in VMTP Shares, are described under the caption Risk
Factors in the Memorandum accompanying this Proxy Statement as Appendix B.
31
C.
|
INFORMATION ABOUT THE REORGANIZATION
|
General
The Board of Nuveens municipal closed-end funds has approved a series of mergers of municipal closed-end funds, including the Reorganization with respect to the Acquiring Fund and the Target Fund.
As noted above, the Funds have similar investment objectives and policies and substantially similar portfolio compositions. With respect to the proposed Reorganization, it is intended that the combination of the Funds will enhance the secondary
trading market for common shares of the Funds and will result in lower total expenses per common share (excluding the cost of leverage) as a result of the increased size of the combined fund. The closing of the Reorganization is contingent upon
certain conditions being satisfied or waived. Principally, shareholders of the Target Fund must approve the Reorganization of their Fund into the Acquiring Fund. The Acquiring Fund also must obtain the shareholder approvals with respect to the
Reorganization described in the Joint Proxy Statement/Prospectus issued to the common shareholders of the Target Fund and the Acquiring Fund in order for the Reorganization to occur. Each Fund also must obtain certain consents, confirmations and/or
waivers from various third parties, including rating agencies with respect to preferred shares. Because the closing of the Reorganization is contingent on the Target Fund and the Acquiring Fund obtaining the requisite shareholder approvals and
satisfying (or obtaining the waiver of) their other closing conditions, it is possible that the Reorganization will not occur, even if shareholders of your Fund approve the Reorganization and your Fund satisfies all of its closing conditions. If the
requisite shareholder approvals are not obtained, the Board of each Fund may take such actions as it deems in the best interests of its Fund, including conducting additional solicitations with respect to the proposals or continuing to operate the
Fund as a stand-alone fund.
Terms of the Reorganization
General.
The Agreement and Plan of Reorganization by and between the Target Fund and the Acquiring Fund
(the Agreement), in the form attached as Appendix A, provides for: (i) the Acquiring Funds acquisition of substantially all of the assets of the Target Fund in exchange for newly issued common shares of the Acquiring
Fund, par value $0.01 per share, and newly issued VMTP Shares of the Acquiring Fund, with a par value of $0.01 per share and a liquidation preference of $100,000 per share, and the Acquiring Funds assumption of substantially all of the
liabilities of the Target Fund; and (ii) the distribution of the Acquiring Fund common shares and Acquiring Fund VMTP Shares received by the Target Fund to its common and preferred shareholders, respectively, as part of the liquidation,
dissolution and termination of the Target Fund in accordance with applicable law. No fractional Acquiring Fund common shares will be issued to the Target Funds common shareholders in connection with the Reorganization and, in lieu of such
fractional shares, the Target Funds common shareholders will receive cash in an amount equal to the value received for such shares in the open market, which may be higher or lower than net asset value. Preferred shareholders of the Target Fund
will receive the same number of Acquiring Fund VMTP Shares having substantially identical terms as the outstanding VMTP Shares of the Target Fund held by such preferred shareholders immediately prior to the Reorganization. The aggregate liquidation
preference of the Acquiring Fund preferred shares received in the Reorganization will equal the aggregate liquidation preference of the Target Fund preferred shares held immediately prior to the Reorganization. VMTP Shares issued by the Acquiring
Fund in connection with the Reorganization will have equal priority with the Acquiring Funds outstanding VMTP as to the payment of dividends and the distribution of assets in the event of the Acquiring Funds liquidation. In addition, the
preferred shares of the
32
Acquiring Fund, including the Acquiring Fund preferred shares to be issued in the Reorganization, will be senior in priority to the Acquiring Funds common shares as to the payment of
dividends and distribution of assets in the event of the Acquiring Funds liquidation.
As a result of the
Reorganization, the assets of the Acquiring Fund and the Target Fund would be combined, and the shareholders of the Target Fund would become shareholders of the Acquiring Fund. The closing date is expected to be on or about June 10, 2013 or
such other date as the parties may agree (the Closing Date). Following the Reorganization, the Target Fund would terminate its registration as an investment company under the 1940 Act. The Acquiring Fund will continue to operate after
the Reorganization as a registered closed-end management investment company with the investment objectives and policies described in this Proxy Statement.
Following the Reorganization, each preferred shareholder of the Target Fund would own the same number of Acquiring Fund VMTP Shares as the VMTP Shares of the Target Fund held by such shareholder
immediately prior to the Closing Date, with substantially identical terms, as of the time of the closing of the Reorganization, to the Target Fund VMTP Shares for which they were exchanged. As a result of the Reorganization, preferred shareholders
of the Funds would hold reduced voting percentages of preferred shares for matters to be voted on by all preferred shareholders or by common and preferred shareholders voting together as a single class than they held in the Acquiring Fund or Target
Fund individually.
The holders of VMTP Shares of the Target Fund will receive the following new series of VMTP Shares of the
Acquiring Fund:
|
|
|
|
|
Acquired Fund
|
|
Target Fund Preferred
Shares
Outstanding
|
|
Acquiring Fund Preferred Shares
to be Issued in
the Reorganization
|
Municipal High Income 2
|
|
VMTP Shares, Series 2016 $100,000 liquidation value per share Term Redemption Date: January 1, 2016
|
|
VMTP Shares, Series 2016 #1 $100,000 liquidation value per share Term Redemption Date: January 1, 2016
|
Valuation of Assets and Liabilities.
If the Reorganization is approved and
the other closing conditions are satisfied or waived, the value of the net assets of the Target Fund will be the value of its assets, less its liabilities, computed as of the close of regular trading on the NYSE on the business day immediately prior
to the Closing Date (such time and date being hereinafter called the Valuation Time). The value of the Target Funds assets shall be determined by using the valuation procedures of the Nuveen closed-end funds adopted by the Board or
such other valuation procedures as shall be mutually agreed upon by the parties. The value of the Target Funds net assets will be calculated net of the liquidation preference (including accumulated and unpaid dividends) of all outstanding
Target Fund preferred shares.
Dividends will accumulate on shares of the Target Funds VMTP Shares, up to and including
the day before the Closing Date occurs and will be paid, together with the dividends then payable in respect of the shares of Acquiring Fund preferred shares to the holders thereof on the Dividend Payment Date (as defined in the VMTP Statement) in
respect of the dividend period of such shares. The first dividend period for the VMTP Shares to be issued in the Reorganization will commence on the Closing Date and end on the last day of the month in which the Closing Date occurs.
33
Amendments.
Under the terms of the Agreement, the Agreement
may be amended, modified, or supplemented in such manner as may be mutually agreed upon in writing by each party as specifically authorized by each Funds Board; provided, however, that following the meeting of the shareholders of the Funds
called by each Fund, no such amendment, modification or supplement may have the effect of changing the provisions for determining the number of Acquiring Fund shares to be issued to the Target Funds shareholders under the Agreement to the
detriment of such shareholders without their further approval.
Conditions.
Under the terms of
the Agreement, the closing of the Reorganization is conditioned upon: (i) the requisite approval by the shareholders of the Target Fund of the proposals in this Proxy Statement; (ii) the requisite approval by the shareholders of the
Acquiring Fund; (iii) the Funds receipt of an opinion substantially to the effect that the Reorganization will qualify as a reorganization under the Code, (iv) the absence of legal proceedings challenging the Reorganization; and
(v) the Funds receipt of certain customary certificates and legal opinions. See Material Federal Income Tax Consequences of the Reorganization. Additionally, in order for the Reorganization to occur: (i) each Fund
must obtain certain consents, confirmations and/or waivers from various third parties, including consents required under the outstanding series of VMTP shares; (ii) confirmation of the requisite ratings on the Acquiring Fund VMTP Shares to be
issued in the Reorganization must be obtained; and (iii) the Acquiring Fund must enter into the relevant agreements described in the Memorandum with respect to the new series of Acquiring Fund VMTP Shares to be issued in the Reorganization.
Termination.
The Agreement may be terminated by the mutual agreement of the parties and such
termination may be effected by each partys Chief Administrative Officer or a Vice President without further action by the Board. In addition, any party may at its option terminate the Agreement at or before the Closing Date due to: (i) a
breach by any other party of any representation, warranty, or agreement contained therein to be performed at or before the Closing Date, if not cured within 30 days; (ii) a condition precedent to the obligations of the terminating party that
has not been met and it reasonably appears it will not or cannot be met; or (iii) a determination by its Board that the consummation of the transactions contemplated by the Agreement is not in the best interests of such party.
Reasons for the Reorganization
Based on the considerations below, the Board of each Fund, including the Board Members who are not interested persons (as defined in the 1940 Act) of the Funds (the Independent Board
Members), has determined that the Reorganization would be in the best interests of its Fund and that the interests of the existing shareholders of the Fund would not be diluted as a result of the Reorganization. The Boards approved the
Reorganization and recommended that shareholders of the respective Funds approve the Reorganization.
In preparation for a
meeting of the Boards held on December 13, 2012 (the Meeting) at which the Reorganization was considered, the Adviser provided the Boards, prior to the Meeting and in prior meetings, with information regarding the proposed
Reorganization, including the rationale therefor and alternatives considered to the Reorganization. Prior to approving the Reorganization, the Independent Board Members reviewed the foregoing information with their independent legal counsel and with
management, reviewed with independent legal counsel applicable law and their duties in considering such matters, and met with independent legal counsel in a private session without
34
management present. The Boards considered a number of principal factors presented at the time of the Meeting or prior meetings in reaching their determinations, including the following:
|
|
|
the compatibility of the Funds investment objectives, policies and related risks;
|
|
|
|
consistency of portfolio management;
|
|
|
|
improved economies of scale and the potential for lower total expenses (excluding the costs of leverage);
|
|
|
|
the potential for improved secondary market trading with respect to the common shares;
|
|
|
|
the anticipated tax-free nature of the Reorganization;
|
|
|
|
the expected costs of the Reorganization;
|
|
|
|
the terms of the Reorganization and whether the Reorganization would dilute the interests of shareholders of the Funds;
|
|
|
|
the effect of the Reorganization on shareholder rights; and
|
|
|
|
any potential benefits of the Reorganization to the Adviser and its affiliates as a result of the Reorganization.
|
Compatibility of Investment Objectives, Policies and Related Risks.
Based on the information presented, the
Boards noted that the investment objectives, policies and risks of the Funds are similar. The Boards noted that each Fund is a diversified fund that invests primarily in municipal securities the income from which is exempt from regular federal
income tax. Each Fund invests at least 50% of its Managed Assets in investment-grade-quality municipal securities. The Boards considered that the portfolio composition of each Fund is substantially similar and considered the impact of the
Reorganization on each Funds portfolio, including any shifts in sector allocations, credit ratings, duration, yield and leverage costs. The Boards also recognized that each Fund utilizes leverage. Because the Funds have similar investment
strategies, the principal risks of each Fund are also similar.
Consistency of Portfolio
Management.
The Boards noted that each Fund has the same investment adviser, sub-adviser and portfolio manager and that such portfolio manager would continue to manage the Acquiring Fund upon completion of the
Reorganization. Through the Reorganization, the Boards recognized that shareholders will remain invested in a closed-end management investment company that will have greater net assets and benefits from potential economies of scale; the same
investment adviser and sub-adviser; and similar investment objectives and investment strategies.
Improved Economies of
Scale and Potential for Lower Total Expenses (Excluding the Costs of Leverage).
The Boards considered the fees and expense ratios of each of the Funds (including estimated expenses of the Acquiring Fund following the
Reorganization). As a result of the greater economies of scale from the larger asset size of the Acquiring Fund after the Reorganization, the Boards noted that it was expected that the total expenses per common share (excluding the costs of
leverage) of the combined fund would be lower than that of the Acquiring Fund and the Target Fund prior to the Reorganization. It is anticipated that the Funds will benefit from the larger asset size as fixed costs are shared over a larger asset
base. In addition, as each Fund utilizes leverage, the Boards
35
considered the differences in the costs of leverage between the Funds and the impact of the Reorganization on such costs. In this connection, the Boards noted the Advisers position that the
greater asset size of the combined fund may provide greater flexibility in managing the structure and costs of leverage over time.
Potential for Improved Secondary Market Trading with Respect to the Common Shares.
While it is not possible to predict trading levels at the time the Reorganization closes,
the Boards noted that the Reorganization is being proposed, in part, to seek to enhance the secondary trading market for the common shares of the Funds. The Boards considered that the potential for higher common share net earnings from operating
expense savings and enhanced total returns over time may increase investor interest in the combined fund which would result in increased market liquidity. The Acquiring Funds greater share volume may result in increased market liquidity after
the Reorganization, which may lead to narrower bid-ask spreads and smaller trade-to-trade price movements.
Anticipated
Tax-Free Reorganization.
The Reorganization will be structured with the intention that it qualify as a tax-free reorganization for federal income tax purposes, and the Funds will obtain an opinion of counsel substantially
to this effect (based on certain factual representations and certain customary assumptions).
Expected Costs of the
Reorganization.
The Boards considered the terms and conditions of the Agreement, including the estimated costs associated with the Reorganization and the allocation of such costs between the Acquiring Fund and the Target
Fund. The Boards noted, however, that, assuming the Reorganization is consummated, the Adviser anticipated that the projected costs of the Reorganization may be recovered over time for the common shareholders and that preferred shareholders will not
bear any costs of the Reorganization.
Terms of the Reorganization and Impact on
Shareholders.
The terms of the Reorganization are intended to avoid dilution of the interests of the existing shareholders of the Funds. In this regard, the Boards considered that each holder of common shares of the Target
Fund will receive common shares of the Acquiring Fund (taking into account any fractional shares to which the shareholder would be entitled) equal in value as of the Valuation Time to the aggregate per share net asset value of that
shareholders Target Fund common shares held immediately prior to the Reorganization. No fractional common shares of the Acquiring Fund, however, will be issued to shareholders in connection with the Reorganization and, in lieu of such
fractional shares, the Target Funds common shareholders will receive cash.
Preferred shareholders of the Target Fund
will receive the same number of Acquiring Fund VMTP Shares having substantially identical terms as the outstanding VMTP Shares of the Target Fund held by such preferred shareholders immediately prior to the Reorganization. The aggregate liquidation
preference of the Acquiring Fund preferred shares received in the Reorganization will equal the aggregate liquidation preference of the corresponding Target Fund preferred shares held immediately prior to the Reorganization.
Potential Benefits to Nuveen Fund Advisors and Affiliates.
The Boards recognized that the Reorganization
may result in some benefits and economies for the Adviser and its affiliates. These may include, for example, a reduction in the level of operational expenses incurred for administrative, compliance and portfolio management services as a result of
the elimination of the Target Fund as a separate fund in the Nuveen complex.
36
Conclusion.
Each Board, including the Independent Board
Members, approved the Reorganization, concluding that the Reorganization is in the best interests of its Fund and that the interests of existing shareholders of the Fund will not be diluted as a result of the Reorganization.
Capitalization
The following table sets forth the unaudited capitalization of the Funds as of October 31, 2012, adjusted to reflect the issuance of VMTP Shares as of December 21, 2012, and the pro-forma
combined capitalization of the combined fund as if the Reorganization had occurred on October 31, 2012. The table reflects a pro forma exchange ratio of approximately 0.96806999 common shares of the Acquiring Fund issued for each common share
of the Target Fund. If the Reorganization is consummated, the actual exchange ratio may vary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquiring
Fund
|
|
|
Acquiring Fund
Leverage
Adjustments
|
|
|
Target
Fund
|
|
|
Target Fund
Leverage
Adjustments
|
|
|
Pro Forma
Adjustments
|
|
|
Combined
Fund
Pro
Forma
(1)
|
|
Variable Rate MuniFund Term Preferred (VMTP) Shares, $100,000 stated value per share, at liquidation value; no shares outstanding
for Acquiring Fund adjusted; 510 shares outstanding for Acquiring Fund; no shares outstanding for Target Fund; 360 shares outstanding for Target Fund adjusted; and 870 shares outstanding for Combined Fund Pro Forma
|
|
|
|
|
|
$
|
51,000,000
|
|
|
|
|
|
|
$
|
36,000,000
|
|
|
|
|
|
|
$
|
87,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares, $.01 par value per share; 29,931,013 shares outstanding for Acquiring Fund; 18,588,534 shares outstanding for
Target Fund; and 47,926,015 shares outstanding for Combined Fund Pro Forma
|
|
$
|
299,310
|
|
|
|
|
|
|
$
|
185,885
|
|
|
|
|
|
|
$
|
(5,935
|
)
(
2)
|
|
$
|
479,260
|
|
Paid-in surplus
|
|
|
410,710,451
|
|
|
|
|
|
|
|
258,265,621
|
|
|
|
|
|
|
|
(664,065
|
)
(
3)
|
|
|
668,312,007
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquiring
Fund
|
|
|
Acquiring Fund
Leverage
Adjustments
|
|
Target
Fund
|
|
|
Target Fund
Leverage
Adjustments
|
|
Pro Forma
Adjustments
|
|
|
Combined
Fund
Pro
Forma
(1)
|
|
Undistributed (Over-distribution of) net investment income
|
|
$
|
841,407
|
|
|
|
|
$
|
843,673
|
|
|
|
|
$
|
(11,755
|
)
(4)
|
|
$
|
1,673,325
|
|
Accumulated net realized gain (loss)
|
|
|
(50,607,147
|
)
|
|
|
|
|
(41,530,537
|
)
|
|
|
|
|
|
|
|
|
(92,137,684
|
)
|
Net unrealized appreciation (depreciation)
|
|
|
41,328,926
|
|
|
|
|
|
24,871,099
|
|
|
|
|
|
(681,755
|
)
|
|
|
66,200,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets attributable to common shares
|
|
$
|
402,572,947
|
|
|
|
|
$
|
242,635,741
|
|
|
|
|
|
|
|
|
$
|
644,526,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value per common share outstanding (net assets attributable to common shares, divided by common shares
outstanding)
|
|
$
|
13.45
|
|
|
|
|
$
|
13.05
|
|
|
|
|
|
|
|
|
$
|
13.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
unlimited
|
|
|
|
|
|
unlimited
|
|
|
|
|
|
|
|
|
|
unlimited
|
|
Preferred
|
|
|
unlimited
|
|
|
|
|
|
unlimited
|
|
|
|
|
|
|
|
|
|
unlimited
|
|
(1)
|
The pro forma balances are presented as if the Reorganization were effective as of October 31, 2012, and are presented for informational purposes only. The actual
Closing Date of the Reorganization is expected to be on or about June 10, 2013, or such later time agreed to by the parties at which time the results would be reflective of the actual composition of shareholders equity as of that date.
|
(2)
|
Assumes the issuance of 17,955,002 Acquiring Fund common shares in exchange for the net assets of the Target Fund. These numbers are based on the net asset value of the
Acquiring Fund and Target Funds as of October 31, 2012, adjusted for estimated Reorganization costs, the effect of the required sale of securities and distributions, if any.
|
(3)
|
Includes the impact of estimated total Reorganization costs of $670,000, which will be borne by the common shareholders of the Acquiring Fund and Target Fund in the
amounts of $50,000 and $620,000, respectively.
|
(4)
|
Assumes the Target Fund makes a net investment income distribution of $11,755.
|
Expenses Associated with the Reorganization
In evaluating the Reorganization, management of the Funds estimated the amount of expenses the Funds would incur to be approximately
$670,000, which includes additional stock exchange listing fees, SEC registration fees, legal and accounting fees, proxy solicitation and distribution costs and other related administrative or operational costs. The expenses of the Reorganization
(whether or not consummated) will be allocated between the Funds ratably based on the relative expected benefits of the Reorganization comprised of forecasted cost savings and distribution increases, if any, to each Fund during the first year
following the Reorganization. Reorganization expenses have been or will be accrued as expenses of each Fund prior to the Valuation Time. These estimated expenses will be borne by the Acquiring Fund and Target Fund in the amounts of $50,000 (0.01%)
and $620,000 (0.28%), respectively. Preferred shareholders of the Funds will not bear any costs of the Reorganization.
38
Additional solicitation may be made by letter or telephone by officers or employees of
Nuveen Investments or the Adviser, or by dealers and their representatives. The Funds have engaged Computershare Fund Services to assist in the solicitation of proxies at an estimated aggregate cost of $10,500 per Fund plus reasonable expenses,
which is included in the foregoing estimate.
Dissenting Shareholders Rights of Appraisal
Under the charter documents of each Fund, shareholders of the Fund do not have dissenters rights of appraisal with
respect to the Reorganization.
Material Federal Income Tax Consequences of the Reorganization
As a condition to each Funds obligation to consummate the Reorganization, each Fund will receive a tax opinion from
Vedder Price P.C. (which opinion will be based on certain factual representations and certain customary assumptions) with respect to the Reorganization substantially to the effect that, on the basis of the existing provisions of the Code, current
administrative rules and court decisions, for federal income tax purposes:
|
1.
|
The transfer of substantially all of the assets of the Target Fund to the Acquiring Fund in exchange solely for Acquiring Fund shares and the assumption by the
Acquiring Fund of substantially all of the liabilities of the Target Fund, followed by the distribution to the Target Fund shareholders of all the Acquiring Fund shares received by the Target Fund in complete liquidation of the Target Fund will
constitute a reorganization within the meaning of Section 368(a) of the Code, and the Acquiring Fund and the Target Fund will each be a party to a reorganization, within the meaning of Section 368(b) of the Code,
with respect to the Reorganization.
|
|
2.
|
No gain or loss will be recognized by the Acquiring Fund upon the receipt of substantially all of the assets of the Target Fund solely in exchange for Acquiring Fund
shares and the assumption by the Acquiring Fund of substantially all of the liabilities of the Target Fund.
|
|
3.
|
No gain or loss will be recognized by the Target Fund upon the transfer of substantially all of the Target Funds assets to the Acquiring Fund solely in exchange
for Acquiring Fund shares and the assumption by the Acquiring Fund of substantially all of the liabilities of the Target Fund or upon the distribution (whether actual or constructive) of all such Acquiring Fund shares to the Target Fund shareholders
solely in exchange for such shareholders shares of the Target Fund in complete liquidation of the Target Fund.
|
|
4.
|
No gain or loss will be recognized by the Target Fund shareholders upon the exchange of their Target Fund shares solely for Acquiring Fund shares in the Reorganization,
except with respect to any cash received in lieu of a fractional Acquiring Fund common share.
|
|
5.
|
The aggregate basis of the Acquiring Fund shares received by each Target Fund shareholder pursuant to the Reorganization (including any fractional
Acquiring Fund common share to which a shareholder would be entitled) will be the same as the aggregate basis of the Target Fund shares exchanged therefor by such shareholder. The holding period of the Acquiring Fund shares received by each Target
Fund shareholder
|
39
|
(including any fractional Acquiring Fund common share to which a shareholder would be entitled) will include the period during which the Target Fund shares exchanged therefor were held by such
shareholder, provided such Target Fund shares are held as capital assets at the time of the Reorganization.
|
|
6.
|
The basis of the Target Funds assets transferred to the Acquiring Fund will be the same as the basis of such assets to the Target Fund immediately before the
Reorganization. The holding period of the assets of the Target Fund in the hands of the Acquiring Fund will include the period during which those assets were held by the Target Fund.
|
In addition, K&L Gates LLP, as special tax counsel to the Acquiring Fund, will deliver an opinion to the Acquiring Fund, subject to
certain representations, assumptions and conditions, substantially to the effect that the Acquiring Fund VMTP Shares received in the Reorganization by the holders of VMTP Shares of the Target Fund will qualify as equity in the Acquiring Fund for
federal income tax purposes. This opinion will be relied upon by Vedder Price P.C. in issuing its opinion on the Reorganization.
No opinion will be expressed as to (1) the effect of the Reorganization on (A) the Target Fund, the Acquiring Fund or any Target Fund shareholder with respect to any asset as to which any
unrealized gain or loss is required to be recognized under federal income tax principles (i) at the end of a taxable year (or on the termination thereof) or (ii) upon the transfer of such asset regardless of whether such transfer would
otherwise be a non-taxable transaction under the Code, or (B) the Target Fund, the Acquiring Fund or any Target Fund shareholder with respect to any stock held in a passive foreign investment company as defined in Section 1297(a) of the
Code or (2) any other federal tax issues (except those set forth above) and all state, local or foreign tax issues of any kind.
Prior to the Valuation Time, the Target Fund will declare a distribution to its common shareholders, which together with all previous declared distributions to preferred and common shareholders, will have
the effect of distributing to shareholders all its net investment income and realized net capital gains (after reduction by any available capital loss carryforwards), if any, through the date of the Reorganization. To the extent distributions are
attributable to ordinary taxable income or capital gains, such ordinary taxable income and capital gains will be allocated to common and preferred shareholders in accordance with each class proportionate share of the total dividends paid by
the Target Fund during the year. As a result, such distribution could cause a portion of the distributions to preferred shareholders with respect to such year to be taxable for federal income tax purposes.
After the Reorganization, the combined funds ability to use the Target Funds or the Acquiring Funds pre-Reorganization
capital losses may be limited under certain federal income tax rules applicable to reorganizations of this type. Therefore, in certain circumstances, shareholders may pay federal income taxes sooner, or pay more federal income taxes, than they would
have had the Reorganization not occurred. The effect of these potential limitations, however, will depend on a number of factors including the amount of the losses, the amount of gains to be offset, the exact timing of the Reorganization and the
amount of unrealized capital gains in the Funds at the time of the Reorganization. As of October 31, 2012, the Funds had capital loss carryforwards as follows:
|
|
|
|
|
|
|
|
|
|
|
Acquiring
Fund
|
|
|
Target
Fund
|
|
Capital loss carryforwards
|
|
$
|
46,740,988
|
|
|
$
|
34,796,597
|
|
40
If not applied, the capital loss carryforwards will expire as follows:
|
|
|
|
|
|
|
|
|
|
|
Acquiring
Fund
|
|
|
Target
Fund
|
|
Expiration Date:
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
$
|
12,119,476
|
|
|
$
|
4,564,842
|
|
October 31, 2017
|
|
$
|
34,412,364
|
|
|
$
|
28,536,506
|
|
October 31, 2018
|
|
$
|
209,148
|
|
|
$
|
541,658
|
|
October 31, 2019
|
|
|
|
|
|
$
|
1,153,591
|
|
For net capital losses arising in taxable years beginning after December 22, 2010
(post-enactment losses), a Fund will generally be able to carryforward such capital losses indefinitely. A Funds net capital losses from taxable years beginning on or prior to December 22, 2010, however, will remain subject to
their current expiration dates and can be used only after the post-enactment losses.
In addition, the shareholders of the
Target Fund will receive a proportionate share of any taxable income and gains realized by the Acquiring Fund and not distributed to its shareholders prior to the Reorganization when such income and gains are eventually distributed by the Acquiring
Fund. As a result, shareholders of the Target Fund may receive a greater amount of taxable distributions than they would have had the Reorganization not occurred.
This description of the federal income tax consequences of the Reorganization is made without regard to the particular facts and circumstances of any shareholder. Shareholders are urged to consult their
own tax advisers as to the specific consequences to them of the Reorganization, including the applicability and effect of state, local, non-U.S. and other tax laws.
The foregoing is intended to be only a summary of the principal federal income tax consequences of the Reorganization and should not be considered to be tax advice. There can be no assurance that the
Internal Revenue Service will concur on all or any of the issues discussed above. Shareholders are urged to consult their own tax advisers regarding the federal, state and local tax consequences with respect to the foregoing matters and any other
considerations which may be applicable to them.
Votes Required
The Reorganization is required to be approved by the affirmative vote of the holders of a majority (more than 50%) of the outstanding
common shares and preferred shares of the Target Fund entitled to vote on the matter, voting as a single class, and by the affirmative vote of the holders of a majority (more than 50%) of each Funds outstanding preferred shares entitled to
vote on the matter, voting as a separate class.
Abstentions and broker non-votes will have the same effect as a vote against
the approval of the Reorganization. Broker non-votes are shares held by brokers or nominees for which the brokers or nominees have executed proxies as to which (i) the broker or nominee does not have discretionary voting power and (ii) the
broker or nominee has not received instructions from the beneficial owner or other person who is entitled to instruct how the shares will be voted.
Preferred shareholders of each Fund are separately being asked to approve the Agreement as a plan of reorganization under the 1940 Act. Section 18(a)(2)(D) of the 1940 Act provides that
the
41
terms of preferred shares issued by a registered closed-end management investment company must contain provisions requiring approval by the vote of a majority of such shares, voting as a class,
of any plan of reorganization adversely affecting such shares. The 1940 Act makes no distinction between a plan of reorganization that has an adverse effect as opposed to a materially adverse effect. While the Board does not believe that the
Funds preferred shareholders would be materially adversely affected by the Reorganization, it is possible that there may be insignificant adverse effects (such as where the asset coverage with respect to the Acquiring Fund VMTP Shares issued
pursuant to the Reorganization is slightly more or less than the asset coverage with respect to the shares of the Target Fund VMTP Shares for which they are exchanged). Each Fund is seeking approval of the Agreement by the holders of that
Funds preferred shares.
In order for the Reorganization to occur, each Fund must obtain the requisite shareholder
approvals as well as certain consents, confirmations and/or waivers from various third parties, including rating agencies with respect to preferred shares. Because the closing of the Reorganization is contingent on the Target Fund and the Acquiring
Fund satisfying (or obtaining the waiver of) their respective closing conditions, if one of the Funds does not obtain its requisite shareholder approvals or satisfy its closing conditions, it is possible that the Reorganization will not occur, even
if shareholders of your Fund approve the Reorganization and your Fund satisfies all of its closing conditions. The VMTP Shares were issued on a private placement basis to one or a small number of institutional holders. To the extent that one or more
preferred shareholders of a Fund owns, holds or controls, individually or in the aggregate, all or a significant portion of a Funds outstanding preferred shares, one or more shareholder approvals required for the Reorganization may turn on the
exercise of voting rights by such particular shareholder(s) and its or their determination as to the favorable view of such proposal(s) with respect to its or their interests. The Funds exercise no influence or control over the determinations of
such shareholders with respect to the proposals; there is no guarantee that such shareholders will approve the proposals over which they may exercise effective disposition power. If the requisite shareholder approvals are not obtained, each
Funds Board may take such actions as it deems in the best interests of its Fund, including conducting additional solicitations with respect to the proposals or continuing to operate the Fund as a stand-alone fund.
Description of Common Shares to be Issued by the Acquiring Fund; Comparison to the Target Fund
As a general matter, the common shares of the Acquiring Fund and the Target Fund have equal voting rights and equal rights with respect
to the payment of dividends and distribution of assets upon liquidation and have no preemptive, conversion or exchange rights or rights to cumulative voting. Holders of whole common shares of each Fund are entitled to vote per share on any matter on
which the shares are entitled to vote, while each fractional share is entitled to a proportional fractional vote. Furthermore, the provisions set forth in the Acquiring Funds declaration of trust (the Acquiring Fund Declaration of
Trust), are substantially similar to the provisions of the Target Funds declaration of trust and each contain, among other things, similar super-majority voting provisions, as described under Additional Information about the
Acquiring FundCertain Provisions in the Acquiring Funds Declaration of Trust and By-Laws The full text of each Funds declaration of trust is on file with the SEC and may be obtained as described on page iv.
The Acquiring Fund Declaration of Trust authorizes an unlimited number of common shares, par value $0.01 per share. If the Reorganization
is consummated, the Acquiring Fund will issue additional common shares on the Closing Date to the common shareholders of the Target Fund based
42
on the relative per share net asset value of the Acquiring Fund and the net asset value of the assets of the Target Fund in each case (net of the liquidation preference and accumulated and unpaid
dividends of the preferred shares) that are transferred in the Reorganization, in each case as of the Valuation Time.
The
terms of the Acquiring Fund common shares to be issued pursuant to the Reorganization will be identical to the terms of the Target Fund common shares that are then outstanding. All the Acquiring Fund common shares have equal rights with respect to
the payment of dividends and the distribution of assets upon liquidation. The Acquiring Fund common shares, when issued, will be fully paid and non-assessable and have no preemptive, conversion or exchange rights or rights to cumulative voting. See
also Summary Description of Massachusetts Business Trusts.
So long as preferred shares, including VMTP Shares are
outstanding, the Acquiring Fund may not declare a dividend or distribution to common shareholders (other than a distribution in common shares of the Fund) or purchase its common shares unless all accumulated dividends on preferred shares have been
paid, and unless asset coverage (as defined in the 1940 Act) with respect to preferred shares at the time of declaration of such dividend or distribution or at the time of such purchase would be at least 200% after giving effect to the dividend or
distribution or purchase price.
Description of the VMTP Shares to be Issued by the Acquiring Fund
The terms of the VMTP Shares of the Acquiring Fund to be issued pursuant to the Reorganization will be substantially
identical, as of the time of the closing of the Reorganization, to the outstanding VMTP Shares of the Target Fund for which they are exchanged, including, the same mandatory and optional redemption terms, liquidation preference and variable dividend
rate provisions.
Each holder of VMTP Shares should review the more detailed information concerning the terms of the VMTP Shares to be issued in the Reorganization contained in the Memorandum attached as Appendix B, which forms a part of this
Proxy Statement, and the other documents incorporated by reference or otherwise summarized in this Proxy Statement and in the Memorandum, including the information set forth in the sections Comparison of the Investment Objectives and Policies
of the Acquiring Fund and the Target Funds below and Risk Factors in the Memorandum as well as the form of Statement Establishing and Fixing the Rights and Preferences of VMTP Shares of the Acquiring Fund attached as an appendix to
the Memorandum.
Following the Reorganization, the Acquiring Fund will have two series of VMTP Shares outstanding (each a
VMTP Series or Series).
Summary Description of Massachusetts Business Trusts
General.
The following description is based on relevant provisions of applicable
Massachusetts law and each Funds operative documents. This summary does not purport to be complete and we refer you to applicable Massachusetts law and each Funds operative documents.
Each of the Acquiring Fund and the Target Fund is a Massachusetts business trust. A fund organized as a Massachusetts business trust is
governed by the trusts declaration of trust or similar instrument.
43
Massachusetts law allows the trustees of a business trust to set the terms of a funds
governance in its declaration. All power and authority to manage the fund and its affairs generally reside with the trustees, and shareholder voting and other rights are limited to those provided to the shareholders in the declaration. Under each
Funds declaration of trust, any determination as to what is in the interests of the Fund made by the trustees in good faith is conclusive, and in construing the provisions of the declaration of trust, there is a presumption in favor of a grant
of power to the trustees. Further, each declaration of trust provides that certain determinations made in good faith by the trustees are binding upon the Fund and all shareholders, and shares are issued and sold on the condition and understanding,
evidenced by the purchase of shares, that any and all such determinations shall be so binding. Because Massachusetts law governing business trusts provides more flexibility compared to typical state corporate statutes, the Massachusetts business
trust is a common form of organization for closed-end funds. However, some consider it less desirable than other entities because it relies on the terms of the applicable declaration and judicial interpretations rather than statutory provisions for
substantive issues, such as the personal liability of shareholders and trustees, and does not provide the level of certitude that corporate laws like those of Minnesota, or newer statutory trust laws, such as those of Delaware, provide.
Shareholders of a Massachusetts business trust are not afforded the statutory limitation of personal liability generally afforded to
shareholders of a corporation from the trusts liabilities. Instead, the declaration of trust of a fund organized as a Massachusetts business trust typically provides that a shareholder will not be personally liable, and further provides for
indemnification to the extent that a shareholder is found personally liable, for the funds acts or obligations. The declaration of trust for each of the Acquiring Fund and the Target Fund contains such provisions.
Similarly, the trustees of a Massachusetts business trust are not afforded statutory protection from personal liability for the
obligations of the trust. Courts in Massachusetts have, however, recognized limitations of a trustees personal liability in contract actions for the obligations of a trust contained in the trusts declaration, and declarations may also
provide that trustees may be indemnified out of the assets of the trust to the extent held personally liable. The declaration of trust for each of the Acquiring Fund and the Target Fund contains such provisions.
Shareholder Voting
.
The declaration of trust of each Fund requires a shareholder vote on a number of
matters, including certain amendments to the declaration of trust, the election of trustees, the merger or reorganization of the Fund (under certain circumstances) or sales of assets in certain circumstances and matters required to be voted by the
1940 Act.
Meetings of shareholders may be called by the trustees and by the written request of shareholders owning at least
10% of the outstanding shares entitled to vote. The by-laws of each Fund provide that the holders of a majority of the voting power of the shares of beneficial interest of the Fund entitled to vote at a meeting shall constitute a quorum for the
transaction of business. The declaration of trust of each Fund provides that the affirmative vote of the holders of a majority of the shares present in person or by proxy and entitled to vote at a meeting of shareholders at which a quorum is present
is required to approve a matter, except in the case of the election of trustees, which only requires a plurality vote, and for events to which other voting provisions apply under the 1940 Act or the declaration of trust and by-laws, such as the
super-majority voting provisions with respect to a merger, consolidation or dissolution of, or sale of substantially all of the assets by, the Fund, or its conversion to an open-end investment company in certain circumstances under the terms of the
declaration of trust.
44
Election and Removal of Trustees
.
The declaration of
trust of each Fund provides that the trustees determine the size of the Board, subject to a minimum of two and a maximum of twelve, and set and alter the terms of office of the trustees, and may make their terms of unlimited duration. Subject to the
provisions of the 1940 Act, the declaration of trust also provides that vacancies on the Board may be filled by the remaining trustees. A trustee may only be removed for cause by action of at least two-thirds of the remaining trustees or by action
of at least two-thirds of the outstanding shares of the class or classes that elected such trustee.
Issuance of
Shares
.
Under the declaration of trust of each Fund, the trustees are permitted to issue an unlimited number of shares for such consideration and on such terms as the trustees may determine. Shareholders are not
entitled to any preemptive rights or other rights to subscribe to additional shares, except as the trustees may determine. Shares are subject to such other preferences, conversion, exchange or similar rights, as the trustees may determine.
Classes.
The declaration of trust of each Fund gives broad authority to the trustees to
establish classes or series in addition to those currently established and to determine the rights and preferences, conversion rights, voting powers, restrictions, limitations, qualifications or terms or conditions of redemptions of the shares of
the classes or series. The trustees are also authorized to terminate a class or series without a vote of shareholders under certain circumstances.
Amendments to Declaration of Trust
.
Amendments to the declaration of trust generally require the consent of shareholders owning more than 50% of shares entitled to
vote, voting in the aggregate. Certain amendments may be made by the trustees without a shareholder vote, and any amendment to the voting requirements contained in the declaration of trust requires the approval of two-thirds of the outstanding
common shares and preferred shares, voting in the aggregate and not by class except to the extent that applicable law or the declaration of trust may require voting by class.
Shareholder, Trustee and Officer Liability
.
The declaration of trust of each Fund provides that shareholders have no personal liability for the acts or obligations of
the Fund and require the Fund to indemnify a shareholder from any loss or expense arising solely by reason of his or her being or having been a shareholder and not because of his or her acts or omissions or for some other reasons. In addition, the
Fund will assume the defense of any claim against a shareholder for personal liability at the request of the shareholder. Similarly, the declaration of trust provides that any person who is a trustee, officer or employee of the Fund is not
personally liable to any person in connection with the affairs of the Fund, other than to the Fund and its shareholders arising from bad faith, willful misfeasance, gross negligence or reckless disregard for his or her duty. The declaration of trust
further provides for indemnification of such persons and advancement of the expenses of defending any such actions for which indemnification might be sought. The declaration of trust also provides that the trustees may rely in good faith on expert
advice.
Derivative Actions
.
Massachusetts has what is commonly referred to as a
universal demand statute, which requires that a shareholder make a written demand on the board, requesting the board members to bring an action, before the shareholder is entitled to bring or maintain a court action or claim on behalf of
the entity.
45
D.
|
ADDITIONAL INFORMATION ABOUT THE INVESTMENT POLICIES
|
Comparison of the Investment Objectives and Policies of the Acquiring Fund and the Target Fund
General
The Funds have similar investment objectives and policies. The Acquiring Funds primary investment objective is to provide high current income exempt from regular federal income tax. The Acquiring
Funds secondary investment objective is to seek attractive total return consistent with its primary objective. The Target Funds primary investment objective is to provide attractive income exempt from regular federal income tax. The
Target Funds secondary investment objective is to seek additional return. Each Fund invests at least 80% of its Managed Assets in investments the income from which is exempt from regular federal income tax. Each Fund seeks to achieve its
investment objectives by investing in municipal securities that the Adviser believes are underrated and undervalued.
Each
Funds investment objectives are fundamental policies of the Fund, and may not be changed without the approval of the holders of a majority of the outstanding common shares and preferred shares voting as a single class, and of holders of a
majority of the outstanding preferred shares voting separately.
Investment Policies
The Acquiring Fund and Target Fund have similar investment policies. Under normal circumstances, each Fund will invest at least 80% of
its Managed Assets in municipal securities that pay interest exempt from regular federal income tax. The foregoing investment policy is a fundamental policy with respect to each Fund.
Under normal circumstances, each Fund expects to be fully invested (at least 95% of its Managed Assets) in such tax-exempt municipal
securities. Up to 30% of each Funds Managed Assets may be invested in municipal securities that pay interest that is taxable under the federal alternative minimum tax applicable to individuals.
Each Fund invests at least 50% of its Managed Assets in investment-grade-quality municipal securities. A security is considered
investment-grade quality if it is rated within the four highest grades (Baa or BBB or better by Moodys, S&P or Fitch) by all nationally recognized statistical rating organizations (NRSROs) that rate such security, or if it is
unrated but judged to be of comparable quality by the Adviser.
Each Fund may invest up to 50% of its Managed Assets in
municipal securities that at the time of investment are rated below investment grade. Below-investment-grade-quality municipal securities include those municipal securities that are rated investment grade by one or more NRSRO but rated below
investment grade by at least one NRSRO. No more than 5% of the Acquiring Funds Managed Assets and, with respect to the Target Fund, 10% of its Managed Assets, may be invested in municipal securities rated below B3/B- or that are unrated but
judged to be of comparable quality by the Adviser. This means that each Fund may invest in municipal securities that are involved in bankruptcy or insolvency proceedings or are experiencing other financial difficulties at the time of acquisition
(such securities are commonly referred to as distressed securities). Municipal securities of below-investment-
46
grade quality are regarded as having predominately speculative characteristics with respect to capacity to pay interest and repay principal and are commonly referred to as junk bonds. The
relative percentages of the value of the investments attributable to investment-grade municipal securities and to below-investment-grade municipal securities could change over time as a result of rebalancing of each Funds assets by the
Adviser, market value fluctuations, issuance of additional shares and other events. If a municipal security satisfies the ratings requirements described above at the time of purchase, a Fund will not be required to dispose of the security upon a
downgrade.
Each Fund may also invest in securities of other open- or closed-end investment companies that invest primarily in
municipal securities of the types in which the Fund may invest directly. In addition, each Fund may purchase municipal securities that are additionally secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies
which provide such credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce a
Funds income. Each Fund may use any insurer, regardless of its rating. A municipal security will be deemed to have the rating of its insurer. The insurance feature does not guarantee the market value of the insured obligations or the net asset
value of the Funds common shares.
Each Fund may enter into certain derivative instruments in pursuit of its investment
objectives, including to seek to enhance return, to hedge some of the risk of the Funds investments in municipal securities or a substitute for a position in the underlying asset. Such instruments include financial futures contracts, swap
contracts (including interest rate and credit default swaps), options on financial futures, options on swap contracts or other derivative instruments. A Fund may not enter into a futures contract or related options or forward contracts if more than
30% of the Funds net assets would be represented by futures contracts or more than 5% of the Funds net assets would be committed to initial margin deposits and premiums on futures contracts or related options.
Each Fund may invest up to approximately 15% of its Managed Assets in inverse floating rate securities. Inverse floating rate securities
represent a leveraged investment in the underlying municipal bond deposited. Inverse floating rate securities offer the opportunity for higher income than the underlying bond, but will subject the Fund to the risk of lower or even no income if
short-term interest rates rise sufficiently. By investing in an inverse floating rate security rather than directly in the underlying bond, the Fund will experience a greater increase in its common share net asset value if the underlying municipal
bond increases in value, but will also experience a correspondingly larger decline in its common share net asset value if the underlying bond declines in value.
Each Fund may borrow money for the repurchase of its shares or for temporary or emergency purposes, such as for the payment of dividends or the settlement of portfolio transactions.
Each Fund is diversified for purposes of the 1940 Act. Consequently, as to 75% of its assets, a Fund may not invest more than 5% of its
total assets in the securities of any single issuer, except that this limitation does not apply to securities of the U.S. Government, its agencies and instrumentalities.
In addition, the Acquiring Fund may not invest in securities other than municipal securities and short-term securities, as described herein, except that the Fund may invest up to 5% of its net assets in
tax-exempt or taxable fixed-income or equity securities for the purpose of acquiring control of an issuer whose municipal securities (a) the Fund already owns and (b) have deteriorated or are expected shortly to deteriorate significantly
in credit quality, provided that the Adviser determines such investment should enable the Fund to maximize better its existing investment in such issuer.
47
During temporary defensive periods and in order to keep a Funds cash fully invested,
each Fund may deviate from its investment objectives and invest up to 100% of its net assets in short-term investments including high quality, short-term securities that may be either tax exempt or taxable. It is the intent of each Fund to invest in
taxable short-term investments only in the event that suitable tax-exempt short-term investments are not available at reasonable prices and yields. Investment in taxable short-term investments would result in a portion of your dividends being
subject to regular federal income taxes and if the proportion of taxable investments exceeded 50% of a Funds total assets as of the close of any quarter of the Funds taxable year, the Fund would not satisfy the general eligibility test
that permits it to pay exempt-interest dividends for that taxable year. For more information, SeeFederal Income Tax Matters in the Reorganization SAI.
Portfolio Investments
Municipal
Securities
General
. The Funds may invest in various municipal securities, including
municipal bonds and notes, other securities issued to finance and refinance public projects, and other related securities and derivative instruments creating exposure to municipal bonds, notes and securities that provide for the payment of interest
income that is exempt from regular federal income tax. Municipal securities are either general obligation or revenue bonds and often are issued by state and local governmental entities to finance or refinance public projects such as roads, public
buildings, schools, and water supply systems, to pay general operating expenses, or to refinance outstanding debt. Municipal securities may also be issued on behalf of private entities or for private activities, such as housing, medical and
educational facility construction, or for privately owned industrial development, transportation, electric utility and pollution control projects. The repayment of such debt may be secured generally by a pledge of the full faith and credit taxing
power of the issuer, a limited or special tax, or any other revenue source, including project revenues, which may include tolls, fees and other user charges, lease payments and mortgage payments. Municipal securities may be issued on a long term
basis to provide permanent financing. Municipal securities may also be issued to finance projects on a short-term interim basis, anticipating repayment with the proceeds of the later issuance of long-term debt.
Each Fund may purchase municipal securities in the form of bonds, notes, leases or certificates of participation; structured as callable
or non-callable; with payment forms including fixed coupon, variable rate, zero coupon, capital appreciation bonds, tender option bonds, and residual interest bonds or inverse floating rate securities; or acquired through investments in pooled
vehicles, partnerships or other investment companies. Inverse floating rate securities are securities that pay interest at rates that vary inversely with changes in prevailing short-term tax-exempt interest rates and represent a leveraged investment
in an underlying municipal security, which could have the economic effect of financial leverage. Each Fund may also purchase pre-refunded municipal securities, private activity bonds and other related securities and derivative instruments that
create exposure to municipal bonds, notes and securities and that provide for the payment of interest income that is exempt from regular federal income tax.
The municipal securities in which the Funds invest are generally issued by states, cities and local authorities and certain possessions and territories of the United States (such as Puerto Rico and Guam),
and pay interest that, in the opinion of bond counsel to the issuer (or on the basis of other authority believed by the Adviser to be reliable), is exempt from regular federal income tax, although the interest may be subject to the federal
alternative minimum tax.
48
The yields on municipal securities depend on a variety of factors, including prevailing
interest rates and the condition of the general money market and the municipal bond market, the size of a particular offering, the maturity of the obligation, its call features and the rating of the issue. The market value of a municipal security
will vary with changes in interest rate levels and as a result of changing evaluations of the ability of its issuer to meet interest and principal payments.
Municipal securities rated Baa or BBB are considered investment grade securities; municipal securities rated Baa are considered medium grade obligations which lack outstanding investment
characteristics and have speculative characteristics, while municipal securities rated BBB are regarded as having adequate capacity to pay principal and interest. Municipal securities of below investment grade quality (Ba/BB or below) are commonly
referred to as junk bonds. Issuers of securities rated Ba/BB or B are regarded as having current capacity to make principal and interest payments but are subject to business, financial or economic conditions which could adversely affect
such payment capacity. Municipal securities rated Aaa or AAA in which a Fund may invest may have been so rated on the basis of the existence of insurance guaranteeing the timely payment, when due, of all principal and interest. Municipal securities
rated below investment grade quality are obligations of issuers that are considered predominately speculative with respect to the issuers capacity to pay interest and repay principal according to the terms of the obligation and, therefore,
carry greater investment risk, including the possibility of issuer default and bankruptcy and increased market price volatility. Municipal securities rated below investment grade tend to be less marketable than higher-quality securities because the
market for them is less broad. The market for unrated municipal securities is even narrower. During periods of thin trading in these markets, the spread between bid and asked prices is likely to increase significantly and a Fund may have greater
difficulty selling its portfolio securities. Each Fund will be more dependent on the Advisers research and analysis when investing in these securities.
Each Fund may invest in distressed securities, which are securities issued by companies that are involved in bankruptcy or insolvency proceedings or are experiencing other financial difficulties at the
time of acquisition by a Fund. The issuers of such securities may be in transition, out of favor, financially leveraged or troubled, or potentially troubled, and may have been or have recently been involved in major strategic actions,
restructurings, bankruptcy, reorganization or liquidation. These characteristics of these companies can cause their securities to be particularly risky, although they also may offer the potential for high returns. These companies securities
may be considered speculative, and the ability of the companies to pay their debts on schedule could be affected by adverse interest rate movements, changes in the general economic climate, economic factors affecting a particular industry or
specific developments within the companies. Distressed securities frequently do not produce income while they are outstanding and may require a Fund to bear certain extraordinary expenses in order to protect and recover its investment.
Investments in lower rated or unrated securities may present special tax issues for a Fund, including where the issuers of these
securities default on their obligations pertaining thereto, and the federal income tax consequences to a Fund as a holder of such distressed securities may not be clear.
Each Fund will primarily invest in municipal securities with long-term maturities in order to maintain a weighted average maturity of 15 to 30 years, but the weighted average maturity of obligations held
by a Fund may be shorter, depending on market conditions. As a result, a Funds portfolio at any given time may include both long-term and intermediate-term municipal securities. In comparison to maturity (which is the date on which a debt
instrument ceases and the issuer is obligated
49
to repay the principal amount), duration is a measure of the price volatility of a debt instrument as a result of changes in market rates of interest, based on the weighted average timing of the
instruments expected principal and interest payments. Duration differs from maturity in that it considers a securitys yield, coupon payments, principal payments and call features in addition to the amount of time until the security
finally matures. As the value of a security changes over time, so will its duration. Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations. In general, a portfolio of
securities with a longer duration can be expected to be more sensitive to interest rate changes than a portfolio with a shorter duration.
During temporary defensive periods (e.g., times when, in the Advisers opinion, temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt securities market adversely
affect the price at which long-term or intermediate-term municipal securities are available), and in order to keep a Funds cash fully invested, including the period during which the net proceeds of an offering are being invested, the Fund may
invest any percentage of its net assets in short-term investments including high quality, short-term securities that may be either tax-exempt or taxable and up to 10% of its Managed Assets in securities of other open or closed-end investment
companies that invest primarily in municipal securities of the type in which a Fund may invest directly. Each Fund intends to invest in taxable short-term investments only in the event that suitable tax-exempt short-term investments are not
available at reasonable prices and yields. Tax-exempt short-term investments include various obligations issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue
anticipation notes or other such municipal bonds maturing in three years or less from the date of issuance) and municipal commercial paper. Each Fund will invest only in taxable short-term investments which are U.S. government securities or
securities rated within the highest grade by Moodys, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable or floating rate of interest. See the Memorandum in Appendix B for a general description of
Moodys, S&Ps and Fitchs ratings of securities in such categories. Taxable short-term investments of a Fund may include certificates of deposit issued by U.S. banks with assets of at least $1 billion, or commercial paper or
corporate notes, bonds or debentures with a remaining maturity of one year or less, or repurchase agreements. To the extent a Fund invests in taxable investments, such Fund will not at such times be in a position to achieve its investment objective
of tax-exempt income.
Obligations of issuers of municipal securities are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition, the obligations of such issuers may become subject to the laws enacted in the future by Congress, state legislatures or referenda
extending the time for payment of principal or interest, or both, or imposing other constraints upon enforcement of such obligations or upon municipalities to levy taxes. There is also the possibility that, as a result of legislation or other
conditions, the power or ability of any issuer to pay, when due, the principal of and interest on its municipal securities may be materially affected.
Subject to rating agency guidelines, a Fund may invest a significant portion of its Managed Assets in broad segments of the municipal securities market, such as revenue obligations of hospitals and other
health care facilities, special taxing districts, securities issued to finance charter schools and other private educational facilities, municipal utility securities, industrial development bonds and other private activity bonds. Subject to the
availability of suitable investment opportunities, the Adviser will attempt to minimize the sensitivity of each Funds portfolio to credit and other risks associated with a particular sector or industry. However, if a Fund invests a significant
portion of its Managed Assets in
50
the segments noted above, such Fund will be more susceptible to economic, business, political, regulatory and other developments generally affecting issuers in such segments of the municipal
securities market. To the extent that a Fund focuses its Managed Assets in the hospital and healthcare facilities sector, such Fund will be subject to risks associated with such sector, including adverse government regulation and reduction in
reimbursement rates, as well as government approval of products and services and intense competition. Securities issued to finance charter schools and other private educational facilities will be subject to various risks, including the reversal of
legislation authorizing or funding charter schools, the failure to renew or secure a charter, the failure of a funding entity to appropriate necessary funds and competition from alternatives such as voucher programs. Issuers of municipal utility
securities can be significantly affected by government regulation, financing difficulties, supply and demand of services or fuel and natural resource conservation.
Municipal Leases and Certificates of Participation
. Each Fund may purchase municipal securities that represent lease obligations and certificates of participation in such
leases. These carry special risks because the issuer of the securities may not be obligated to appropriate money annually to make payments under the lease. A municipal lease is an obligation in the form of a lease or installment purchase that is
issued by a state or local government to acquire equipment and facilities. Income from such obligations generally is exempt from state and local taxes in the state of issuance. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the governmental issuer) have evolved as a means for governmental issuers to acquire property and equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt issuance limitations are deemed to be inapplicable because of the inclusion in many leases or contracts of non-appropriation clauses that relieve the governmental issuer of any obligation to make future
payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body on a yearly or other periodic basis. In addition, such leases or contracts may be subject to the temporary abatement of payments
in the event the issuer is prevented from maintaining occupancy of the leased premises or utilizing the leased equipment or facilities. Although the obligations may be secured by the leased equipment or facilities, the disposition of the property in
the event of non-appropriation or foreclosure might prove difficult, time consuming and costly, and result in a delay in recovering, or the failure to recover fully, a Funds original investment. To the extent that the Funds invest in unrated
municipal leases or participate in such leases, the credit quality rating and risk of cancellation of such unrated leases will be monitored on an ongoing basis. In order to reduce this risk, the Funds purchase only municipal securities representing
lease obligations where the Adviser believes the issuer has a strong incentive to continue making appropriations until maturity.
A certificate of participation represents an undivided interest in an unmanaged pool of municipal leases, an installment purchase agreement or other instruments. The certificates are typically issued by a
municipal agency, a trust or other entity that has received an assignment of the payments to be made by the state or political subdivision under such leases or installment purchase agreements. Such certificates provide the Funds with the right to a
pro rata undivided interest in the underlying municipal securities. In addition, such participations generally provide the Funds with the right to demand payment, on not more than seven days notice, of all or any part of the Funds
participation interest in the underlying municipal securities, plus accrued interest.
Municipal
Notes
. Municipal securities in the form of notes generally are used to provide for short-term capital needs, in anticipation of an issuers receipt of other revenues or financing, and typically have maturities of up
to three years. Such instruments may include tax anticipation notes,
51
revenue anticipation notes, bond anticipation notes, tax and revenue anticipation notes and construction loan notes. Tax anticipation notes are issued to finance the working capital needs of
governments. Generally, they are issued in anticipation of various tax revenues, such as income, sales, property, use and business taxes, and are payable from these specific future taxes. Revenue anticipation notes are issued in expectation of
receipt of other kinds of revenue, such as federal revenues available under federal revenue-sharing programs. Bond anticipation notes are issued to provide interim financing until long-term bond financing can be arranged. In most cases, the
long-term bonds then provide the funds needed for repayment of the bond anticipation notes. Tax and revenue anticipation notes combine the funding sources of both tax anticipation notes and revenue anticipation notes. Construction loan notes are
sold to provide construction financing. Mortgage notes insured by the Federal Housing Authority secure these notes; however, the proceeds from the insurance may be less than the economic equivalent of the payment of principal and interest on the
mortgage note if there has been a default. The anticipated revenues from taxes, grants or bond financings generally secure the obligations of an issuer of municipal notes. An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be insufficient to satisfy the issuers payment obligations under the notes or that refinancing will be otherwise unavailable.
Pre-Refunded Municipal Securities
. The principal of, and interest on, pre-refunded municipal securities are
no longer paid from the original revenue source for the securities. Instead, the source of such payments is typically an escrow fund consisting of U.S. Government securities. The assets in the escrow fund are derived from the proceeds of refunding
bonds issued by the same issuer as the pre-refunded municipal securities. Issuers of municipal securities use this advance refunding technique to obtain more favorable terms with respect to securities that are not yet subject to call or redemption
by the issuer. For example, advance refunding enables an issuer to refinance debt at lower market interest rates, restructure debt to improve cash flow or eliminate restrictive covenants in the indenture or other governing instrument for the
pre-refunded municipal securities. However, except for a change in the revenue source from which principal and interest payments are made, the pre-refunded municipal securities remain outstanding on their original terms until they mature or are
redeemed by the issuer.
Private Activity Bonds
. Private activity bonds, formerly referred to as
industrial development bonds, are issued by or on behalf of public authorities to obtain funds to provide privately operated housing facilities, airport, mass transit or port facilities, sewage disposal, solid waste disposal or hazardous waste
treatment or disposal facilities and certain local facilities for water supply, gas or electricity. Other types of private activity bonds, the proceeds of which are used for the construction, equipment, repair or improvement of privately operated
industrial or commercial facilities, may constitute municipal securities, although the current federal tax laws place substantial limitations on the size of such issues. A Funds distribution of its interest income from private activity bonds
may subject certain investors to the federal alternative minimum tax.
Inverse Floating Rate
Securities
. Inverse floating rate securities (sometimes referred to as inverse floaters) are securities whose interest rates bear an inverse relationship to the interest rate on another security or the value of
an index. Generally, inverse floating rate securities represent beneficial interests in a special purpose trust formed by a third-party sponsor for the purpose of holding municipal bonds. The special purpose trust typically sells two classes of
beneficial interests or securities: floating rate securities (sometimes referred to as short-term floaters or tender option bonds) and inverse floating rate securities (sometimes referred to as inverse floaters or residual interest securities). Both
classes of beneficial interests are represented by certificates. The short-term floating rate securities have first priority on the cash flow from the municipal bonds held by the special purpose trust. Typically, a third
52
party, such as a bank, broker-dealer or other financial institution, grants the floating rate security holders the option, at periodic intervals, to tender their securities to the institution and
receive the face value thereof. As consideration for providing the option, the financial institution receives periodic fees.
The holder of the short-term floater effectively holds a demand obligation that bears interest at the prevailing short-term, tax-exempt
rate. However, the institution granting the tender option will not be obligated to accept tendered short-term floaters in the event of certain defaults or a significant downgrade in the credit rating assigned to the bond issuer. For its inverse
floating rate investment, each Fund receives the residual cash flow from the special purpose trust. Because the holder of the short term floater is generally assured liquidity at the total face value of the security, a Fund as the holder of the
inverse floater assumes the interest rate cash flow risk and the market value risk associated with the municipal security deposited into the special purpose trust. The volatility of the interest cash flow and the residual market value will vary with
the degree to which the trust is leveraged. This is expressed in the ratio of the total face value of the short-term floaters in relation to the value of the residual inverse floaters that are issued by the special purpose trust. Each Fund expects
to make limited investments in inverse floaters, with leverage ratios that may vary at inception between one and three times. In addition, all voting rights and decisions to be made with respect to any other rights relating to the municipal bonds
held in the special purpose trust are passed through to the Funds, as the holder of the residual inverse floating rate securities.
Because increases in the interest rate on the short-term floaters reduce the residual interest paid on inverse floaters, and because fluctuations in the value of the municipal bond deposited in the
special purpose trust affect the value of the inverse floater only, and not the value of the short-term floater issued by the trust, inverse floaters value are more volatile than that of fixed rate bonds. The market price of inverse floating
rate securities generally is more volatile than the underlying bonds due to the leveraging effect of this ownership structure. These securities generally will underperform the market of fixed rate bonds in a rising interest rate environment
(
i.e.,
when bond values are falling), but tend to out-perform the market of fixed rate bonds when interest rates decline or remain relatively stable. Although volatile, inverse floaters typically offer the potential for yields higher than
those available on fixed rate bonds with comparable credit quality, coupon, call provisions and maturity. Inverse floaters have varying degrees of liquidity or illiquidity based upon the ability to sell the underlying bonds deposited in a special
purpose trust at an attractive price.
Each Fund may invest in inverse floating rate securities issued by special purpose
trusts that have recourse to the Fund. In the Advisers discretion, each Fund may enter into a separate shortfall and forbearance agreement with the third-party sponsor of a special purpose trust. Each Fund may enter into such recourse
agreements: (i) when the liquidity provider to the special purpose trust requires such an agreement because the level of leverage in the trust exceeds the level that the liquidity provider is willing to support absent such an agreement; and/or
(ii) to seek to prevent the liquidity provider from collapsing the trust in the event that the municipal obligation held in the trust has declined in value. Such an agreement would require a Fund to reimburse the third-party sponsor of such
inverse floater, upon termination of the trust issuing the inverse floater, the difference between the liquidation value of the bonds held in the trust and the principal amount due to the holders of floating rate interests. Such agreements may
expose a Fund to a risk of loss that exceeds its investment in the inverse floating rate securities. Absent a shortfall and forbearance agreement, a Fund would not be required to make such a reimbursement. If a Fund chooses not to enter into such an
agreement, the special purpose trust could be liquidated and such Fund could incur a loss.
53
Each Funds investments in inverse floating rate securities issued by special purpose
trusts that have recourse to the Fund may be highly leveraged. The structure and degree to which a Funds inverse floating rate securities are highly leveraged will vary based upon a number of factors, including the size of the trust itself and
the terms of the underlying municipal security held in a special purpose trust. An inverse floating rate security generally is considered highly leveraged if the principal amount of the short-term floating rate interests issued by the related
special purpose trust is in excess of three times the principal amount of the inverse floating rate securities owned by the trust (the ratio of the principal
amount of such short-term floating rate interests to the principal amount of the inverse floating rate securities is referred to as the gearing). In the event of a significant decline in the
value of an underlying security, a Fund may suffer losses in excess of the amount of its investment (up to an amount equal to the value of the municipal securities underlying the inverse floating rate securities) as a result of liquidating special
purpose trusts or other collateral required to maintain a Funds anticipated effective leverage ratio.
Each Fund will
segregate or earmark liquid assets with its custodian in accordance with the 1940 Act to cover its obligations with respect to its investments in special purpose trusts.
Floating Rate Securities
. Each Fund may also invest in floating rate securities issued by special purpose trusts. Floating rate securities may take the form of short-term
floating rate securities or the option period may be substantially longer. Generally, the interest rate earned will be based upon the market rates for municipal securities with maturities or remarketing provisions that are comparable in duration to
the periodic interval of the tender option, which may vary from weekly, to monthly, to extended periods of one year or multiple years. Since the option feature has a shorter term than the final maturity or first call date of the underlying bond
deposited in the trust, a Fund as the holder of the floating rate security relies upon the terms of the agreement with the financial institution furnishing the option as well as the credit strength of that institution. As further assurance of
liquidity, the terms of the trust provide for a liquidation of the municipal security deposited in the trust and the application of the proceeds to pay off the floating rate security. The trusts that are organized to issue both short-term floating
rate securities and inverse floaters generally include liquidation triggers to protect the investor in the floating rate security.
Special Taxing Districts
. Special taxing districts are organized to plan and finance infrastructure developments to induce residential, commercial and industrial growth and
redevelopment. The bond financing methods such as tax increment finance, tax assessment, special services district and Mello-Roos bonds, generally are payable solely from taxes or other revenues attributable to the specific projects financed by the
bonds without recourse to the credit or taxing power of related or overlapping municipalities. They often are exposed to real estate development-related risks and can have more taxpayer concentration risk than general tax-supported bonds, such as
general obligation bonds.
Further, the fees, special taxes, or tax allocations and other revenues that are established to
secure such financings generally are limited as to the rate or amount that may be levied or assessed and are not subject to increase pursuant to rate covenants or municipal or corporate guarantees. The bonds could default if development failed to
progress as anticipated or if larger taxpayers failed to pay the assessments, fees and taxes as provided in the financing plans of the districts.
54
When-Issued and Delayed-Delivery Transactions
Each Fund may buy and sell municipal securities on a when-issued or delayed-delivery basis, making payment or taking delivery at a later
date, normally within 15 to 45 days of the trade date. This type of transaction may involve an element of risk because no interest accrues on the bonds prior to settlement and, because bonds are subject to market fluctuations, the value of the bonds
at time of delivery may be less (or more) than cost. A separate account of each Fund will be established with its custodian consisting of cash, cash equivalents, or liquid securities having a market value at all times at least equal to the amount of
the commitment.
Zero Coupon Bonds
A zero coupon bond is a bond that does not pay interest either for the entire life of the obligation or for an initial period after the issuance of the obligation. When held to its maturity, its return
comes from the difference between the purchase price and its maturity value. A zero coupon bond is normally issued and traded at a deep discount from face value. Zero coupon bonds allow an issuer to avoid or delay the need to generate cash to meet
current interest payments and, as a result, may involve greater credit risk and tend to be more volatile in price than securities that pay interest periodically. A Fund would be required to distribute the income on any of these instruments as it
accrues, even though the Fund will not receive all of the income on a current basis or in cash. Thus, a Fund may have to sell other investments, including when it may not be advisable to do so, in order to obtain cash needed to pay income dividends
in amounts necessary to avoid unfavorable tax consequences.
Structured Notes
Each Fund may utilize structured notes and similar instruments for investment purposes and also for hedging purposes. Structured notes
are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset, market or interest rate (an embedded index), such as selected securities, an index of
securities or specified interest rates, or the differential performance of two assets or markets. The terms of such structured instruments normally provide that their principal and/or interest payments are to be adjusted upwards or downwards (but
not ordinarily below zero) to reflect changes in the embedded index while the structured instruments are outstanding. As a result, the interest and/or principal payments that may be made on a structured product may vary widely, depending upon a
variety of factors, including the volatility of the embedded index and the effect of changes in the embedded index on principal and/or interest payments. The rate of return on structured notes may be determined by applying a multiplier to the
performance or differential performance of the referenced index or indices or other assets. Application of a multiplier involves leverage that will serve to magnify the potential for gain and the risk of loss. These types of investments may generate
taxable income.
Derivatives
General
. Each Fund may invest in certain derivative instruments in pursuit of its investment objectives. Such instruments include financial futures contracts, swap contracts
(including interest rate and credit default swaps), options on financial futures, options on swap contracts or other derivative instruments. A Fund may also use credit default swaps and interest rate swaps. Credit default swaps may require initial
premium (discount) payments as well as periodic payments (receipts) related to the interest leg of the swap or to the default of a reference obligation. If a Fund is a seller of a contract, the
55
Fund would be required to pay the par (or other agreed upon) value of a referenced debt obligation to the counterparty in the event of a default or other credit event by the reference issuer,
such as a U.S. or foreign corporate issuer, with respect to such debt obligations. In return, such Fund would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred.
If no default occurs, such Fund would keep the stream of payments and would have no payment obligations. As the seller, a Fund would be subject to investment exposure on the notional amount of the swap. If a Fund is a buyer of a contract, the Fund
would have the right to deliver a referenced debt obligation and receive the par (or other agreed-upon) value of such debt obligation from the counterparty in the event of a default or other credit event (such as a credit downgrade) by the reference
issuer, such as a U.S. or foreign corporation, with respect to its debt obligations. In return, such Fund would pay the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no
default occurs, the counterparty would keep the stream of payments and would have no further obligations to such Fund. Interest rate swaps involve the exchange by a Fund with a counterparty of their respective commitments to pay or receive interest,
such as an exchange of fixed-rate payments for floating rate payments. A Fund will usually enter into interest rate swaps on a net basis; that is, the two payment streams will be netted out in a cash settlement on the payment date or dates specified
in the instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two payments.
The
Adviser may use derivative instruments to seek to enhance return, to hedge some of the risk of each Funds investments in municipal securities or as a substitute for a position in the underlying asset. These types of strategies may generate
taxable income.
There is no assurance that these derivative strategies will be available at any time or that the Adviser will
determine to use them for a Fund or, if used, that the strategies will be successful.
Limitations on the Use of Futures,
Futures Options and Swaps
. Pursuant to a claim for exemption filed with the National Futures Association on behalf of each Fund, each Fund is not deemed to be a commodity pool operator or a commodity pool under the
Commodity Exchange Act (CEA) and neither it nor the Adviser or Nuveen Asset Management is currently subject to registration or regulation as such under the CEA. In February 2012, the Commodity Futures Trading Commission
(CFTC) announced substantial amendments to certain exemptions, and to the conditions for reliance on those exemptions, from registration as a commodity pool operator. Under amendments to the exemption provided under CFTC Regulation 4.5,
if a Fund uses futures, options on futures, or swaps other than for bona fide hedging purposes (as defined by the CFTC), the aggregate initial margin and premiums on these positions (after taking into account unrealized profits and unrealized losses
on any such positions and excluding the amount by which options that are in-the-money at the time of purchase are in-the-money) may not exceed 5% of the Funds net asset value, or alternatively, the aggregate net
notional value of those positions may not exceed 100% of the Funds net asset value (after taking into account unrealized profits and unrealized losses on any such positions). The CFTC amendments to Regulation 4.5 took effect on
December 31, 2012, each Fund intents to comply with amended Regulation 4.5s requirements such that the Adviser and/or the Sun-Adviser will not be required to register with respect to the Fund as a commodity pool operator with the CFTC.
Each Fund reserves the right to engage in transactions involving futures, options thereon and swaps to the extent allowed by CFTC regulations in effect from time to time and in accordance with the Funds policies. The requirements for
qualification as a regulated investment company may limit the extent to which the Funds may enter into futures transactions, engage in options transactions or engage in swap transactions.
56
Other Investment Companies
Each Fund may invest up to 10% of its Managed Assets in securities of other open- or closed-end investment companies (including
exchange-traded funds (ETFs)) that invest primarily in municipal securities of the types in which the Fund may invest directly. In addition, each Fund may invest a portion of its Managed Assets in pooled investment vehicles (other than
investment companies) that invest primarily in municipal securities of the types in which the Fund may invest directly. Each Fund generally expects that it may invest in other investment companies and/or other pooled investment vehicles either
during periods when it has large amounts of uninvested cash or during periods when there is a shortage of attractive, high-yielding municipal securities available in the market. Each Fund may invest in investment companies that are advised by the
Adviser or its affiliates to the extent permitted by applicable law and/or pursuant to exemptive relief from the SEC. The Funds have not applied for and currently do not intend to apply for such relief. As a shareholder in an investment company, a
Fund will bear its ratable share of that investment companys expenses and would remain subject to payment of the Funds advisory and administrative fees with respect to assets so invested. Common shareholders would therefore be subject to
duplicative expenses to the extent a Fund invests in other investment companies.
The Adviser will take expenses into account
when evaluating the investment merits of an investment in an investment company relative to available municipal security investments. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to
the same leverage risks described herein. The net asset value and market value of leveraged shares will be more volatile, and the yield to common shareholders will tend to fluctuate more than the yield generated by unleveraged shares.
Investment Portfolio and Capital Structure Strategies to Manage Leverage Risk
Common shareholders of each Fund are subject to the risks of leverage primarily in the form of additional common share earnings and net
asset value risk, associated with a Funds use of financial leverage in the form of preferred shares or inverse floating rate securities.
In an effort to mitigate these risks, each Fund and the Adviser seek to maintain the Funds financial leverage within an established range, and to rebalance leverage levels if the Funds
leverage ratio moves outside this range to a meaningful degree for a persistent period of time. A Fund may rebalance leverage levels in one or more ways, including by increasing/reducing the amount of leverage outstanding and issuing/repurchasing
common shares. Reducing leverage may require a Fund to raise cash through the sale of portfolio securities at times and/or at prices that would otherwise be unattractive for the Fund. Each Fund may also seek to diversify its capital structure and
the risks associated with leverage by employing multiple forms of leverage. Each Fund and the Adviser will weigh the relative potential benefits and risks as well as the costs associated with a particular action, and will take such action only if it
determines that on balance the likely potential benefits outweigh the associated risks and costs.
Because the long-term
municipal securities in which a Fund invests generally pay fixed rates of interest while the Funds costs of leverage generally fluctuate with short-term yields, common shareholders bear incremental earnings risk from leverage.
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Hedging Strategies
Each Fund may use various investment strategies designed to limit the risk of bond price fluctuations and to preserve capital. These
hedging strategies include using credit default swaps, interest rate swaps on taxable or tax-exempt indices, forward start interest rate swaps and options on interest rate swaps, financial futures contracts, options on financial futures or options
based on either an index of long-term municipal securities or on taxable debt securities whose prices, in the opinion of the Adviser, correlate with the prices of a Funds investments. These hedging strategies may generate taxable income.
Each Funds Board recommends that shareholders vote FOR the approval of the Reorganization.
Other Information
Management of the Funds
does not intend to present and does not have reason to believe that others will present any items of business at the Annual Meeting, except as described in this Proxy
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Statement. However, if other matters are properly presented at the meetings for a vote, the proxies will be voted upon such matters in accordance with the judgment of the persons acting under the
proxies.
A list of shareholders of each Fund entitled to be present and to vote at the Annual Meeting will be available at
the offices of the Funds, 333 West Wacker Drive, Chicago, Illinois, for inspection by any shareholder of the Funds during regular business hours for ten days prior to the date of the Annual Meeting.
In the absence of a quorum for a particular matter, business may proceed on any other matter or matters which may properly come before
the Annual Meeting if there shall be present, in person or by proxy, a quorum of shareholders in respect of such other matters. The chairman of the meeting may, whether or not a quorum is present, propose one or more adjournments of the Annual
Meeting on behalf of a Fund without further notice to permit further solicitation of proxies. Any such adjournment will require the affirmative vote of the holders of a majority of the shares of the Fund present in person or by proxy and entitled to
vote at the session of the Annual Meeting to be adjourned.
Broker-dealer firms holding shares in street name for
the benefit of their customers and clients will request the instruction of such customers and clients on how to vote their shares on the proposals. A broker-dealer firm that has not received instructions from a customer prior to the date specified
in its request for voting instructions may not vote such customers shares on the proposals other than the election of Board Members. A signed proxy card or other authorization by a beneficial owner of shares of a Fund that does not specify how
the beneficial owners shares are to be voted on a proposal may be deemed to be an instruction to vote such shares in favor of the proposal.
IF YOU CANNOT BE PRESENT AT THE MEETING, YOU ARE REQUESTED TO FILL IN, SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
Kevin J. McCarthy
Vice President and Secretary
The Nuveen Funds
[ ], 2013
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APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the Agreement) is made as of this day of
, 2013 by and between Nuveen Municipal High Income Opportunity Fund (the Acquiring Fund) and Nuveen Municipal High Income Opportunity Fund 2 (the Target
Fund), each, a Massachusetts business trust. The Acquiring Fund and the Target Fund may be referred to herein each as a Fund and together as the Funds.
This Agreement is intended to be, and is adopted as, a plan of reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the Code), and the Treasury Regulations promulgated thereunder. The reorganization of the Target Fund into the Acquiring Fund will consist of: (i) the transfer of substantially all of the
assets of the Target Fund to the Acquiring Fund in exchange solely for newly issued common shares of beneficial interest, par value $0.01 per share, of the Acquiring Fund (Acquiring Fund Common Shares) and newly issued Variable Rate
MuniFund Term Preferred Shares (VMTP Shares) of the Acquiring Fund, with a par value of $0.01 per share and liquidation preference of $100,000 per share, as set forth in this Agreement (Acquiring Fund VMTP Shares and together
with the Acquiring Fund Common Shares, Acquiring Fund Shares) and the assumption by the Acquiring Fund of substantially all of the liabilities of the Target Fund; and (ii) the distribution of all the Acquiring Fund Common Shares and
Acquiring Fund VMTP Shares received by the Target Fund to the holders of common shares and VMTP Shares of the Target Fund, respectively, as part of the complete liquidation, dissolution and termination of the Target Fund as provided herein, all upon
the terms and conditions set forth in this Agreement (the Reorganization).
WHEREAS, each Fund is a closed-end,
management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act), and the Target Fund owns securities that generally are assets of the character in which the Acquiring Fund is permitted to
invest;
WHEREAS, the Acquiring Fund is authorized to issue the Acquiring Fund Shares; and
WHEREAS, the Board of Trustees of the Acquiring Fund (the Acquiring Fund Board) has determined that the Reorganization is in
the best interests of the Acquiring Fund and that the interests of the existing shareholders of the Acquiring Fund will not be diluted as a result of the Reorganization, and the Board of Trustees of the Target Fund (the Target Fund
Board) has determined that the Reorganization is in the best interests of the Target Fund and that the interests of the existing shareholders of the Target Fund will not be diluted as a result of the Reorganization.
NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto covenant
and agree as follows:
ARTICLE I
TRANSFER OF ASSETS OF THE TARGET FUND IN EXCHANGE FOR ACQUIRING FUND SHARES AND THE ASSUMPTION OF THE LIABILITIES OF THE TARGET FUND AND TERMINATION AND LIQUIDATION
OF THE TARGET FUND
1.1 THE EXCHANGE. Subject to the terms and conditions contained herein and on the basis of the representations and warranties
contained herein, the Target Fund agrees to transfer
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substantially all of its assets, as set forth in Section 1.2, to the Acquiring Fund. In consideration therefor, the Acquiring Fund agrees: (i) to issue and deliver to the Target Fund
the number of Acquiring Fund Common Shares computed in the manner set forth in Section 2.3, and the same number of Acquiring Fund VMTP Shares as the number of VMTP Shares of the Target Fund outstanding immediately prior to the Closing Date (as
such term is defined in Section 3.1) and having substantially identical terms to the Target Funds VMTP Shares as of the Closing Date, and (ii) to assume substantially all of the liabilities of the Target Fund, if any, as set forth in
Section 1.3. The Acquiring Fund VMTP Shares to be issued to the Target Fund shall consist of a separate series, as set forth in Exhibit A hereto, and such series shall: (i) have equal priority with other outstanding preferred shares of the
Acquiring Fund as to the payment of dividends and as to the distribution of assets upon liquidation of the Acquiring Fund; and (ii) have, along with any other outstanding preferred shares of the Acquiring Fund, preference with respect to the
payment of dividends and as to the distribution of assets upon liquidation of the affairs of the Acquiring Fund over the Acquiring Fund common shares. Such transactions shall take place at the closing provided for in Section 3.1 (the
Closing).
1.2 ASSETS TO BE TRANSFERRED. The
Target Fund shall transfer substantially all of its assets to the Acquiring Fund, including, without limitation, cash, securities, commodities, interests in futures, dividends or interest receivables owned by the Target Fund and any deferred or
prepaid expenses shown as an asset on the books of the Target Fund as of the Closing, except that the Target Fund shall retain assets sufficient to pay the preferred share dividends as set forth in Section 1.4 and the dividends set forth in
Section 8.5.
The Target Fund will, within a reasonable period of time before the Closing Date, furnish the Acquiring
Fund with a list of the Target Funds portfolio securities and other investments. The Acquiring Fund will, within a reasonable period of time before the Closing Date, furnish the Target Fund with a list of the securities, if any, on the Target
Funds list referred to above that do not conform to the Acquiring Funds investment objectives, policies, and restrictions. The Target Fund, if requested by the Acquiring Fund, will dispose of securities on the Acquiring Funds list
before the Closing Date. In addition, if it is determined that the portfolios of the Target Fund and the Acquiring Fund, when aggregated, would contain investments exceeding certain percentage limitations imposed upon the Acquiring Fund with respect
to such investments, the Target Fund, if requested by the Acquiring Fund, will dispose of a sufficient amount of such investments as may be necessary to avoid violating such limitations as of the Closing Date. Notwithstanding the foregoing, nothing
herein will require the Target Fund to dispose of any investments or securities if, in the reasonable judgment of the Target Fund Board or Nuveen Fund Advisors, LLC, the investment adviser to the Funds (the Adviser), such disposition
would adversely affect the status of the Reorganization as a reorganization as such term is used in the Code or would otherwise not be in the best interests of the Target Fund.
1.3 LIABILITIES TO BE ASSUMED. The Target Fund will endeavor to
discharge all of its known liabilities and obligations to the extent possible before the Closing Date, except for the dividends set forth in Section 1.4 and the dividends set forth in Section 8.5. Notwithstanding the foregoing, the
liabilities not so discharged shall be assumed by the Acquiring Fund, which assumed liabilities shall include all of the Target Funds liabilities, debts, obligations, and duties of whatever kind or nature, whether absolute, accrued,
contingent, or otherwise, whether or not arising in the ordinary course of business, whether or not determinable at the Closing Date, and whether or not specifically referred to in this Agreement, provided that the Acquiring Fund shall not assume
any liabilities with respect to the dividends set forth in Section 1.4 or the dividends set forth in Section 8.5.
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1.4 DECLARATION OF PREFERRED SHARE
DIVIDENDS. Dividends shall accumulate on the existing Target Fund VMTP Shares up to and including the day before the Closing Date (as such term is defined in Section 3.1) and then cease to accumulate, and dividends on the
Acquiring Fund VMTP Shares shall accumulate from and including the Closing Date. Prior to the Valuation Time, the Target Fund shall declare all accumulated but unpaid dividends on its Target Fund VMTP Shares up to and including the day before the
Closing Date. Such dividends shall be paid on the dividend payment date in respect of the first dividend period of the Acquiring Fund VMTP Shares for which the Target Fund VMTP Shares were exchanged to the holder thereof on the day immediately
preceding the Closing Date. The Target Fund shall retain assets in an amount sufficient to pay the dividends declared by it pursuant to this Section 1.4, and such assets shall not be transferred to the Acquiring Fund on the Closing Date.
1.5 LIQUIDATION AND DISTRIBUTION. On or as soon after
the Closing Date as is practicable but in no event later than 12 months after the Closing Date (the Liquidation Date): (a) the Target Fund will distribute in complete liquidation of the Target Fund, pro rata to its common
shareholders of record, determined as of the Valuation Time (the Target Fund Common Shareholders), all of the Acquiring Fund Common Shares received by the Target Fund pursuant to Section 1.1 (together with any dividends declared
with respect thereto to holders of record as of a time after the Valuation Time and payable prior to the Liquidation Date (Interim Dividends)) and to its preferred shareholders of record, determined as of the Valuation Time
(Target Fund Preferred Shareholders and, together with Target Fund Common Shareholders, the Target Fund Shareholders), one share of Acquiring Fund VMTP Shares received by the Target Fund (together with any Interim
Dividends) in exchange for each Target Fund VMTP Share held by the Target Fund Preferred Shareholder immediately prior to the Reorganization; and (b) the Target Fund will thereupon proceed to dissolve and terminate as set forth in
Section 1.8 below. Such distribution will be accomplished by the transfer of the Acquiring Fund Shares then credited to the account of the Target Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring
Fund in the names of Target Fund Shareholders and representing, in the case of a Target Fund Common Shareholder, such shareholders pro rata share of the Acquiring Fund Common Shares received by the Target Fund and in the case of a Target Fund
Preferred Shareholder, a number of Acquiring Fund VMTP Shares received by the Target Fund equal to the number of Target Fund VMTP Shares held by such Target Fund Preferred Shareholder immediately prior to the Closing Date (as set forth above), and
by paying to Target Fund Shareholders any Interim Dividends on such transferred shares. All issued and outstanding common and preferred shares of the Target Fund will simultaneously be canceled on the books of the Target Fund. The Acquiring Fund
shall not issue certificates representing Acquiring Fund Shares in connection with such transfer.
1.6 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Funds transfer agent. Acquiring Fund Shares will be issued to the Target Fund in an amount computed in the manner set forth in this Agreement, to be distributed to Target Fund Shareholders.
1.7 TRANSFER TAXES. Any transfer taxes payable upon the issuance of
Acquiring Fund Shares in a name other than the registered holder of the Target Funds common shares or preferred shares on the books of the Target Fund as of that time shall, as a condition of such issuance and transfer, be paid by the person
to whom such Acquiring Fund Shares are to be issued and transferred.
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1.8 TERMINATION. The
Target Fund shall completely liquidate and be dissolved, terminated and have its affairs wound up in accordance with Massachusetts state law promptly following the Closing Date and the making of all distributions pursuant to Section 1.5.
1.9 REPORTING. Any reporting responsibility of the
Target Fund including, without limitation, the responsibility for filing of regulatory reports, tax returns or other documents with the Securities and Exchange Commission (the Commission), the exchange on which the Target Funds
shares are listed or any state securities commission and any federal, state or local tax authorities or any other relevant regulatory authority, is and shall remain the responsibility of the Target Fund.
1.10 BOOKS AND RECORDS. All books and records of the Target Fund,
including all books and records required to be maintained under the 1940 Act, and the rules and regulations thereunder, shall be available to the Acquiring Fund from and after the Closing Date and shall be turned over to the Acquiring Fund as soon
as practicable following the Closing Date.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the net assets of the Target
Fund shall be the value of its assets, less its liabilities, computed as of the close of regular trading on the New York Stock Exchange on the business day immediately prior to the Closing Date (such time and date being hereinafter called the
Valuation Time), using the valuation procedures of the Nuveen closed-end funds adopted by the Target Fund Board or such other valuation procedures as shall be mutually agreed upon by the parties. The value of the Target Funds net
assets shall be calculated net of the liquidation preference (including accumulated and unpaid dividends) of all outstanding preferred shares of the Target Fund.
2.2 VALUATION OF SHARES. The net asset value per Acquiring Fund Common Share shall be computed as of the Valuation Time, using the
valuation procedures of the Nuveen closed-end funds adopted by the Acquiring Fund Board or such other valuation procedures as shall be mutually agreed upon by the parties. The value of the Acquiring Funds net assets shall be calculated net of
the liquidation preference (including accumulated and unpaid dividends) of all outstanding Acquiring Fund preferred shares.
2.3 COMMON SHARES TO BE ISSUED. The number of Acquiring Fund Common Shares to be issued in exchange for the Target Funds assets
transferred to the Acquiring Fund shall be determined by dividing the value of such assets transferred to the Acquiring Fund (net of the liabilities of the Target Fund that are assumed by the Acquiring Fund) determined in accordance with
Section 2.1, by the net asset value of an Acquiring Fund Common Share determined in accordance with Section 2.2. No fractional Acquiring Fund Common Shares will be issued to Target Fund Common Shareholders and, in lieu of such fractional
shares, Target Fund Common Shareholders will receive cash. The aggregate net asset value of Acquiring Fund Common Shares received by the Target Fund in the Reorganization will equal, as of the Valuation Time, the aggregate net asset value of Target
Fund common shares held by Target Fund Common Shareholders as of such time. In the event there are fractional Acquiring Fund Common Shares due a Target Fund Common Shareholder on the Closing Date after the Target Funds assets have been
exchanged for Acquiring Fund Common Shares,
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the Acquiring Funds transfer agent will aggregate such fractional common shares and sell the resulting whole on the exchange on which such shares are listed for the account of holders of
all such fractional interests, and each such holder will be entitled to a pro rata share of the proceeds from such sale. With respect to the aggregation and sale of fractional common shares, the Acquiring Funds transfer agent will act directly
on behalf of the shareholders entitled to receive fractional shares and will accumulate such fractional shares, sell the shares and distribute the cash proceeds net of brokerage commissions, if any, directly to shareholders entitled to receive the
fractional shares (without interest and subject to withholding taxes).
2.4 EFFECT OF SUSPENSION IN TRADING. In the event that at the
Valuation Time, either: (a) the exchange on which shares of a Fund are listed or another primary exchange on which the portfolio securities of the Acquiring Fund or the Target Fund are purchased or sold shall be closed to trading or trading on
such exchange shall be restricted; or (b) trading or the reporting of trading on the exchange on which shares of a Fund are listed or elsewhere shall be disrupted so that accurate appraisal of the value of the net assets of the Acquiring Fund
or the Target Fund is impracticable, the Valuation Time shall be postponed until the first business day after the day when trading is fully resumed and reporting is restored.
2.5 COMPUTATIONS OF NET ASSETS. All computations of net asset value in this Article II shall be made by or under the direction of
State Street Bank and Trust Company (State Street) in accordance with its regular practice as custodian of the Funds.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing shall occur on June 10, 2013 or
such other date as the parties may agree (the Closing Date). Unless otherwise provided, all acts taking place at the Closing shall be deemed to take place as of 8:00 a.m. Central time. The Closing shall be held as of 8:00 a.m.
Central time at the offices of Vedder Price P.C. in Chicago, Illinois or at such other time and/or place as the parties may agree.
3.2 CUSTODIANS CERTIFICATE. The Target Fund shall cause State Street, as custodian for the Target Fund (the
Custodian), to deliver to the Acquiring Fund at the Closing a certificate of an authorized officer stating that the Target Funds portfolio securities, cash, and any other assets shall have been delivered in proper form to the
Acquiring Fund on the Closing Date.
3.3 CERTIFICATES OF TRANSFER AGENT.
(a) The Target Fund shall issue and deliver or cause State Street in its
capacity as transfer agent with respect to common shares and VMTP Shares, to issue and deliver to the Acquiring Fund at the Closing a certificate of an authorized officer stating that its records contain the names and addresses of all holders of
common shares and VMTP Shares of the Target Fund, and the number and percentage ownership of outstanding common shares and VMTP Shares owned by each such Target Fund Shareholder immediately prior to the Closing.
(b) The Acquiring Fund shall issue and deliver or cause State Street in its capacity as
transfer agent with respect to common shares and VMTP Shares, to issue and deliver to the Target
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Fund a confirmation evidencing the Acquiring Fund Shares to be credited on the Closing Date to the Secretary of the Target Fund or provide evidence satisfactory to the Target Fund that such
Acquiring Fund Shares have been credited to the Target Funds account on the books of the Acquiring Fund.
3.4 DELIVERY OF ADDITIONAL ITEMS. At the Closing, each party shall
deliver to the other parties such bills of sale, checks, assignments, share certificates, receipts and other documents, if any, as such other parties or their counsel may reasonably request to effect the transactions contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE TARGET FUND. The Target Fund represents
and warrants solely on its own behalf with respect to the Reorganization as follows:
(a) The Target Fund is a business trust duly organized, validly existing and in good
standing under the laws of the Commonwealth of Massachusetts.
(b) The Target
Fund is registered as a closed-end management investment company under the 1940 Act, and such registration is in full force and effect.
(c) The Target Fund is not, and the execution, delivery, and performance of this Agreement (subject to shareholder approval) will not result in, the
violation of any provision of the Target Funds Declaration of Trust, By-Laws, Statement Establishing and Fixing the Rights and Preferences of Variable Rate MuniFund Term Preferred Shares (Target Fund VMTP Statement), or of any
material agreement, indenture, instrument, contract, lease, or other undertaking to which the Target Fund is a party or by which it is bound.
(d) Except as otherwise disclosed in writing to and accepted by the Acquiring Fund, the Target Fund has no material contracts or other commitments that will
be terminated with liability to it before the Closing Date.
(e) No
litigation, administrative proceeding, or investigation of or before any court or governmental body is presently pending or to its knowledge threatened against the Target Fund or any of its properties or assets, which, if adversely determined, would
materially and adversely affect its financial condition, the conduct of its business, or the ability of the Target Fund to carry out the transactions contemplated by this Agreement. The Target Fund knows of no facts that might form the basis for the
institution of such proceedings and is not a party to or subject to the provisions of any order, decree, or judgment of any court or governmental body that materially and adversely affects its business or its ability to consummate the transactions
contemplated herein.
(f) The financial statements of the Target Fund as
October 31, 2012, and for the fiscal year then ended have been prepared in accordance with generally accepted accounting principles, and such statements (copies of which have been furnished to the Acquiring Fund) fairly reflect the
financial condition of the Target Fund as of October 31, 2012, and there are no known contingent liabilities of the Target Fund as of such date that are not disclosed in such statements.
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(g) Since the date of the financial
statements referred to in subsection (f) above, there have been no material adverse changes in the Target Funds financial condition, assets, liabilities or business (other than changes occurring in the ordinary course of
business) and there are no known contingent liabilities of the Target Fund arising after such date. For the purposes of this subsection (g), a decline in the net asset value of the Target Fund shall not constitute a material adverse
change.
(h) All federal, state, local and other tax returns and reports of
the Target Fund required by law to be filed by it (taking into account permitted extensions for filing) have been timely filed and are complete and correct in all material respects. All federal, state, local and other taxes of the Target Fund
required to be paid (whether or not shown on any such return or report) have been paid, or provision shall have been made for the payment thereof and any such unpaid taxes, as of the date of the financial statements referred to in subsection
(f) above, are properly reflected thereon. To the best of the Target Funds knowledge, no tax authority is currently auditing or preparing to audit the Target Fund, and no assessment for taxes, interest, additions to tax or penalties has
been asserted against the Target Fund.
(i) The authorized capital of the
Target Fund consists of an unlimited number of common and preferred shares of beneficial interest, par value $0.01 per share. All issued and outstanding shares of the Target Fund are duly and validly issued, fully paid and non-assessable by the
Target Fund (recognizing that under Massachusetts law, Target Fund shareholders, under certain circumstances, could be held personally liable for the obligations of the Target Fund under Massachusetts law). All of the issued and outstanding shares
of the Target Fund will, at the time of the Closing, be held by the persons and in the amounts set forth in the records of the Target Funds transfer agent as provided in Section 3.3. The Target Fund has no outstanding options, warrants or
other rights to subscribe for or purchase any shares of the Target Fund, and has no outstanding securities convertible into shares of the Target Fund.
(j) At the Closing, the Target Fund will have good and marketable title to the Target Funds assets to be transferred to the Acquiring Fund pursuant to
Section 1.2, and full right, power, and authority to sell, assign, transfer, and deliver such assets, and the Acquiring Fund will acquire good and marketable title thereto, subject to no restrictions on the full transfer thereof, including such
restrictions as might arise under the Securities Act of 1933, as amended (the 1933 Act), except those restrictions as to which the Acquiring Fund has received notice and necessary documentation at or prior to the Closing.
(k) The execution, delivery and performance of this Agreement have been duly authorized
by all necessary action on the part of the Target Fund, including the determinations of the Target Fund Board required by Rule 17a-8(a) of the 1940 Act. Subject to approval by shareholders, this Agreement constitutes a valid and binding
obligation of the Target Fund, enforceable in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors rights and to general equity
principles.
(l) The information to be furnished by the Target Fund for use in
no-action letters, applications for orders, registration statements, proxy materials and other documents that may be necessary in connection with the transactions contemplated herein shall be accurate and complete in all material respects and shall
comply in all material respects with federal securities and other laws and regulations.
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(m) From the effective date of the
Registration Statement (as defined in Section 5.7) through the time of the meeting of shareholders and on the Closing Date, any written information furnished by the Target Fund with respect to the Target Fund for use in the Proxy Materials
(as defined in Section 5.7), or any other materials provided in connection with the Reorganization, does not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated or necessary to
make the statements, in light of the circumstances under which such statements were made, not misleading.
(n) For each taxable year of its operations (including the taxable year ending on the
Closing Date), the Target Fund: (i) has elected to qualify, and has qualified or will qualify (in the case of the short taxable year ending with the Closing Date), as a regulated investment company under the Code (a
RIC); (ii) has been eligible to compute and has computed its federal income tax under Section 852 of the Code, and on or prior to the Closing Date will have declared a distribution with respect to all its investment company
taxable income (determined without regard to the deduction for dividends paid), the excess of its interest income excludible from gross income under Section 103(a) of the Code over its deductions disallowed under Sections 265 and
171(a)(2) of the Code and its net capital gain (as such terms are defined in the Code) that has accrued or will accrue on or prior to the Closing Date; and (iii) has been, and will be (in the case of the short taxable year ending with
the Closing Date), treated as a separate corporation for federal income tax purposes.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring Fund
represents and warrants as follows:
(a) The Acquiring Fund is a business
trust duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts.
(b) The Acquiring Fund is registered as a closed-end management investment company under
the 1940 Act, and such registration is in full force and effect.
(c) The
Acquiring Fund is not, and the execution, delivery and performance of this Agreement will not result, in a violation of the Acquiring Funds Declaration of Trust, By-Laws, Statement Establishing and Fixing the Rights and Preferences of Variable
Rate MuniFund Term Preferred Shares (Acquiring Fund VMTP Statement), or of any material agreement, indenture, instrument, contract, lease, or other undertaking to which the Acquiring Fund is a party or by which it is bound.
(d) No litigation, administrative proceeding or investigation of or before any court or
governmental body is presently pending or to its knowledge threatened against the Acquiring Fund or any of its properties or assets, which, if adversely determined, would materially and adversely affect its financial condition, the conduct of its
business or the ability of the Acquiring Fund to carry out the transactions contemplated by this Agreement. The Acquiring Fund knows of no facts that might form the basis for the institution of such proceedings and it is not a party to or subject to
the provisions of any order, decree, or judgment of any court or governmental body that materially and adversely affects its business or its ability to consummate the transactions contemplated herein.
(e) The financial statements of the Acquiring Fund as of October 31, 2012 and for
the fiscal year then ended have been prepared in accordance with generally accepted accounting principles and have been audited by independent auditors, and such statements (copies of which have
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been furnished to the Target Fund) fairly reflect the financial condition of the Acquiring Fund as of October 31, 2012, and there are no known contingent liabilities of the Acquiring
Fund as of such date that are not disclosed in such statements.
(f) Since the
date of the financial statements referred to in subsection (e) above, there have been no material adverse changes in the Acquiring Funds financial condition, assets, liabilities or business (other than changes occurring in the ordinary
course of business) and there are no known contingent liabilities of the Acquiring Fund arising after such date. For the purposes of this subsection (f), a decline in the net asset value of the Acquiring Fund shall not constitute a material
adverse change.
(g) All federal, state, local and other tax returns and
reports of the Acquiring Fund required by law to be filed by it (taking into account permitted extensions for filing) have been timely filed and are complete and correct in all material respects. All federal, state, local and other taxes of the
Acquiring Fund required to be paid (whether or not shown on any such return or report) have been paid or provision shall have been made for their payment and any such unpaid taxes, as of the date of the financial statements referred to in
subsection (e) above, are properly reflected thereon. To the best of the Acquiring Funds knowledge, no tax authority is currently auditing or preparing to audit the Acquiring Fund, and no assessment for taxes, interest, additions to tax
or penalties has been asserted against the Acquiring Fund.
(h) The authorized
capital of the Acquiring Fund consists of an unlimited number of common and preferred shares of beneficial interest, par value $0.01 per share. All issued and outstanding shares of the Acquiring Fund are duly and validly issued, fully paid and
non-assessable by the Acquiring Fund (recognizing that under Massachusetts law, Acquiring Fund shareholders, under certain circumstances, could be held personally liable for the obligations of the Acquiring Fund). The Acquiring Fund has no
outstanding options, warrants, or other rights to subscribe for or purchase any shares of the Acquiring Fund, and has no outstanding securities convertible into shares of the Acquiring Fund.
(i) The execution, delivery and performance of this Agreement have been duly authorized
by all necessary action on the part of the Acquiring Fund, including the determinations of the Acquiring Fund Board required pursuant to Rule 17a-8(a) of the 1940 Act. Subject to approval by shareholders, this Agreement constitutes a valid and
binding obligation of the Acquiring Fund, enforceable in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors rights and to general
equity principles.
(j) The Acquiring Fund Shares to be issued and delivered
to the Target Fund for the account of Target Fund Shareholders pursuant to the terms of this Agreement will, at the Closing Date, have been duly authorized. When so issued and delivered, such Acquiring Fund Shares will be duly and validly issued
shares of the Acquiring Fund, and will be fully paid and non-assessable by the Acquiring Fund (recognizing that under Massachusetts law, Acquiring Fund shareholders, under certain circumstances, could be held personally liable for the obligations of
the Acquiring Fund).
(k) The information to be furnished by the Acquiring
Fund for use in no-action letters, applications for orders, registration statements, proxy materials, and other documents that may be necessary in connection with the transactions contemplated herein shall be accurate and complete in all material
respects and shall comply in all material respects with federal securities and other laws and regulations.
A-9
(l) From the effective date of the
Registration Statement (as defined in Section 5.7) through the time of the meeting of shareholders and on the Closing Date, any written information furnished by the Acquiring Fund with respect to the Acquiring Fund for use in the Proxy
Materials (as defined in Section 5.7), or any other materials provided in connection with the Reorganization, does not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated or
necessary to make the statements, in light of the circumstances under which such statements were made, not misleading.
(m) For each taxable year of its operations, including the taxable year that includes the
Closing Date, the Acquiring Fund: (i) has elected to qualify, has qualified or will qualify (in the case of the year that includes the Closing Date) and intends to continue to qualify as a RIC under the Code; (ii) has been eligible to
and has computed its federal income tax under Section 852 of the Code, and will do so for the taxable year that includes the Closing Date; and (iii) has been, and will be (in the case of the taxable year that includes the Closing Date),
treated as a separate corporation for federal income tax purposes.
(n) The
Acquiring Fund agrees to use all reasonable efforts to obtain the approvals and authorizations required by the 1933 Act, the 1940 Act, and any state securities laws as it may deem appropriate in order to continue its operations after the Closing
Date.
ARTICLE V
COVENANTS OF THE FUNDS
5.1 OPERATION IN ORDINARY COURSE. Subject to Sections 1.2, 1.4
and 8.5, the Acquiring Fund and the Target Fund will operate its respective business in the ordinary course between the date of this Agreement and the Closing Date, it being understood that such ordinary course of business will include customary
dividends and distributions, and any other distribution necessary or desirable to avoid federal income or excise taxes.
5.2 APPROVAL OF SHAREHOLDERS. The Acquiring Fund and the Target
Fund will call a meeting of their respective shareholders to consider and act upon this Agreement and to take all other appropriate action necessary to obtain approval of the transactions contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Target Fund covenants that the
Acquiring Fund Shares to be issued pursuant to this Agreement are not being acquired for the purpose of making any distribution, other than in connection with the Reorganization and in accordance with the terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Target Fund will assist the
Acquiring Fund in obtaining such information as the Acquiring Fund reasonably requests concerning the beneficial ownership of the Target Funds shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, each Fund will take or cause to be taken, all action, and do or cause
to be done, all things reasonably necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, including any actions required to be taken after the Closing Date.
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5.6 STATEMENT OF EARNINGS AND
PROFITS. As promptly as practicable, but in any case within 60 days after the Closing Date, the Target Fund shall furnish the Acquiring Fund, in such form as is reasonably satisfactory to the Acquiring Fund and which shall be
certified by the Target Funds Controller, a statement of the earnings and profits of the Target Fund for federal income tax purposes, as well as any net operating loss carryovers and capital loss carryovers, that will be carried over to the
Acquiring Fund pursuant to Section 381 of the Code.
5.7 PREPARATION OF
REGISTRATION STATEMENT AND PROXY MATERIALS. The Funds will prepare and file with the Commission a registration statement on Form N-14 relating to the Acquiring Fund Common Shares to be issued to Target Fund Common
Shareholders (the Registration Statement). The Registration Statement shall include a proxy statement of the Funds and a prospectus of the Acquiring Fund relating to the transactions contemplated by this Agreement. The Registration
Statement shall be in compliance with the 1933 Act, the Securities Exchange Act of 1934, as amended (the 1934 Act), and the 1940 Act, as applicable. Each party will provide the other party with the materials and information necessary to
prepare the proxy statement and related materials (the Proxy Materials), for inclusion therein, in connection with the meetings of the Funds shareholders to consider the approval of this Agreement and the transactions contemplated
herein.
5.8 TAX STATUS OF REORGANIZATION. The intention
of the parties is that the Reorganization will qualify as a reorganization within the meaning of Section 368(a) of the Code. Neither the Target Fund nor the Acquiring Fund shall take any action, or cause any action to be taken
(including, without limitation, the filing of any tax return), that is inconsistent with such treatment or that results in the failure of the transactions to qualify as a reorganization within the meaning of Section 368(a) of
the Code. At or prior to the Closing Date, the parties to this Agreement will take such action, or cause such action to be taken, as is reasonably necessary to enable counsel to render the tax opinion contemplated in Section 8.8.
ARTICLE VI
CONDITION PRECEDENT TO OBLIGATIONS OF THE TARGET FUND
The obligations of
the Target Fund to consummate the transactions provided for herein shall be subject to the fulfillment or waiver of the following condition:
6.1 All representations, covenants, and warranties of the Acquiring Fund contained in this Agreement shall be true and correct in all material respects as of
the date hereof and as of the Closing Date, with the same force and effect as if made on and as of the Closing Date. The Acquiring Fund shall have delivered to the Target Fund a certificate executed in the Acquiring Funds name by the Acquiring
Funds Chief Administrative Officer or Vice President and Controller, in form and substance satisfactory to the Target Fund and dated as of the Closing Date, to such effect and as to such other matters as the Target Fund shall reasonably
request.
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ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to consummate the transactions provided for herein shall be subject to the fulfillment or waiver of the following conditions:
7.1 All representations, covenants, and warranties of the Target Fund contained in this
Agreement shall be true and correct in all material respects as of the date hereof and as of the Closing Date, with the same force and effect as if made on and as of the Closing Date. The Target Fund shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in the Target Funds name by the Target Funds Chief Administrative Officer or Vice President and Controller, in form and substance satisfactory to the Acquiring Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Acquiring Fund shall reasonably request.
7.2 The Target Fund shall have delivered to the Acquiring Fund a statement of the Target
Funds assets and liabilities, together with a list of the Target Funds portfolio securities showing the tax basis of such securities by lot and the holding periods of such securities, as of the Closing Date, certified by the Controller
of the Target Fund.
7.3 Prior to the Valuation Time, the Target Fund shall
have declared the dividends and/or distributions contemplated by Section 1.4 and Section 8.5.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT
The obligations of the Target Fund and the Acquiring Fund hereunder shall also be subject to the fulfillment or waiver of the following conditions:
8.1 This Agreement and the transactions contemplated herein shall have been approved by
the requisite vote of the holders of the outstanding shares of the Target Fund in accordance with applicable law and the provisions of the Target Funds Declaration of Trust, Target Fund VMTP Statement and By-Laws. In addition, this Agreement,
the issuance of Acquiring Fund Shares and the transactions contemplated herein shall have been approved by the requisite votes of the holders of the outstanding shares of the Acquiring Fund in accordance with applicable law, the requirements of the
applicable exchanges and the provisions of the Acquiring Funds Declaration of Trust, Acquiring Fund VMTP Statement and By-Laws.
8.2 On the Closing Date, the Commission shall not have issued an unfavorable report under Section 25(b) of the 1940 Act, or instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated by this Agreement under Section 25(c) of the 1940 Act. Furthermore, no action, suit or other proceeding shall be threatened or pending before any court or
governmental agency in which it is sought to restrain or prohibit, or obtain damages or other relief in connection with this Agreement or the transactions contemplated herein.
8.3 All required consents of other parties and all other consents, orders, and permits of federal, state and local regulatory authorities (including those of
the Commission and of state securities
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authorities, including any necessary no-action positions and exemptive orders from such federal and state authorities) to permit consummation of the transactions contemplated
herein shall have been obtained.
8.4 The Registration Statement shall have
become effective under the 1933 Act, and no stop orders suspending the effectiveness thereof shall have been issued. To the best knowledge of the parties to this Agreement, no investigation or proceeding for that purpose shall have been instituted
or be pending, threatened or contemplated under the 1933 Act.
8.5 The Target
Fund shall have declared prior to the Valuation Time a dividend or dividends which, together with all previous such dividends, shall have the effect of distributing to its shareholders at least all of the Target Funds investment company
taxable income for all taxable periods ending on or before the Closing Date (computed without regard to any deduction for dividends paid), if any, plus the excess of its interest income excludible from gross income under Section 103(a) of
the Code, if any, over its deductions disallowed under Sections 265 and 171(a)(2) of the Code for all taxable periods ending on or before the Closing Date and all of its net capital gains realized in all taxable periods ending on or before
the Closing Date (after reduction for any available capital loss carry forward).
8.6 The Target Fund shall have received on the Closing Date an opinion from Vedder Price
P.C. dated as of the Closing Date, substantially to the effect that:
(a) The
Acquiring Fund has been formed as a voluntary association with transferable shares of beneficial interest commonly referred to as a Massachusetts business trust, and is existing under the laws of the Commonwealth of Massachusetts and, to
such counsels knowledge, has the power as a business trust to own all of its properties and assets and to carry on its business as presently conducted, in each case as described in the Joint Proxy Statement/Prospectus.
(b) The Acquiring Fund is registered as a closed-end management investment company under
the 1940 Act, and, to such counsels knowledge, such registration under the 1940 Act is in full force and effect.
(c) Assuming that the Acquiring Fund Shares will be issued in accordance with the terms
of this Agreement, the Acquiring Fund Shares to be issued and delivered to the Target Fund on behalf of its Target Fund Shareholders as provided by this Agreement are duly authorized and, upon such delivery, will be validly issued and fully paid and
non-assessable by the Acquiring Fund, except that, as described in the Joint Proxy Statement/Prospectus, shareholders of the Acquiring Fund may, under certain circumstances, be held personally liable for its obligations, and no shareholder of the
Acquiring Fund has, as such holder, any preemptive rights to acquire, purchase or subscribe for any securities of the Acquiring Fund under the Acquiring Funds Declaration of Trust, By-Laws or Massachusetts law.
(d) The Registration Statement is effective and, to such counsels knowledge, no
stop order under the 1933 Act pertaining thereto has been issued.
(e) To the
knowledge of such counsel, no consent, approval, authorization or order of any court or governmental authority of the United States or the Commonwealth of Massachusetts is required for consummation by the Acquiring Fund of the transactions
contemplated herein, except as have been obtained.
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(f) The execution and delivery of the
Agreement by the Fund, did not, and the consummation by the Acquiring Fund of the transactions contemplated herein will not, violate the Acquiring Funds Declaration of Trust, Acquiring Fund VMTP Statement or By-Laws (assuming the requisite
approval of the Funds shareholders has been obtained in accordance with its Declaration of Trust, Acquiring Fund VMTP Statement and By-Laws).
Insofar as the opinions expressed above relate to or are dependent upon matters that are governed by the laws of the Commonwealth of Massachusetts, Vedder Price P.C. may rely on the opinion of Bingham
McCutchen LLP.
8.7 The Acquiring Fund shall have received on the Closing Date
an opinion from Vedder Price P.C. dated as of the Closing Date, substantially to the effect that:
(a) The Target Fund has been formed as a voluntary association with transferable shares
of beneficial interest commonly referred to as a Massachusetts business trust, and is existing under the laws of the Commonwealth of Massachusetts and, to such counsels knowledge, has the power as a business trust to own all of its
properties and assets and to carry on its business as presently conducted, in each case as described in the Joint Proxy Statement/Prospectus.
(b) The Target Fund is registered as a closed-end management investment company under the 1940 Act, and, to such counsels knowledge, such registration
under the 1940 Act is in full force and effect.
(c) To the knowledge of such
counsel, no consent, approval, authorization or order of any court or governmental authority of the United States or the Commonwealth of Massachusetts is required for consummation by the Target Fund of the transactions contemplated herein, except as
have been obtained.
(d) The execution and delivery of the Agreement by the
Target Fund, did not, and the consummation by the Target Fund of the transactions contemplated herein will not, violate the Target Funds Declaration of Trust, Target Fund VMTP Statement or By-Laws (assuming the requisite approval of the
Funds shareholders has been obtained in accordance with its Declaration of Trust, Target Fund VMTP Statement and By-Laws).
Insofar as the opinions expressed above relate to or are dependent upon matters that are governed by the laws of the Commonwealth of Massachusetts, Vedder Price P.C. may rely on the opinion of Bingham
McCutchen LLP.
8.8 The Funds shall have received on the Closing Date an opinion of Vedder Price P.C.
addressed to the Acquiring Fund and the Target Fund substantially to the effect that for federal income tax purposes:
(a) The transfer of substantially all of the Target Funds assets to the Acquiring
Fund in exchange solely for Acquiring Fund Shares and the assumption by the Acquiring Fund of substantially all of the liabilities of the Target Fund followed by the distribution to Target Fund Shareholders of all the Acquiring Fund Shares received
by the Target Fund in complete liquidation of the Target Fund will constitute a reorganization within the meaning of Section 368(a) of the Code and the Acquiring Fund and the Target Fund will each be a party to a
reorganization, within the meaning of Section 368(b) of the Code, with respect to the Reorganization.
A-14
(b) No gain or loss will be recognized by
the Acquiring Fund upon the receipt of substantially all of the assets of the Target Fund solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of substantially all of the liabilities of the Target Fund.
(c) No gain or loss will be recognized by the Target Fund upon the transfer of
substantially all of its assets to the Acquiring Fund solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of substantially all of the liabilities of the Target Fund or upon the distribution (whether actual or
constructive) of such Acquiring Fund Shares to Target Fund Shareholders solely in exchange for such shareholders common shares and VMTP Shares of the Target Fund in complete liquidation of the Target Fund.
(d) No gain or loss will be recognized by the Target Fund Shareholders upon the exchange
of their Target Fund shares solely for Acquiring Fund Shares in the Reorganization, except with respect to any cash received in lieu of a fractional Acquiring Fund Common Share.
(e) The aggregate basis of the Acquiring Fund Shares received by each Target Fund
Shareholder pursuant to the Reorganization (including any fractional Acquiring Fund Common Share to which a Target Fund Common Shareholder would be entitled) will be the same as the aggregate basis of the Target Fund shares exchanged therefor
by such shareholder. The holding period of the Acquiring Fund Shares received by each Target Fund Shareholder (including any fractional Acquiring Fund Common Share to which a Target Fund Common Shareholder would be entitled) will include the
period during which the Target Fund shares exchanged therefor were held by such shareholder, provided such Target Fund shares are held as capital assets at the time of the Reorganization.
(f) The basis of the Target Funds assets transferred to the Acquiring Fund will be the same as the basis of such assets to the
Target Fund immediately before the Reorganization. The holding period of the assets of the Target Fund in the hands of the Acquiring Fund will include the period during which those assets were held by the Target Fund.
No opinion will be expressed as to (1) the effect of the Reorganization on (A) the Target Fund, the Acquiring Fund or any
Target Fund Shareholder with respect to any asset as to which any unrealized gain or loss is required to be recognized under federal income tax principles (i) at the end of a taxable year (or on the termination thereof) or (ii) upon the
transfer of such asset regardless of whether such transfer would otherwise be a non-taxable transaction under the Code, or (B) the Target Fund, the Acquiring Fund or any Target Fund Shareholder with respect to any stock held in a passive
foreign investment company as defined in Section 1297(a) of the Code or (2) any other federal tax issues (except those set forth above) and all state, local or foreign tax issues of any kind.
Such opinion shall be based on customary assumptions and such representations as Vedder Price P.C. may reasonably request of the Funds,
and the Target Fund and the Acquiring Fund will cooperate to make and certify the accuracy of such representations. Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor the Target Fund may waive the conditions set forth in
this Section 8.8. Insofar as the opinions expressed above relate to or are dependent upon the classification of the Acquiring Fund VMTP Shares as equity securities for U.S. federal income tax purposes, Vedder Price P.C. may rely on the opinion
of K&L Gates LLP with respect to such issue.
8.9 The Acquiring Fund shall
have obtained written confirmation from Fitch, Inc. or such other rating agencies then rating the VMTP Shares, that (a) consummation of the transactions
A-15
contemplated by this Agreement will not impair the then current rating assigned by such rating agencies to the existing Acquiring Fund VMTP Shares and (b) the Acquiring Fund VMTP Shares to
be issued pursuant to Section 1.1 will be rated by such rating agencies no less than the then current rating assigned by such rating agencies to the Target Fund VMTP Shares exchanged therefor.
ARTICLE IX
EXPENSES
9.1 The expenses
incurred in connection with the Reorganization (whether or not the Reorganization is consummated) will be allocated between the Funds pro-rata based on the projected relative benefits to each Fund during the first year following the Reorganization
and each Fund shall have accrued such expenses as liabilities at or before the Valuation Time. Reorganization expenses include, without limitation: (a) expenses associated with the preparation and filing of the Registration Statement and other
Proxy Materials; (b) postage; (c) printing; (d) accounting fees; (e) legal fees incurred by each Fund; (f) solicitation costs of the transactions; and (g) other related administrative or operational costs.
9.2 Each party represents and warrants to the other party that there is no person or
entity entitled to receive any brokers fees or similar fees or commission payments in connection with the transactions provided for herein.
9.3 Notwithstanding the foregoing, expenses will in any event be paid by the party directly incurring such expenses if and to the extent that the payment by
another party of such expenses would result in the disqualification of the Target Fund or the Acquiring Fund, as the case may be, as a RIC.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The parties agree that neither party has made to the other party any representation,
warranty and/or covenant not set forth herein, and that this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this Agreement or in any
document delivered pursuant to or in connection with this Agreement shall not survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the parties and such
termination may be effected by each Funds Chief Administrative Officer or any Vice President without further action by the Target Fund Board or the Acquiring Fund Board. In addition, this Agreement may be terminated at or before the Closing
Date due to:
(a) a breach by the non-terminating party of any representation,
warranty, or agreement contained herein to be performed at or before the Closing Date, if not cured within 30 days;
A-16
(b) a condition precedent to the obligations
of the terminating party that has not been met or waived and it reasonably appears that it will not or cannot be met; or
(c) a determination by the Target Fund Board or the Acquiring Fund Board that the
consummation of the transactions contemplated herein is not in the best interests of the Target Fund or Acquiring Fund, respectively.
11.2 In the event of any such termination, in the absence of willful default, there shall be no liability for damages on the part of the Acquiring Fund
Board, the Target Fund Board, the Target Fund, the Acquiring Fund, the Adviser, or any Funds or Advisers officers.
ARTICLE XII
AMENDMENTS
12.1 This
Agreement may be amended, modified, or supplemented in such manner as may be mutually agreed upon in writing by the officers of each Fund as specifically authorized by each Funds Board of Trustees;
provided, however
, that following the
meeting of the shareholders of the Funds called by each Fund pursuant to Section 5.2 of this Agreement, no such amendment, modification or supplement may have the effect of changing the provisions for determining the number of Acquiring Fund
Shares to be issued to the Target Fund Shareholders under this Agreement to the detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The article and section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original.
13.3 This
Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts.
13.4 This Agreement shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns, and no assignment or transfer hereof or of any rights or obligations hereunder shall be made by either party without the written consent of the other party. Nothing herein expressed or implied is intended or shall
be construed to confer upon or give any person, firm, or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement.
13.5 It is expressly agreed that the obligations of each Fund hereunder shall not be
binding upon any of the Board members, shareholders, nominees, officers, agents, or employees of a Fund personally, but shall bind only the property of a Fund, as provided in each Funds Declaration of Trust, which is on file with the Secretary
of State of the Commonwealth of Massachusetts. The execution and
A-17
delivery of this Agreement have been authorized by each Funds Board of Trustees, and this Agreement has been signed by authorized officers of each Fund acting as such. Neither the
authorization by such Board members nor the execution and delivery by such officers shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the property of a Fund as
provided in its Declaration of Trust.
[Remainder of Page Intentionally Left Blank]
A-18
IN WITNESS WHEREOF, the parties have duly executed this Agreement, all as of the date first
written above.
|
|
|
NUVEEN MUNICIPAL HIGH INCOME
OPPORTUNITY FUND
|
|
|
By:
|
|
|
Name:
|
|
Kevin J. McCarthys
|
Title:
|
|
Vice President and Secretary
|
ACKNOWLEDGED:
|
|
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NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND 2
|
|
|
By:
|
|
|
Name:
|
|
Kevin J. McCarthy
|
Title:
|
|
Vice President and Secretary
|
ACKNOWLEDGED:
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EXHIBIT A
|
|
|
Target Fund Preferred Shares Outstanding
|
|
Acquiring Fund Preferred Shares to be Issued in
the Reorganization
|
VMTP Shares, Series 2016
$100,000 liquidation value per share
Term
Redemption Date:
January 1, 2016
|
|
VMTP Shares, Series 2016 #1
$100,000 liquidation value per share
Term
Redemption Date:
January 1, 2016
|
A-20
APPENDIX B
BENEFICIAL OWNERSHIP
Beneficial Ownership
The following table lists the dollar range of equity securities beneficially owned by each Board Member and Board Member Nominee and for
the Board Members and Board Member Nominees as a group in each Fund and in all Nuveen funds overseen by the Board Member nominee as of December 31, 2012.
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|
|
|
|
|
|
|
|
|
|
|
|
Dollar Range of Equity Securities
|
|
|
|
|
|
Board Member Nominees
|
|
Municipal
High Income
|
|
|
Municipal
High Income 2
|
|
|
Family of
Investment
Companies
(1)
|
|
Board Members/Nominees who are not interested persons of the Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert P. Bremner
|
|
|
|
|
|
|
|
|
|
over $
|
100,000
|
|
Jack B. Evans
|
|
|
|
|
|
|
|
|
|
over $
|
100,000
|
|
William C. Hunter
|
|
|
|
|
|
|
|
|
|
over $
|
100,000
|
|
David J. Kundert
|
|
|
|
|
|
|
|
|
|
over $
|
100,000
|
|
William J. Schneider
|
|
|
|
|
|
|
|
|
|
over $
|
100,000
|
|
Judith M. Stockdale
|
|
|
|
|
|
|
|
|
|
over $
|
100,000
|
|
Carole E. Stone
|
|
|
|
|
|
|
|
|
|
over $
|
100,000
|
|
Virginia L. Stringer
|
|
|
|
|
|
|
|
|
|
over $
|
100,000
|
|
Terence J. Toth
|
|
|
|
|
|
|
|
|
|
over $
|
100,000
|
|
|
|
|
|
Board Member/Nominee who is an interested person of the Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
John P. Amboian
|
|
|
|
|
|
|
|
|
|
over $
|
100,000
|
|
(1)
|
The amounts reflect the aggregate dollar range of equity securities and the number of shares beneficially owned by the Board Member in the Funds and in all Nuveen funds
overseen by the Board Member.
|
B-1
The following table sets forth, for each Board Member and Board Member Nominee and for the
Board Members and Board Member Nominees and officers as a group, the amount of shares beneficially owned in each Fund as of December 31, 2012. The information as to beneficial ownership is based on statements furnished by each Board Member and
officer.
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|
|
|
|
|
|
|
|
Fund Shares Owned By Board Members And Officers
(1)
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|
|
|
|
Board Member Nominees
|
|
Municipal
High Income
|
|
|
Municipal
High Income 2
|
|
Independent Board Members/Nominees
|
|
|
|
|
|
|
|
|
Robert P. Bremner
|
|
|
0
|
|
|
|
0
|
|
Jack B. Evans
|
|
|
0
|
|
|
|
0
|
|
William C. Hunter
|
|
|
0
|
|
|
|
0
|
|
David J. Kundert
|
|
|
0
|
|
|
|
0
|
|
William J. Schneider
|
|
|
0
|
|
|
|
0
|
|
Judith M. Stockdale
|
|
|
0
|
|
|
|
0
|
|
Carole E. Stone
|
|
|
0
|
|
|
|
0
|
|
Virginia L. Stringer
|
|
|
0
|
|
|
|
0
|
|
Terence J. Toth
|
|
|
0
|
|
|
|
0
|
|
|
|
|
Non-Independent Board Member/Nominee
|
|
|
|
|
|
|
|
|
John P. Amboian
|
|
|
0
|
|
|
|
0
|
|
|
|
|
All Board Members and Officers as a Group
|
|
|
0
|
|
|
|
0
|
|
(1)
|
The numbers include share equivalents of certain Nuveen funds in which the Board Member is deemed to be invested pursuant to the Deferred Compensation Plan.
|
B-2
APPENDIX C
NUMBER OF BOARD AND COMMITTEE MEETINGS HELD DURING
EACH FUNDS LAST FISCAL YEAR
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Fund
|
|
Regular
Board
Meeting
|
|
Special
Board
Meeting
|
|
Executive
Committee
Meeting
|
|
Dividend
Committee
Meeting
|
|
Compliance,
Risk
Management
and
Regulatory
Oversight
Committee
Meeting
|
|
Audit
Committee
Meeting
|
|
Nominating
and
Governance
Committee
Meeting
|
|
Closed-End
Fund
Committee
Meeting
|
Municipal High Income
|
|
6
|
|
6
|
|
0
|
|
4
|
|
6
|
|
4
|
|
6
|
|
3
|
Municipal High Income 2
|
|
6
|
|
6
|
|
0
|
|
4
|
|
6
|
|
4
|
|
6
|
|
3
|
C-1
APPENDIX D
NUVEEN FUND BOARD
AUDIT COMMITTEE CHARTER
I. Organization and Membership
There shall be a committee of each Board of Directors/Trustees (the Board) of the Nuveen Management Investment Companies (the
Funds or, individually, a Fund) to be known as the Audit Committee. The Audit Committee shall be comprised of at least three Directors/Trustees. Audit Committee members shall be independent of the Funds and free of any
relationship that, in the opinion of the Directors/Trustees, would interfere with their exercise of independent judgment as an Audit Committee member. In particular, each member must meet the independence and experience requirements applicable to
the Funds of the exchanges on which shares of the Funds are listed, Section 10A of the Securities Exchange Act of 1934 (the Exchange Act), and the rules and regulations of the Securities and Exchange Commission (the
Commission). Each such member of the Audit Committee shall have a basic understanding of finance and accounting, be able to read and understand fundamental financial statements, and be financially literate, and at least one such member
shall have accounting or related financial management expertise, in each case as determined by the Directors/Trustees, exercising their business judgment (this person may also serve as the Audit Committees financial expert as
defined by the Commission). The Board shall appoint the members and the Chairman of the Audit Committee, on the recommendation of the Nominating and Governance Committee. The Audit Committee shall meet periodically but in any event no less
frequently than on a semi-annual basis. Except for the Funds, Audit Committee members shall not serve simultaneously on the audit committees of more than two other public companies.
II. Statement of Policy, Purpose and Processes
The Audit Committee shall
assist the Board in oversight and monitoring of (1) the accounting and reporting policies, processes and practices, and the audits of the financial statements, of the Funds; (2) the quality and integrity of the financial statements of the
Funds; (3) the Funds compliance with legal and regulatory requirements, (4) the independent auditors qualifications, performance and independence; and (5) oversight of the Pricing Procedures of the Funds and the Valuation
Group. In exercising this oversight, the Audit Committee can request other committees of the Board to assume responsibility for some of the monitoring as long as the other committees are composed exclusively of independent directors.
In doing so, the Audit Committee shall seek to maintain free and open means of communication among the Directors/Trustees, the
independent auditors, the internal auditors and the management of the Funds. The Audit Committee shall meet periodically with Fund management, the Funds internal auditor, and the Funds independent auditors, in separate executive
sessions. The Audit Committee shall prepare reports of the Audit Committee as required by the Commission to be included in the Funds annual proxy statements or otherwise.
The Audit Committee shall have the authority and resources in its discretion to retain special legal, accounting or other consultants to
advise the Audit Committee and to otherwise discharge its responsibilities, including appropriate funding as determined by the Audit Committee for compensation to independent auditors engaged for the purpose of preparing or issuing an audit report
D-1
or performing other audit, review or attest services for a Fund, compensation to advisers employed by the Audit Committee, and ordinary administrative expenses of the Audit Committee that are
necessary or appropriate in carrying out its duties, as determined in its discretion. The Audit Committee may request any officer or employee of Nuveen Investments, Inc. (or its affiliates) (collectively, Nuveen) or the Funds
independent auditors or outside counsel to attend a meeting of the Audit Committee or to meet with any members of, or consultants to, the Audit Committee. The Funds independent auditors and internal auditors shall have unrestricted
accessibility at any time to Committee members.
Responsibilities
Fund management has the primary responsibility to establish and maintain systems for accounting, reporting, disclosure and internal
control.
The independent auditors have the primary responsibility to plan and implement an audit, with proper consideration
given to the accounting, reporting and internal controls. Each independent auditor engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Funds shall report directly to the Audit
Committee. The independent auditors are ultimately accountable to the Board and the Audit Committee. It is the ultimate responsibility of the Audit Committee to select, appoint, retain, evaluate, oversee and replace any independent auditors and to
determine their compensation, subject to ratification of the Board, if required. These Audit Committee responsibilities may not be delegated to any other Committee or the Board.
The Audit Committee is responsible for the following:
With respect to Fund financial statements:
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1.
|
Reviewing and discussing the annual audited financial statements and semi-annual financial statements with Fund management and the independent auditors including major
issues regarding accounting and auditing principles and practices, and the Funds disclosures in its periodic reports under Managements Discussion and Analysis.
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|
2.
|
Requiring the independent auditors to deliver to the Chairman of the Audit Committee a timely report on any issues relating to the significant accounting policies,
management judgments and accounting estimates or other matters that would need to be communicated under Statement on Auditing Standards (SAS) No. 90, Audit Committee Communications (which amended SAS No. 61, Communication with Audit
Committees), that arise during the auditors review of the Funds financial statements, which information the Chairman shall further communicate to the other members of the Audit Committee, as deemed necessary or appropriate in the
Chairmans judgment.
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|
3.
|
Discussing with management the Funds press releases regarding financial results and dividends, as well as financial information and earnings guidance provided to
analysts and rating agencies. This discussion may be done generally, consisting of discussing the types of information to be disclosed and the types of presentations to be made. The Chairman of the Audit Committee shall be authorized to have these
discussions with management on behalf of the Audit Committee.
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D-2
|
4.
|
Discussing with management and the independent auditors (a) significant financial reporting issues and judgments made in connection with the preparation and
presentation of the Funds financial statements, including any significant changes in the Funds selection or application of accounting principles and any major issues as to the adequacy of the Funds internal controls and any special
audit steps adopted in light of material control deficiencies; and (b) analyses prepared by Fund management and/or the independent auditor setting forth significant financial reporting issues and judgments made in connection with the
preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements.
|
|
5.
|
Discussing with management and the independent auditors the effect of regulatory and accounting initiatives on the Funds financial statements.
|
|
6.
|
Reviewing and discussing reports, both written and oral, from the independent auditors and/or Fund management regarding (a) all critical accounting policies and
practices to be used; (b) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management, ramifications of the use of such alternative treatments and disclosures, and
the treatment preferred by the independent auditors; and (c) other material written communications between the independent auditors and management, such as any management letter or schedule of unadjusted differences.
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|
7.
|
Discussing with Fund management the Funds major financial risk exposures and the steps management has taken to monitor and control these exposures, including the
Funds risk assessment and risk management policies and guidelines. In fulfilling its obligations under this paragraph, the Audit Committee may review in a general manner the processes other Board committees have in place with respect to risk
assessment and risk management.
|
|
8.
|
Reviewing disclosures made to the Audit Committee by the Funds principal executive officer and principal financial officer during their certification process for
the Funds periodic reports about any significant deficiencies in the design or operation of internal controls or material weaknesses therein and any fraud involving management or other employees who have a significant role in the Funds
internal controls. In fulfilling its obligations under this paragraph, the Audit Committee may review in a general manner the processes other Board committees have in place with respect to deficiencies in internal controls, material weaknesses, or
any fraud associated with internal controls.
|
With respect to the independent auditors:
|
1.
|
Selecting, appointing, retaining or replacing the independent auditors, subject, if applicable, only to Board and shareholder ratification; and compensating, evaluating
and overseeing the work of the independent auditor (including the resolution of disagreements between Fund management and the independent auditor regarding financial reporting).
|
|
2.
|
Meeting with the independent auditors and Fund management to review the scope, fees, audit plans and staffing for the audit, for the current year. At
the conclusion of the audit,
|
D-3
|
reviewing such audit results, including the independent auditors evaluation of the Funds financial and internal controls, any comments or recommendations of the independent auditors,
any audit problems or difficulties and managements response, including any restrictions on the scope of the independent auditors activities or on access to requested information, any significant disagreements with management, any
accounting adjustments noted or proposed by the auditor but not made by the Fund, any communications between the audit team and the audit firms national office regarding auditing or accounting issues presented by the engagement, any
significant changes required from the originally planned audit programs and any adjustments to the financial statements recommended by the auditors.
|
|
3.
|
Pre-approving all audit services and permitted non-audit services, and the terms thereof, to be performed for the Funds by their independent auditors, subject to the de
minimis exceptions for non-audit services described in Section 10A of the Exchange Act that the Audit Committee approves prior to the completion of the audit, in accordance with any policies or procedures relating thereto as adopted by the
Board or the Audit Committee. The Chairman of the Audit Committee shall be authorized to give pre-approvals of such non-audit services on behalf of the Audit Committee.
|
|
4.
|
Obtaining and reviewing a report or reports from the independent auditors at least annually (including a formal written statement delineating all relationships between
the auditors and the Funds consistent with Independent Standards Board Standard 1, as may be amended, restated, modified or replaced) regarding (a) the independent auditors internal quality-control procedures; (b) any material issues
raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities within the preceding five years, respecting one or more independent audits carried
out by the firm; (c) any steps taken to deal with any such issues; and (d) all relationships between the independent auditor and the Funds and their affiliates, in order to assist the Audit committee in assessing the auditors
independence. After reviewing the foregoing report[s] and the independent auditors work throughout the year, the Audit Committee shall be responsible for evaluating the qualifications, performance and independence of the independent auditor
and their compliance with all applicable requirements for independence and peer review, and a review and evaluation of the lead partner, taking into account the opinions of Fund management and the internal auditors, and discussing such reports with
the independent auditors. The Audit Committee shall present its conclusions with respect to the independent auditor to the Board.
|
|
5.
|
Reviewing any reports from the independent auditors mandated by Section 10A(b) of the Exchange Act regarding any illegal act detected by the independent auditor
(whether or not perceived to have a material effect on the Funds financial statements) and obtaining from the independent auditors any information about illegal acts in accordance with Section 10A(b).
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|
6.
|
Ensuring the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit
as required by law, and further considering the rotation of the independent auditor firm itself.
|
D-4
|
7.
|
Establishing and recommending to the Board for ratification policies for the Funds, Fund managements or the Fund advisers hiring of employees or
former employees of the independent auditor who participated in the audits of the Funds.
|
|
8.
|
Taking, or recommending that the Board take, appropriate action to oversee the independence of the outside auditor.
|
With respect to any internal auditor:
|
1.
|
Reviewing the proposed programs of the internal auditor for the coming year. It is not the obligation or responsibility of the Audit Committee to confirm the
independence of any Nuveen internal auditors performing services relating to the Funds or to approve any termination or replacement of the Nuveen Manager of Internal Audit.
|
|
2.
|
Receiving a summary of findings from any completed internal audits pertaining to the Funds and a progress report on the proposed internal audit plan for the Funds, with
explanations for significant deviations from the original plan.
|
With respect to pricing and valuation oversight:
|
1.
|
The Board has responsibilities regarding the pricing of a Funds securities under the 1940 Act. The Board has delegated this responsibility to the Committee to
address valuation issues that arise between Board meetings, subject to the Boards general supervision of such actions. The Committee is primarily responsible for the oversight of the Pricing Procedures and actions taken by the internal
Valuation Group (Valuation Matters). The Valuation Group will report on Valuation Matters to the Committee and/or the Board of Directors/Trustees, as appropriate.
|
|
2.
|
Performing all duties assigned to it under the Funds Pricing Procedures, as such may be amended from time to time.
|
|
3.
|
Periodically reviewing and making recommendations regarding modifications to the Pricing Procedures as well as consider recommendations by the Valuation Group regarding
the Pricing Procedures.
|
|
4.
|
Reviewing any issues relating to the valuation of a Funds securities brought to the Committees attention, including suspensions in pricing, pricing
irregularities, price overrides, self-pricing, NAV errors and corrections thereto, and other pricing matters. In this regard, the Committee should consider the risks to the Funds in assessing the possible resolutions of these Valuation Matters.
|
|
5.
|
Evaluating, as it deems necessary or appropriate, the performance of any pricing agent and recommending changes thereto to the full Board.
|
|
6.
|
Reviewing any reports or comments from examinations by regulatory authorities relating to Valuation Matters of the Funds and considering managements responses to
any such comments and, to the extent the Committee deems necessary or appropriate, proposing to management and/or the full Board the modification of the Funds policies and procedures relating to such matters. The Committee, if deemed necessary
or desirable, may also meet with regulators.
|
D-5
|
7.
|
Meeting with members of management of the Funds, outside counsel, or others in fulfilling its duties hereunder, including assessing the continued appropriateness and
adequacy of the Pricing Procedures, eliciting any recommendations for improvements of such procedures or other Valuation Matters, and assessing the possible resolutions of issues regarding Valuation Matters brought to its attention.
|
|
8.
|
Performing any special review, investigations or oversight responsibilities relating to Valuation as requested by the Board of Directors/Trustees.
|
|
9.
|
Investigating or initiating an investigation of reports of improprieties or suspected improprieties in connection with the Funds policies and procedures relating
to Valuation Matters not otherwise assigned to another Board committee.
|
Other responsibilities:
|
1.
|
Reviewing with counsel to the Funds, counsel to Nuveen, the Fund advisers counsel and independent counsel to the Board legal matters that may have a material
impact on the Funds financial statements or compliance policies.
|
|
2.
|
Receiving and reviewing periodic or special reports issued on exposure/controls, irregularities and control failures related to the Funds.
|
|
3.
|
Reviewing with the independent auditors, with any internal auditor and with Fund management, the adequacy and effectiveness of the accounting and financial controls of
the Funds, and eliciting any recommendations for the improvement of internal control procedures or particular areas where new or more detailed controls or procedures are desirable. Particular emphasis should be given to the adequacy of such internal
controls to expose payments, transactions or procedures that might be deemed illegal or otherwise improper.
|
|
4.
|
Reviewing the reports of examinations by regulatory authorities as they relate to financial statement matters.
|
|
5.
|
Discussing with management and the independent auditor any correspondence with regulators or governmental agencies that raises material issues regarding the Funds
financial statements or accounting policies.
|
|
6.
|
Obtaining reports from management with respect to the Funds policies and procedures regarding compliance with applicable laws and regulations.
|
|
7.
|
Reporting regularly to the Board on the results of the activities of the Audit Committee, including any issues that arise with respect to the quality or integrity of
the Funds financial statements, the Funds compliance with legal or regulatory requirements, the performance and independence of the Funds independent auditors, or the performance of the internal audit function.
|
|
8.
|
Performing any special reviews, investigations or oversight responsibilities requested by the Board.
|
D-6
|
9.
|
Reviewing and reassessing annually the adequacy of this charter and recommending to the Board approval of any proposed changes deemed necessary or advisable by the
Audit Committee.
|
|
10.
|
Undertaking an annual review of the performance of the Audit Committee.
|
|
11.
|
Establishing procedures for the receipt, retention and treatment of complaints received by the Funds regarding accounting, internal accounting controls or auditing
matters, and the confidential, anonymous submission of concerns regarding questionable accounting or auditing matters by employees of Fund management, the investment adviser, administrator, principal underwriter, or any other provider of
accounting-related services for the Funds, as well as employees of the Funds.
|
Although the Audit Committee
shall have the authority and responsibilities set forth in this Charter, it is not the responsibility of the Audit Committee to plan or conduct audits or to determine that the Funds financial statements are complete and accurate and are in
accordance with generally accepted accounting principles. That is the responsibility of management and the independent auditors. Nor is it the duty of the Audit Committee to conduct investigations, to resolve disagreements, if any, between
management and the independent auditors or to ensure compliance with laws and regulations.
D-7
APPENDIX E
CONFIDENTIAL INFORMATION MEMORANDUM
Copy No.
Strictly Confidential
NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND
VARIABLE RATE MUNIFUND TERM PREFERRED SHARES
360 SHARES SERIES 2016 #1
LIQUIDATION PREFERENCE $100,000 PER SHARE
This Information Memorandum is provided for information purposes in connection with the issuance of up to 360 Variable Rate MuniFund Term
Preferred Shares, Series 2016 #1 (Series 2016 #1 VMTP Shares or New VMTP Shares), of the Nuveen Municipal High Income Opportunity Fund (the Fund) in connection with the reorganization of Nuveen Municipal High
Income Opportunity Fund 2 (High Income 2) into the Fund (the Reorganization). Each New VMTP Share has a liquidation preference of $100,000 per share (the Liquidation Preference).
This Information Memorandum is being provided exclusively to holders of Variable Rate MuniFund Term Preferred shares (VMTP
Shares) of High Income 2 as of March [ ], 2013. Upon the closing of the Reorganization, High Income 2 will transfer substantially all of its assets to the Fund in exchange for common and preferred shares of the Fund, and
the assumption by the Fund of substantially all of the liabilities of High Income 2. High Income 2 will then be liquidated, dissolved and terminated in accordance with its declaration of trust. Holders of VMTP Shares of High Income 2 will receive,
on a one-for-one basis, New VMTP Shares of the Fund in exchange for VMTP Shares of High Income 2 held immediately prior to the Reorganization. References herein to the Fund refer to the Fund at the time the Reorganization is effected,
and all references to Series 2016 #1 VMTP Shares and New VMTP Shares generally refer to such shares as issued by the Fund at the time such shares are issued.
The terms of the New VMTP Shares to be issued in the Reorganization will be substantially identical, as of the time of the closing of
the Reorganization, to the outstanding VMTP Shares of High Income 2 for which they will be exchanged.
The preferences, voting powers, restrictions, limitations as to dividends, qualification, and terms and conditions of redemption of the Series
2016 #1 VMTP Shares are set forth in the Statement Establishing and Fixing the Rights and Preferences of Variable Rate MuniFund Term Preferred Shares attached hereto as Appendix A and incorporated herein by reference (the Statement) and
the Purchase Agreement between the Fund and the initial holder of the Series 2016 #1 VMTP Shares (the VMTP Purchase Agreement). Any capitalized terms used but not defined herein shall have the meaning given in the Statement.
Each
prospective holder of the Series 2016 #1 VMTP Shares is strongly urged to review the Statement
in its entirety for a complete description of all terms applicable to the Series 2016 #1 VMTP
Shares. The summary description of the Series 2016 #1 VMTP Shares contained in this Information Memorandum does not purport to be a complete description of all terms applicable to the Series
2016 #1 VMTP Shares.
Investing in VMTP Shares involves risks. See Risk Factors beginning on page 3.
The securities offered hereby have not been registered under the Securities Act of 1933, as amended (the Securities Act),
or any state securities laws and, unless so registered, may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws.
Accordingly, the securities are being offered and sold only to qualified institutional buyers (as defined in Rule 144A under the Securities Act) in accordance with the exemption from the registration requirements of the Securities Act
provided by Section 4(a)(2) of the Securities Act and are subject to transfer restrictions. See Notice to Investors.
It is expected
that the New VMTP Shares will be ready for delivery in book-entry form only through the facilities of The Depository Trust Company (
DTC
), on or about
[ ], 2013.
The date of this Information Memorandum is March [ ], 2013.
ii
The Fund.
The Fund is a diversified, closed-end management investment company. The
Funds primary investment objective is to provide high current income exempt from regular federal income tax. The Funds secondary investment objective is to seek attractive total return consistent with its primary objective.
Series 2016 #1 VMTP Shares.
The terms of the Series 2016 #1 VMTP Shares to be issued pursuant to the Reorganization will be
substantially identical, as of the time of closing of the Reorganization, to the terms of the outstanding VMTP Shares of High Income 2 for which they will be exchanged, including the same:
|
|
|
dividend rate and dividend rate determination method, including applicable spread adjustments;
|
|
|
|
mandatory and optional redemption terms, including the same term redemption date;
|
|
|
|
voting and consent rights;
|
|
|
|
registration rights; and
|
|
|
|
information delivery requirements.
|
The terms of the Series 2016 #1 VMTP Shares are further summarized below. The specific preferences, voting powers, restrictions, limitations as to dividends, qualification, and terms and conditions of
redemption of the Series 2016 #1 VMTP Shares are contained in the Statement attached hereto as Appendix A.
VMTP Shares
Outstanding
. The Fund has outstanding one series of VMTP Shares. The outstanding VMTP Shares will rank equally with the New VMTP Shares, and with any other series of preferred shares of the Fund that may be issued in the future, as to payment of
dividends and the distribution of the Funds assets upon dissolution, liquidation or winding up of the affairs of the Fund. See Risk FactorsMultiple Series Risk.
Dividend Rate.
The dividend rate for the Series 2016 #1 VMTP Shares is determined with respect to Rate Periods that will generally
commence on a Thursday and end on the following Wednesday when a new Index Rate (as defined below) is published. The Index Rate for any such Rate Period will be the Securities Industry and Financial Markets Association
(SIFMA) Municipal Swap Index made available at 3:00 p.m., New York City time, on the day immediately preceding the beginning of such Rate Period. If the day immediately preceding a Rate Period is not a Business Day, that Rate Period
will begin on the next Business Day on which such index is next made available but the end date of such Rate Period will not be adjusted. The dividend rate for any Rate Period will be equal to the Index Rate plus the Applicable Spread.
The Applicable Spread will initially be the same as the Applicable Spread for the VMTP Shares of High Income 2 held immediately prior to the Reorganization and is subject to adjustment in certain circumstances, including a change in the credit
rating assigned to the Series 2016 #1 VMTP Shares by a rating agency providing a credit rating for the Series 2016 #1 VMTP Shares at the request of the Fund, as described below, provided that the dividend rate will in no event exceed 15% per
annum. The applicable dividend rate of the New VMTP Shares is referred to herein as the Dividend Rate. See Dividends and Distributions and the related definitions in the Statement for additional information relating to the
applicable Dividend Rate.
iii
Applicable Spread Adjustments.
As noted above, the Applicable Spread will initially
be the same as the Applicable Spread for the VMTP Shares of High Income 2 held immediately prior to the Reorganization but will adjust based on the highest applicable credit rating most recently assigned to the Series 2016 #1 VMTP Shares by Fitch
Ratings, part of the Fitch Group, which is a jointly owned subsidiary of Fimalac, S.A. and Hearst Corporation (Fitch), or any additional or different rating agency providing a long-term credit rating on the Series 2016 #1 VMTP Shares and
which is designated a Rating Agency as provided in the Statement, to the per annum percentage set forth opposite such assigned rating in the table below on the Rate Determination Date for such Rate Period:
|
|
|
|
|
Long-Term
Ratings*
|
|
Fitch
|
|
Applicable
Spread**
|
|
AAA to A+
|
|
|
1.15
|
%
|
A to A-
|
|
|
1.65
|
%
|
BBB+ to BBB-
|
|
|
3.15
|
%
|
BB+ or lower***
|
|
|
6.15
|
%
|
*
|
And/or the equivalent ratings of an Other Rating Agency (as defined in the Statement) then rating the Series 2016 #1 VMTP Shares utilizing the highest of the ratings of
the Rating Agencies then rating the Series 2016 #1 VMTP Shares.
|
**
|
Unless an Increased Rate Period is in effect or the Increased Rate otherwise applies to any portion of a Rate Period, in which case the Applicable Spread will be 6.15%
for such period or portion thereof, as the case may be (as discussed below).
|
The
Applicable Spread will increase to 6.15% per annum for a Rate Period (an Increased Rate Period) if on the first day of such Rate Period, (A) the Fund has failed to deposit with the Redemption and Paying Agent for the Series
2016 #1 VMTP Shares by 12:00 noon, New York City time, on a Dividend Payment Date for such Series, Deposit Securities that will provide funds available to the Redemption and Paying Agent on such Dividend Payment Date sufficient to pay the full
amount of any dividend on such Series payable on such Dividend Payment Date (a Dividend Default) and such Dividend Default has not ended in the manner contemplated by the Statement on or prior to such first day; (B) the Fund has
failed to deposit with the Redemption and Paying Agent for the Series 2016 #1 VMTP Shares by 12:00 noon, New York City time, on an applicable Redemption Date for such Series, Deposit Securities that will provide funds available to the Redemption and
Paying Agent on such Redemption Date sufficient to pay the full amount of the Redemption Price payable in respect of such Series on such Redemption Date (a Redemption Default) and such Redemption Default has not ended in the manner
contemplated by the Statement on or prior to such first day; (C) any Rating Agency has withdrawn the credit rating required to be maintained with respect to the Series 2016 #1 VMTP Shares pursuant to the Statement other than due to the Rating
Agency ceasing to rate tax-exempt closed-end management investment companies generally and such withdrawal is continuing; (D) a Ratings Event (as defined below) has occurred and is continuing with respect to the Series 2016 #1 VMTP Shares; or
(E) (i) a court or other applicable governmental authority has made a final determination that for U.S. federal income tax purposes the Series 2016 #1 VMTP Shares do not qualify as equity in the Fund and (ii) such determination
results from an act or failure to act on the part of the Fund. A Ratings Event will be deemed to exist with respect to the Series 2016 #1 VMTP Shares at any time such VMTP Shares have a long-term credit rating from at least one-half of
the Rating Agencies designated at such time that is Below Investment Grade (as defined in the Statement). No Increased Rate Period for the Series 2016 #1 VMTP Shares with respect to any Dividend Default
iv
or Redemption Default will be deemed to have commenced if the amount of any dividend or any Redemption Price due (if such Default is not solely due to the willful failure of the Fund) is
deposited irrevocably in trust, in same-day funds, with the Redemption and Paying Agent by 12:00 noon, New York City time, on a Business Day that is not later than three (3) Business Days after the applicable Dividend Payment Date or Redemption
Date with respect to which such Default occurred, together with an amount equal to the Index Rate plus 6.15% per annum, applied to the amount and period of such non-payment on the Series 2016 #1 VMTP Shares.
Dividend Payments.
The holders of Series 2016 #1 VMTP Shares will be entitled to receive, when, as and if declared by, or under
authority granted by, the Board of Trustees of the Fund (the Board of Trustees) out of funds legally available for payment, cumulative cash dividends and other distributions on each such VMTP Share at the applicable Dividend Rate for
such Series, calculated as set forth in the Statement. Dividends and other distributions on the Series 2016 #1 VMTP Shares will accumulate from the Date of Original Issue with respect to such Series, which will be the closing date of the
Reorganization. The Dividend Period for the Series 2016 #1 VMTP Shares will generally be a calendar month and the Dividend Payment Date in respect of each Dividend Period is the first Business Day following the end of such
Dividend Period, except that the first Dividend Period on the Series 2016 #1 VMTP Shares will begin on the Date of Original Issue and end on (and include) the last calendar day of the month in which the Date of Original Issue occurred. The amount of
dividends per share payable on the Series 2016 #1 VMTP Shares on any Dividend Payment Date will equal the sum of the dividends accumulated but not yet paid for each Rate Period (or part thereof) in the related Dividend Period. The amount of
dividends per share accumulated for each such Rate Period (or part thereof) will be computed by (i) multiplying the Dividend Rate in effect for the Series 2016 #1 VMTP Shares for such Rate Period (or part thereof) by a fraction, the numerator
of which will be the actual number of days in such Rate Period (or part thereof) and the denominator of which will be the actual number of days in the year in which such Rate Period (or part thereof) occurs (365 or 366) and (ii) multiplying the
product determined pursuant to clause (i) by the Liquidation Preference for a Series 2016 #1 VMTP Share ($100,000). Dividends on Series 2016 #1 VMTP Shares with respect to any Dividend Period will be declared to the Holders of record of such
shares as their names shall appear on the registration books of the Fund at the close of business on each day in such Dividend Period. Dividends on Series 2016 #1 VMTP Shares will be paid on each Dividend Payment Date for such Series to the Holders
of shares of such Series as their names appear on the registration books of the Fund at the close of business on the day immediately preceding such Dividend Payment Date (or if such day is not a Business Day, the next preceding Business Day). See
Dividends and Distributions and the related definitions in the Statement for additional information relating to dividend payments.
Term Redemption.
The Fund will be required to redeem all outstanding Series 2016 #1 VMTP Shares on January 1, 2016, unless earlier redeemed or repurchased by the Fund, at a redemption price
equal to the sum of the $100,000 liquidation preference per Series 2016 #1 VMTP Share plus an amount equal to all accumulated but unpaid dividends and other distributions thereon (whether or not earned or declared but excluding interest thereon) to
(but excluding) the redemption date. See RedemptionTerm Redemption in the Statement for additional information relating to the term redemption of the Series 2016 #1 VMTP Shares.
Optional Redemption.
The Series 2016 #1 VMTP Shares will be subject to optional redemption in whole or in part at the option of
the Fund on any Business Day (as defined below) (i) prior to June 21, 2014 at a redemption price equal to the sum of the $100,000 Liquidation Preference per share plus an amount equal to all accumulated but unpaid dividends and other
v
distributions thereon (whether or not earned or declared but excluding interest thereon) from and including the Date of Original Issue to (but excluding) the redemption date plus an optional
redemption premium per share equal to the product of (a) 1.00% and (b) the $100,000 Liquidation Preference per share, or (ii) on or after June 21, 2014 at a redemption price equal to the sum of the $100,000 Liquidation Preference
per share plus an amount equal to all accumulated but unpaid dividends and other distributions thereon (whether or not earned or declared but excluding interest thereon) to (but excluding) the redemption date. See RedemptionOptional
Redemption in the Statement for additional information relating to the optional redemption of the Series 2016 #1 VMTP Shares.
Asset Coverage Mandatory Redemption.
If the Fund fails to have Asset Coverage (as defined in the Statement) of at least 225% as of the close of business on any Business Day (meaning any day other
than a day (a) on which commercial banks in The City of New York, New York are required or authorized by law or executive order to close or (b) on which the New York Stock Exchange is closed) on which such Asset Coverage is required to be
calculated and such failure is not cured as of 30 calendar days following such Business Day, the Fund will, to the extent permitted by the 1940 Act and Massachusetts law, cause a notice of redemption to be issued with respect to its Preferred Shares
(as defined in the Statement) in an amount equal to the lesser of (i) the minimum number of Preferred Shares that would result in the Fund having Asset Coverage of at least 225% and (ii) the maximum number of Preferred Shares that can be
redeemed out of monies expected to be legally available therefor in accordance with the Funds declaration of trust, as amended (the Declaration of Trust) and applicable law; and, at the Funds sole option, the Fund may redeem
a number of Preferred Shares that will result in the Fund having Asset Coverage of up to and including 250%. The Preferred Shares to be redeemed may include at the Funds sole option (to the extent permitted by the Investment Company Act of
1940, as amended (the 1940 Act) and Massachusetts law) any number or proportion of VMTP Shares of any Series. If Series 2016 #1 VMTP Shares are redeemed, such shares will be redeemed at a redemption price equal to Liquidation Preference
per share of $100,000 plus accumulated but unpaid dividends and other distributions thereon (whether or not declared, but excluding interest thereon) from and including the date of Original Issue to (but excluding) the date fixed for such
redemption. See RedemptionAsset Coverage Mandatory Redemption in the Statement for additional information relating to the Asset Coverage Mandatory Redemption.
Effective Leverage Ratio Mandatory Redemption.
If the Effective Leverage Ratio (as defined in the Statement) of the Fund exceeds
45% as of the close of business on any Business Day on which such ratio is required to be calculated and such failure is not cured as of the close of business on the date that is seven Business Days following the Business Day on which such
non-compliance is first determined (an Effective Leverage Ratio Cure Date), the Fund shall, by the close of business on the Business Day next following such Effective Leverage Ratio Cure Date, cause the Effective Leverage Ratio not to
exceed 45% by (A) engaging in transactions involving or relating to the floating rate securities not owned by the Fund and/or the inverse floating rate securities owned by the Fund, including the purchase, sale or retirement thereof,
(B) proceeding with redeeming a sufficient number of Preferred Shares, which at the Funds sole option, to the extent permitted by the 1940 Act and Massachusetts law, may include any number or proportion of VMTP Shares of any Series, in
accordance with the terms of such Preferred Shares, or (C) engaging in any combination of the actions contemplated by (A) and (B) above. Any Series 2016 #1 VMTP Shares so redeemed will be redeemed at a redemption price equal to the
Liquidation Preference per share of $100,000 plus accumulated but unpaid dividends and other distributions thereon (whether or not declared, but excluding interest thereon) from and including the Date of Original Issue to (but excluding) the date
fixed for such redemption. Notwithstanding the foregoing, in the event that the Funds Effective Leverage Ratio
vi
exceeds 45% on any Business Day solely by reason of fluctuations in the market value of the Funds portfolio securities, the Effective Leverage Ratio is only required not to exceed 46% on
such Business Day. See RedemptionEffective Leverage Ratio Mandatory Redemption in the Statement for additional information relating to the Effective Leverage Ratio Mandatory Redemption.
Information Requirements.
For so long as it owns any Series 2016 #1 VMTP Shares, Banc of America Preferred Funding Corporation, in
its capacity as initial holder of the Series 2016 #1 VMTP Shares (the Initial Holder), is entitled to receive various information concerning the Fund that is described in the VMTP Purchase Agreement under the heading Covenants of
the IssuerInformation. In particular, such holder is entitled to receive on the fifteenth and last day of each month (i) reports of portfolio holdings of the Fund and (ii) a report on the Funds Asset Coverage Ratio and
Effective Leverage Ratio. Prior to any registration of the Series 2016 #1 VMTP Shares under the Securities Act, a permitted transferee of such Series 2016 #1 VMTP Shares will have the right to receive such information upon satisfying certain
conditions. A fee is payable to the Initial Holder of Series 2016 #1 VMTP Shares if these reports have not been timely delivered and such failure is not cured within three (3) Business Days after notification of such failure is provided by such
holder. See Section 2.4 of the VMTP Purchase Agreement for additional information. Also, in the event of such a failure, such holder has the right to calculate the Effective Leverage Ratio for the Series 2016 #1 VMTP Shares based on the
securities holdings contained in the most recent reports provided and current market prices at the time of calculation.
Voting and Consent Rights.
The holders of Series 2016 #1 VMTP Shares are entitled to certain voting rights. See Voting
Rights in the Statement for a description of the voting rights granted to the holders of Series 2016 #1 VMTP Shares. In addition, the consent of the holders of more than 50% of the outstanding Series 2016 #1 VMTP Shares is required under the
VMTP Purchase Agreement for certain actions affecting their investment in the Fund, including, but not limited to, (i) any amendment, alteration or repeal of any provision of the Declaration of Trust, or the Statement, that would affect any
preference, right or power of the Series 2016 #1 VMTP Shares differentially from the rights of the holders of the Funds common shares, (ii) any termination of any Rating Agency for the Series 2016 #1 VMTP Shares or any selection of a
replacement or additional Rating Agency for the Series 2016 #1 VMTP Shares, (iii) the issuance of any indebtedness or additional preferred shares of the Fund (subject to certain exceptions including, but not limited to, the incurrence of
indebtedness or the issuance of Preferred Shares, the proceeds of which are used to redeem or repurchase Series 2016 #1 VMTP Shares), and (iv) the creation or incurrence of certain liens on the Funds assets. The Initial Holder also has
certain consent rights under the VMTP Purchase Agreement that are applicable only to it. Certain (but not all) of these consent rights are assignable by the Initial Holder to subsequent holders of Series 2016 #1 VMTP Shares that are permitted
transferees of such Series 2016 #1 VMTP Shares as set forth in the Statement and VMTP Purchase Agreement. All of the consent rights granted to the holders of more than 50% of the outstanding Series 2016 #1 VMTP Shares and/or the Initial Holder
terminate if any of the Series 2016 #1 VMTP Shares are registered for sale under the Securities Act. See the VMTP Purchase Agreement for a complete description of all terms applicable to these consent rights and the limitations thereof.
Investment Strategies.
The Funds primary investment objective is to provide high current income exempt from regular federal
income tax. The Funds secondary investment objective is to seek attractive total return consistent with its primary objective. Under normal circumstances, the Fund seeks to achieve its investment objectives by investing at least 80% of its
assets, including assets attributable to preferred shares and the principal amount of any borrowings (Managed Assets), in
vii
municipal securities that pay interest that is exempt from regular federal income tax. Under normal circumstances, the Fund expects to be fully invested (at least 95% of its Managed Assets) in
such tax-exempt municipal securities. Up to 30% of the Funds Managed Assets may be invested in municipal securities that pay interest that is taxable under the federal alternative minimum tax applicable to individuals. The Fund invests at
least 50% of its Managed Assets in investment-grade-quality municipal securities. A security is considered investment-grade quality if it is rated within the four highest grades (Baa or BBB or better by Moodys, S&P or Fitch) by all
nationally recognized statistical rating organizations (NRSROs) that rate such security, or if it is unrated but judged to be of comparable quality by the Funds investment adviser, Nuveen Fund Advisors, LLC (Nuveen Fund
Advisors or the Adviser). The Fund may invest up to 50% of its Managed Assets in municipal securities that, at the time of investment, are rated below investment grade. Below-investment-grade-quality municipal securities include
those municipal securities that are rated investment grade by one or more NRSRO but rated below investment grade by at least one NRSRO. No more than 5% of the Funds Managed Assets may be invested in municipal securities rated below B3/B- or
that are unrated but judged to be of comparable quality by the Adviser. There is no assurance that the Fund will achieve its investment objectives. See The Funds Investments.
Tax Exemption.
The dividend rate for Series 2016 #1 VMTP Shares assumes that each months distribution is comprised solely of
dividends exempt from regular federal income tax, although a portion of those dividends may be subject to the federal alternative minimum tax. From time to time, the Fund may be required to allocate capital gains and/or ordinary income to a given
months distribution on Series 2016 #1 VMTP Shares. To the extent that it does so, the Fund will use commercially reasonable efforts to contemporaneously either (i) adjust the Dividend Rate so as to pay, or (ii) make a separate,
supplemental distribution of, in either case an amount that, when combined with the total amount of regular tax-exempt income, capital gains and ordinary income in the monthly distribution, is intended to make the distributions equal on an after-tax
basis (determined based upon the maximum marginal federal income tax rates taking into account Section 1411 of the Internal Revenue Code of 1986, as amended (the Code) in effect at the time of such payment) to the amount of the
monthly distribution if it had been entirely comprised of dividends exempt from regular federal income tax. Alternatively, where such commercially reasonable efforts do not reasonably permit the Fund to effect a payment or distribution as described
in the preceding sentence, the Fund will satisfy the requirement to allocate capital gains or ordinary income to Series 2016 #1 VMTP Shares by making a supplemental distribution of such gains or income to holders of Series 2016 #1 VMTP Shares, over
and above the monthly dividend that is fully exempt from regular federal income tax. If, in connection with a redemption of Series 2016 #1 VMTP Shares, the Fund allocates capital gains or ordinary income to a distribution on Series 2016 #1 VMTP
Shares without having made either a contemporaneous adjustment of the Dividend Rate or supplemental distribution of an additional amount or an alternative supplemental distribution of capital gains and/or ordinary income, it will cause an additional
amount to be distributed to holders of Series 2016 #1 VMTP Shares whose interests are redeemed, which amount, when combined with the total amount of regular tax-exempt income, capital gains and ordinary income allocated in the distribution, is
intended to make the distribution and the additional amount equal on an after-tax basis (determined based upon the maximum marginal federal income tax rates taking into account Section 1411 of the Code in effect at the time of such payment) to
the amount of the distribution if it had been entirely comprised of dividends exempt from regular federal income tax. Investors should consult with their own tax advisors before making an investment in the Series 2016 #1 VMTP Shares. See
Federal Income Tax Matters.
viii
Priority of Payment.
Series 2016 #1 VMTP Shares will be senior securities that
represent stock of the Fund and are senior, with priority in all respects, to the Funds common shares as to payment of dividends and as to distribution of assets upon dissolution, liquidation or winding up of the affairs of the Fund. Series
2016 #1 VMTP Shares will have equal priority as to payment of dividends and as to distribution of assets upon dissolution, liquidation or winding up of the affairs of the Fund with other preferred shares currently outstanding or issued in the
future, including the Funds existing VMTP Shares, Series 2016. The Fund may issue additional preferred shares on a parity with Series 2016 #1 VMTP Shares, subject to certain limitations as set forth in the Statement and (prior to any
registration for sale of the Series 2016 #1 VMTP Shares under the Securities Act) certain consent rights of the holders of more than 50% of any of the outstanding Series 2016 #1 VMTP Shares as set forth in the VMTP Purchase Agreement. The Fund may
not issue additional classes of shares that are senior to Series 2016 #1 VMTP Shares or that are senior to other outstanding preferred shares of the Fund as to payment of dividends or as to distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Fund. The Fund, as a fundamental policy, may not issue debt securities that rank senior to Series 2016 #1 VMTP Shares other than as described herein. In addition, as a fundamental policy, the Fund may not borrow
money, except as permitted by the 1940 Act and exemptive orders granted under the 1940 Act. The VMTP Purchase Agreement limits such borrowings for temporary purposes to not more than 5% of the Funds assets and a term of not more than 60 days.
See The Funds Investments, Issuance of Additional Preferred Shares in the Statement and MiscellaneousConsent Rights of the Majority Participants to Certain Actions in the VMTP Purchase Agreement. The
Series 2016 #1 VMTP Shares will rank junior to the claims of the Funds creditors.
Transfer Restrictions.
The
Series 2016 #1 VMTP Shares are subject to substantial restrictions on transfer. See Transfers in the Statement and the description of such transfer restrictions in this Information Memorandum for additional information on these transfer
restrictions.
Term Redemption Liquidity Account and Liquidity Requirement.
On or prior to July 1, 2015 ( the
Liquidity Account Initial Date), the Fund will cause its custodian to segregate, by means of appropriate identification on its books and records or otherwise in accordance with its custodians normal procedures, from the other
assets of the Fund (the Term Redemption Liquidity Account) Deposit Securities (as defined in the Statement) or any other security or investment owned by the Fund that is rated not less than A3 by Moodys, A- by S&P, A- by Fitch
or an equivalent rating by any other NRSRO (each a Liquidity Account Investment and collectively the Liquidity Account Investments) with a Market Value (as defined in the Statement) equal to at least 110% of the Term
Redemption Amount (as defined below) with respect to such Series 2016 #1 Series 2016 #1 VMTP Shares. The Term Redemption Amount for Series 2016 #1 Series 2016 #1 VMTP Shares is equal to the Term Redemption Price to be paid on the Term
Redemption Date, based on the number of Series 2016 #1 VMTP Shares then outstanding, assuming for this purpose that the Dividend Rate in effect at the Liquidity Account Initial Date will be the Dividend Rate in effect until the Term Redemption Date.
If, on any date after the Liquidity Account Initial Date, the aggregate Market Value of the Liquidity Account Investments included in the Term Redemption Liquidity Account for Series 2016 #1 VMTP Shares as of the close of business on any Business
Day is less than 110% of the Term Redemption Amount, then the Fund will cause the custodian and Nuveen Fund Advisors, the Funds investment adviser, to take all such necessary actions, including segregating assets of the Fund as Liquidity
Account Investments, so that the aggregate Market Value of the Liquidity Account Investments included in the Term Redemption Liquidity Account is at least equal to 110% of the Term Redemption Amount not later than the close of business on the next
succeeding Business Day. With respect to
ix
assets of the Fund segregated as Liquidity Account Investments with respect to the Series 2016 #1 VMTP Shares, Nuveen Fund Advisors, on behalf of the Fund, will be entitled to instruct the
custodian on any date to release any Liquidity Account Investments from such segregation and to substitute therefor other Liquidity Account Investments not so segregated, so long as (i) the assets of the Fund segregated as Liquidity Account
Investments at the close of business on such date have a Market Value (as defined in the Statement) equal to 110% of the Term Redemption Amount and (ii) the assets of the Fund segregated as Deposit Securities at the close of business on such
date have a Market Value equal to the Liquidity Requirement (if any) (as set forth below) that is applicable to such date. The Fund will cause the custodian not to permit any lien, security interest or encumbrance to be created or permitted to exist
on or in respect of any Liquidity Account Investments included in the Term Redemption Liquidity Account, other than liens, security interests or encumbrances arising by operation of law and any lien of the custodian with respect to the payment of
its fees or repayment for its advances.
The Market Value of the Deposit Securities held in the Term Redemption Liquidity
Account for the Series 2016 #1 VMTP Shares, from and after the 15th day of the calendar month that is the number of months preceding the month of the Term Redemption Date specified in the table set forth below, will not be less than the percentage
of the Term Redemption Amount for the Series 2016 #1 VMTP Shares set forth below opposite such number of months (the Liquidity Requirement), but in all cases subject to the cure provisions of described below:
|
|
|
|
|
Number of Months
Preceding Month of Term
Redemption
Date
|
|
Value of Deposit
Securities as Percentage
of Term
Redemption
Amount
|
|
5
|
|
|
20
|
%
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4
|
|
|
40
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%
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3
|
|
|
60
|
%
|
2
|
|
|
80
|
%
|
1
|
|
|
100
|
%
|
If the aggregate Market Value of the Deposit Securities included in the Term Redemption Liquidity Account
for the Series 2016 #1 VMTP Shares as of the close of business on any Business Day is less than the Liquidity Requirement for such Business Day, then the Fund will cause the segregation of additional or substitute Deposit Securities in respect of
the Term Redemption Liquidity Account, so that the aggregate Market Value of the Deposit Securities included in the Term Redemption Liquidity Account is at least equal to the Liquidity Requirement not later than the close of business on the next
succeeding Business Day.
The Deposit Securities included in the Term Redemption Liquidity Account may be applied by the Fund,
in its discretion, towards payment of the Term Redemption Price. Upon the deposit by the Fund with the Redemption and Paying Agent of Deposit Securities having an initial combined Market Value sufficient to effect the redemption of the Series 2016
#1 VMTP Shares on the Term Redemption Date, the requirement of the Fund to maintain the Term Redemption Liquidity Account as described above will lapse and be of no further force and effect.
Eligible Assets.
In the VMTP Purchase Agreement, the Fund has represented that, as of the date of this Offering Memorandum, the
Fund owns only Eligible Assets. Eligible Assets means the instruments described in Exhibit B to the VMTP Purchase Agreement, which exhibit may be amended from time to time with the prior written consent of Banc of America Preferred
Funding Corporation, in which the Fund may invest. In addition, the Fund has covenanted in the VMTP Purchase Agreement to
x
only make investments in Eligible Assets, in accordance with the Funds investment objectives and the investment policies set forth in this Information Memorandum.
Registration Rights.
The holders of a majority of the outstanding Series 2016 #1 VMTP Shares have the right to demand the
registration under the Securities Act of all or a portion of the Series 2016 #1 VMTP Shares (Demand Registration) pursuant to the Registration Rights Agreement between the Fund and the Initial Holder. The Fund must use its commercially
reasonable best efforts to effect a Demand Registration after receipt of a Demand Registration request in accordance with the terms of Registration Rights Agreement, subject to the Funds right to defer its obligation to effect a Demand
Registration for a period of up to 90 days if the Board of Trustees determines, in its good faith judgment, that it would be seriously detrimental to the Fund or its shareholders for a registration statement to be filed to effect the Demand
Registration. The failure of the Fund to fulfill certain obligations under the Registration Rights Agreement related to a Demand Registration will give rise to a fee payable to the Initial Holder as described in Section 2.4 of the VMTP Purchase
Agreement so long as it is a holder or Designated Owner (as defined in the Statement) of any Series 2016 #1 VMTP Shares. The right to cause the Fund to register Series 2016 #1 VMTP Shares under the Registration Rights Agreement terminates on the
earliest of (i) March 21, 2015; (ii) the redemption or repurchase of all Series 2016 #1 VMTP Shares or (iii) the registration and sale of all Series 2016 #1 VMTP Shares pursuant to a Demand Registration (or all holders of Series 2016
#1 VMTP Shares have withdrawn from such Demand Registration).
Redemption and Paying Agent.
The redemption and paying
agent for Series 2016 #1 VMTP Shares will be State Street Bank and Trust Company, Canton, Massachusetts (the Redemption and Paying Agent or State Street).
Adviser and Sub-Adviser.
Nuveen Fund Advisors, the Funds investment adviser, is responsible for determining the Funds
overall investment strategies and their implementation. Nuveen Asset Management, LLC (Nuveen Asset Management or the Sub-Adviser) serves as the Funds sub-adviser and oversees the day-to-day operations of the Fund.
The Funds principal office is located at 333 West Wacker Drive, Chicago, Illinois 60606, and its telephone number is
(800) 257-8787. Prospective investors should read this Information Memorandum, which sets forth concisely the information about the Fund that a prospective investor ought to know before deciding whether to invest.
THE SERIES 2016 #1 VMTP SHARES REPRESENT INVESTMENTS IN THE FUND AND DO NOT REPRESENT AN INTEREST IN OR OBLIGATIONS OF, AND ARE NOT
INSURED BY, THE FUNDS INVESTMENT ADVISER OR THE REDEMPTION AND PAYING AGENT.
This Information Memorandum is
furnished by the Fund on a confidential basis in connection with an issuance of securities exempt from registration under the Securities Act, solely for the purpose of enabling holders of High Income 2 VMTP Shares to consider the terms of the New
VMTP Shares to be issued in the Reorganization. The information contained or incorporated by reference in this Information Memorandum has been provided solely by the Fund and other sources identified herein.
The New VMTP Shares have not been and will not be registered under the Securities Act or any state securities laws and, unless so
registered, may not be offered or sold except pursuant to an
xi
exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable securities laws. Accordingly, New VMTP Shares may be offered and sold only
to qualified institutional buyers in accordance with the exemption from the registration requirements of the Securities Act provided by Section 4(a)(2) of the Securities Act. Prospective purchasers are hereby notified that sellers of New VMTP
Shares may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. For certain restrictions on resales, see Notice to Investors. It is unlikely that a market will develop for the
securities offered hereby.
Prospective holders of New VMTP Shares are hereby offered the opportunity, prior to acquiring any
securities, to ask questions and receive answers concerning the terms and conditions of the New VMTP Shares and to obtain from the Fund additional information, to the extent that the Fund possesses such information or can acquire it without
unreasonable effort or expense, that is necessary to verify the accuracy of the information contained herein or provided pursuant hereto.
The New VMTP Shares have not been approved or disapproved by the Securities and Exchange Commission (SEC), or any state securities commission or regulatory authority, nor have the foregoing
authorities reviewed this Information Memorandum or confirmed the accuracy or determined the adequacy of this Information Memorandum. Any representation to the contrary is a criminal offense.
This Information Memorandum is personal to the intended recipient and does not constitute an offer to any other person or to the public
generally to subscribe for or otherwise acquire New VMTP Shares. Distribution of this Information Memorandum to any person other than the intended recipient and those persons, if any, retained to advise such intended recipient with respect to the
New VMTP Shares is not authorized, and any disclosure of any of its contents is prohibited. Each intended recipient, by accepting delivery of this Information Memorandum, agrees to the foregoing and agrees to make no copies of this Information
Memorandum.
The New VMTP Shares will be issued in book-entry form, as global securities (the global securities).
The global securities will be deposited with, or on behalf of DTC and registered in the name of Cede & Co., the nominee of DTC. Beneficial interests in the global securities will be held only through DTC and any of its participants. Unless
the context otherwise requires, references in this Information Memorandum to New VMTP Shares and Series 2016 #1 VMTP Shares include any beneficial interest therein. See Book-Entry Procedures and Settlement.
This Information Memorandum contains information believed to be accurate as of the date hereof with respect to certain terms
of certain documents, but reference is made to the actual documents (copies of which are attached or otherwise available on a confidential basis to prospective investors) for complete information with respect thereto, and all such summaries are
qualified in their entirety by such reference.
The distribution of this Information Memorandum and the offering of New VMTP
Shares in certain jurisdictions may be restricted by law. Persons in possession of this Information Memorandum are required to inform themselves about and to observe any such restrictions. This Information Memorandum does not constitute, and may not
be used for or in connection with, an offer or solicitation by anyone in any jurisdiction in which an offer or solicitation is not authorized or to any person to whom it is unlawful to make an offer or solicitation.
xii
No action has been taken by the Fund that would permit an offering of New VMTP Shares or the
circulation or distribution of this Information Memorandum or any offering material in relation to the Fund in any jurisdiction where action for that purpose is required.
THIS INFORMATION MEMORANDUM IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO BE RELIED UPON ALONE AS THE BASIS FOR AN INVESTMENT DECISION. IN MAKING AN INVESTMENT DECISION, PROSPECTIVE INVESTORS
MUST RELY ON THEIR OWN EXAMINATION OF THE FUND, AND THE TERMS OF THE NEW VMTP SHARES, INCLUDING THE MERITS AND RISKS INVOLVED. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF AN INVESTMENT IN NEW VMTP SHARES
FOR AN INDEFINITE PERIOD OF TIME.
NEITHER THE FUND NOR ANY OF ITS AFFILIATES MAKES ANY REPRESENTATION TO ANY PROSPECTIVE
HOLDER OF NEW VMTP SHARES REGARDING THE LEGALITY OF INVESTMENT THEREIN BY SUCH PROSPECTIVE HOLDER UNDER APPLICABLE LEGAL INVESTMENT OR SIMILAR LAWS OR REGULATIONS OR THE PROPER CLASSIFICATION OF SUCH AN INVESTMENT THEREUNDER.
THE CONTENTS OF THIS INFORMATION MEMORANDUM ARE NOT TO BE CONSTRUED AS LEGAL, BUSINESS OR TAX ADVICE. EACH PROSPECTIVE HOLDER SHOULD
CONSULT ITS OWN ATTORNEY, BUSINESS ADVISOR AND TAX ADVISOR AS TO LEGAL, BUSINESS AND TAX ADVICE. INVESTMENT IN NEW VMTP SHARES MAY NOT BE SUITABLE FOR ALL RECIPIENTS OF THIS INFORMATION MEMORANDUM.
Notwithstanding anything to the contrary contained in this Information Memorandum or any other express or implied agreement to the
contrary, each prospective holder of New VMTP Shares (and each employee, representative or other agent of each prospective holder) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of an
investment in the securities offered hereby and all materials of any kind that are provided to the prospective holder relating to such tax treatment and tax structure (as such terms are defined in U.S. Treasury regulation section 1.6011-4).
This authorization of tax disclosure is retroactively effective to the commencement of discussions with the prospective holders regarding the transactions contemplated herein.
In this Information Memorandum, references to U.S. Dollars, Dollars and $ are to United States
dollars.
FORWARD LOOKING STATEMENTS
Any projections, forecasts and estimates contained or incorporated by reference herein are forward looking statements and are based upon certain assumptions. Projections, forecasts and estimates are
necessarily speculative in nature, and some or all of the assumptions underlying any projections, forecasts or estimates may not materialize or may vary significantly from actual results. Actual results may vary from any projections, forecasts and
estimates and the variations may be material. Some important factors that could cause actual results to differ materially from those in any
xiii
forward looking statements include changes in interest rates, market, financial or legal uncertainties, the state of the market in municipal securities, the funding and solvency of governmental
entities and municipal issuers, and the timing and frequency of defaults on underlying investments. Consequently, the inclusion of any projections, forecasts and estimates herein should not be regarded as a representation by the Fund or any of its
affiliates or any other person or entity of the results that will actually be achieved by the Fund. None of the Fund or its affiliates has any obligation to update or otherwise revise any projections, forecasts and estimates including any revisions
to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of unanticipated events, even if the underlying assumptions do not come to fruition.
xiv
TABLE OF CONTENTS
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Appendix A
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Statement Establishing and Fixing the Rights and Preferences of Variable Rate MuniFund Term Preferred Shares
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A-1
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Appendix B
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Ratings of Investments
|
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B-1
|
|
You should rely only on the information contained in or incorporated by reference into this Information Memorandum. We
have not authorized anyone to provide you with information different from that contained in this Information Memorandum. The information contained in this Information Memorandum is accurate only as of the date of this Information Memorandum,
regardless of the time of delivery of this Information Memorandum or any sale of New VMTP Shares.
xv
NOTICE TO INVESTORS
Each person acquiring New VMTP Shares, by its acceptance thereof, will be deemed to have acknowledged, represented to and agreed with the
Fund as follows:
(1) It understands and acknowledges that the securities are
restricted securities and have not been registered under the Securities Act or any other applicable securities law, are being offered for sale pursuant to Section 4(a)(2) of the Securities Act, and may not be offered, sold or
otherwise transferred except in compliance with the registration requirements of the Securities Act or any other applicable securities law, pursuant to an exemption therefrom or in a transaction not subject thereto and in each case in compliance
with the conditions for transfer set forth in paragraph (5) below.
(2) It
is a qualified institutional buyer (QIB), as defined in Rule 144A promulgated under the Securities Act, and is acquiring the securities for its own account or for the account of another QIB.
(3) It acknowledges that neither the Fund nor any person representing the Fund has made
any representation to it with respect to the Fund or the offering or sale of any securities other than the information contained or incorporated by reference in this Information Memorandum, which has been delivered to it and upon which it is relying
in making its investment decision with respect to the securities and information delivered or made available to it in response to its questions, due diligence, and requests for information. Further, no representation has been made regarding New VMTP
Shares or the advisability of investing in New VMTP Shares. Moreover, it acknowledges that it has had access to such financial and other information concerning the Fund and the securities as it has deemed necessary in connection with its decision to
purchase the securities offered hereby, including an opportunity to ask questions of and request information from the Fund.
(4) It is acquiring the New VMTP Shares for its own account for investment, and not with a
view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act, subject to any requirements of law that the disposition of its property be at all times within its control and subject to its ability to
resell such securities pursuant to Rule 144A or any exemption from registration available under the Securities Act.
(5) It agrees, and each subsequent holder or owner of the Series 2016 #1 VMTP Shares will
be required to agree, to offer, sell or otherwise transfer such securities only to (A)(i) persons it reasonably believes are QIBs that are registered closed-end management investment companies, the shares of which are traded on a national securities
exchange, banks, insurance companies or registered open-end management investment companies, in each case, pursuant to Rule 144A or another available exemption from registration under the Securities Act, in a manner not involving any public offering
with the meaning of Section 4(a)(2) of the Securities Act, (ii) a tender option bond trust in which all investors are persons it reasonably believes are QIBs that are registered closed-end management investment companies, the shares of
which are traded on a national securities exchange, banks, insurance companies, or registered open-end management investment companies, or (iii) other investors that the Fund has consented in writing to permit to be holders of such securities
and (B) unless the prior written consent of the Fund and the holder(s) of more than 50% of the outstanding Series 2016 #1 VMTP Shares has been obtained, is not a Nuveen Person (as defined in the VMTP Purchase Agreement), if such Nuveen Person
would, after such sale and transfer, own more than 20% of the outstanding Series 2016 #1 VMTP Shares. The foregoing restrictions on transfer do not apply to
any Series 2016 #1 VMTP Shares that are being registered and sold pursuant to an effective registration statement under the Securities Act or to any subsequent transfer of such registered
Series 2016 #1 VMTP Shares.
(6) Each purchaser acknowledges that the
global certificate representing Series 2016 #1 VMTP Shares (unless sold to the public in an underwritten offering of such Series 2016 #1 VMTP Shares pursuant to a registration statement filed under the Securities Act) will contain a legend
substantially to the following effect:
THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE SECURITIES ACT), OR ANY STATE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS
ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY TO (A)(1) A PERSON THAT THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER THAT IS A REGISTERED CLOSED-END MANAGEMENT INVESTMENT
COMPANY, THE SHARES OF WHICH ARE TRADED ON A NATIONAL SECURITIES EXCHANGE, BANK, INSURANCE COMPANY, OR REGISTERED OPEN-END MANAGEMENT INVESTMENT COMPANY, IN EACH CASE, IN AN OFFER AND SALE MADE PURSUANT TO RULE 144A OR ANOTHER AVAILABLE EXEMPTION
FROM REGISTRATION UNDER THE SECURITIES ACT, IN A MANNER NOT INVOLVING ANY PUBLIC OFFERING WITHIN THE MEANING OF SECTION 4(a)(2) OF THE SECURITIES ACT; (2) A TENDER OPTION BOND TRUST IN WHICH ALL INVESTORS ARE PERSONS IT REASONABLY BELIEVES
ARE QUALIFIED INSTITUTIONAL BUYERS THAT ARE REGISTERED CLOSED-END MANAGEMENT INVESTMENT COMPANIES, THE SHARES OF WHICH ARE TRADED ON A NATIONAL SECURITIES EXCHANGE, BANKS, INSURANCE COMPANIES, OR REGISTERED OPEN-END MANAGEMENT INVESTMENT COMPANIES;
OR (3) OTHER PERSONS THAT THE ISSUER OF THE SECURITY HAS CONSENTED IN WRITING TO PERMIT TO BE THE HOLDER OF THE SECURITY AND (B) UNLESS THE PRIOR WRITTEN CONSENT OF THE ISSUER OF THE SECURITY AND THE HOLDER(S) OF MORE THAN 50% OF THE
OUTSTANDING SERIES 2016 #1 VMTP SHARES IS OBTAINED, NOT A NUVEEN PERSON (AS DEFINED IN THE VMTP PURCHASE AGREEMENT BETWEEN THE ISSUER OF THE SECURITY AND BANC OF AMERICA PREFERRED FUNDING CORPORATION), IF SUCH NUVEEN PERSON WOULD, AFTER SUCH SALE
AND TRANSFER, OWN MORE THAN 20% OF THE OUTSTANDING SERIES 2016 #1 VMTP SHARES.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE
HEREOF SHALL BE DEEMED TO HAVE AGREED THAT, IN CONNECTION WITH ANY TRANSFER OF SERIES 2016 #1 VMTP SHARES, IT IS TRANSFERRING TO THE TRANSFEREE THE RIGHT TO RECEIVE FROM THE FUND ANY DIVIDENDS DECLARED AND UNPAID FOR EACH DAY PRIOR TO THE TRANSFEREE
BECOMING THE BENEFICIAL OWNER OF THE SERIES 2016 #1 VMTP SHARES IN EXCHANGE FOR PAYMENT OF THE PURCHASE PRICE FOR SUCH VMTP SHARES BY THE TRANSFEREE.
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(7) It acknowledges that the Fund and others
will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements and agrees that, if any of the acknowledgments, representations or warranties deemed to have been made by its purchase of securities are no longer
accurate, it shall promptly notify the Fund. If it is acquiring any securities as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to each such account and that it has full
power to make the foregoing acknowledgments, representations and agreements on behalf of each such account.
RISK FACTORS
Risk is inherent in all investing. Investing in any investment company security involves risk,
including the risk that you may receive little or no return on your investment or even that you may lose part or all of your investment. Therefore, before investing you should consider carefully the following risks that you assume when you invest in
New VMTP Shares. The section below does not describe all of the risks associated with an investment in the Fund. Additional risks and uncertainties may also adversely affect and impact the Fund. See also The Funds Investments
and How the Fund Manages Portfolio Risk.
Risks of Investing in New VMTP Shares
Dividend Rate RiskNew VMTP Shares.
The New VMTP Shares are variable dividend rate securities. Such
securities generally are less sensitive to interest and dividend rate changes but may decline in value if their dividend rate does not rise as much, or as quickly, as interest and dividend rates in general. Conversely, variable dividend rate
securities will not generally increase in value if interest and dividend rates decline.
Risks Related to SIFMA Municipal
Swap Index.
The Dividend Rate on the New VMTP Shares is based on the weekly SIFMA Municipal Swap Index plus an applicable spread that is determined based on the long-term credit rating of the New VMTP Shares. The SIFMA
Municipal Swap Index is affected by factors that may affect other interest or dividend rates and rate indexes differently, including the following:
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Marginal Tax Rates.
As the SIFMA Municipal Swap Index represents the rate payable on tax-exempt variable rate demand
obligations, decreases in the marginal tax rate may increase the SIFMA Municipal Swap Index, including in relation to other interest and dividend rates and rate indexes, as a result of the reduced after-tax benefits of the tax-exempt variable rate
demand obligations included in the SIFMA Municipal Swap Index. Conversely, increases in the marginal tax rate may decrease the SIFMA Municipal Swap Index, including in relation to other interest and dividend rates and rate indexes, as a result of
the greater after-tax benefits of the tax-exempt variable rate demand obligations included in the SIFMA Municipal Swap Index.
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Tax-Exempt Status of Municipal Securities.
Changes in the tax-exempt status of municipal securities may also affect the
SIFMA Municipal Swap Index in relation to other interest and dividend rates and rate indexes. If the tax-exempt status of municipal securities were to be removed, reduced or otherwise adversely affected, the SIFMA Municipal Swap Index would likely
increase, converging toward non-tax-exempt interest and dividend rates.
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Tax Treatment of Comparable Securities.
Changes in tax laws that grant non-municipal securities more favorable tax
treatment to investors may adversely impact market demand for, and the pricing of, municipal securities generally and the tax-exempt variable rate demand obligations included in the SIFMA Municipal Swap Index specifically.
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Creditworthiness of Municipal Securities.
Any actual or anticipated decline in the actual or perceived creditworthiness
of issuers of municipal securities could significantly increase the level of the SIFMA Municipal Swap Index. Issues of creditworthiness that disproportionately affect issuers of municipal securities in relation to issuers of other variable interest
and dividend rate securities would increase the level of the SIFMA Municipal Swap Index in relation to other interest and dividend rates and rate indexes.
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Supply and Demand for Municipal Securities; Remarketing Practices.
In addition to the creditworthiness of municipal
securities, other factors can affect the level of the SIFMA Municipal Swap Index, including in relation to other interest and dividend rates and rate indexes, such as supply and demand imbalances, any changes in the remarketing practices for
tax-exempt variable rate demand obligations, and other technical trading factors. Aside from changes in the tax law, such supply and demand movements could derive from fragmentation in the market for municipal securities, uncertainty with respect to
the rights of the holders of municipal securities, and illiquidity generally in the market.
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Yield Compression.
As market interest and dividend rates in general decrease, municipal securities may become subject to
decreasing demand (as the positive tax effects of holding tax-exempt municipal securities decline on a relative basis) and increasing supply (as municipal issuers seek to exploit low interest rates by issuing more securities). This demand and supply
imbalance could increase the SIFMA Municipal Swap Index, including in relation to other interest and dividend rates and rate indexes.
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Discontinuation or Modification of the SIFMA Municipal Swap Index.
The SIFMA Municipal Swap Index was created by SIFMA and is produced by Municipal Market Data, a Thomson
Financial Services Company (MMD). SIFMA and/or MMD may make methodological or other changes that could change the index level of the SIFMA Municipal Swap Index, including changes related to the method by which the index level is
calculated, the criteria for eligibility for inclusion in the SIFMA Municipal Swap Index, and/or the timing on which the SIFMA Municipal Swap Index is published. In addition, SIFMA and/or MMD may alter, discontinue or suspend calculation or
dissemination of the SIFMA Municipal Swap Index. SIFMA and MMD have no obligation to consider the interests of the holders of the New VMTP Shares in calculating, revising or discontinuing the SIFMA Municipal Swap Index. In the event that the SIFMA
Municipal Swap Index is no longer published, the Dividend Rate will be based on the S&P Municipal Bond 7 Day High Grade Rate Index. If the S&P Municipal Bond 7 Day High Grade Rate Index is no longer published the Board of Trustees may in
good faith select another reasonably comparable index as a replacement subject to approval of a majority of holders of the New VMTP Shares as set forth in the VMTP Purchase Agreement. No assurance can be given that the S&P Municipal Bond 7 Day
High Grade Rate Index or such other comparable index selected by the Board will be an accurate assessment of average tax-exempt variable rate demand obligation interest and dividend rates that the SIFMA Municipal Swap Index is currently proposed to
measure.
No Public Trading Market and Restrictions on Transfer.
The New VMTP Shares are a new
issue of securities and there is currently no established trading market for such shares. The Fund does not intend to apply for a listing of the New VMTP Shares on a securities exchange or an automated
4
dealer quotation system. Accordingly, there can be no assurance as to the development or liquidity of any market for the New VMTP Shares. The Fund has not registered, and does not intend to
register, the New VMTP Shares under the Securities Act, except in connection with the rights conferred by the Registration Rights Agreement. Accordingly, the New VMTP Shares are subject to restrictions on transferability and resale and may only be
purchased by and sold to qualified institutional buyers (as defined in Rule 144A under the Securities Act or any successor provision) in accordance with Rule 144A under the Securities Act or any successor provision. Furthermore,
pursuant to the terms and conditions of the Statement, unless otherwise permitted by the Fund, the New VMTP Shares may only be purchased by and sold to qualified institutional buyers in accordance with Rule 144A that are
(a) registered closed-end management investment companies, the shares of which are traded on a national securities exchange (Closed-End Funds), banks or entities that are 100% direct or indirect subsidiaries of banks publicly
traded parent holding companies (collectively, Banks), insurance companies and registered open-end management investment companies or (b) tender option bond trusts in which all investors are Closed-End Funds, Banks, insurance
companies, and registered open-end management investment companies. See the terms and conditions in the Statement under the heading Transfers. Such restrictions on transfer of the New VMTP Shares may further limit their liquidity. If at
any time the Fund is not subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
Exchange Act
), in order to preserve the exemption for resales and transfers under Rule 144A, the Fund will
furnish, or cause to be furnished, to VMTP shareholders and prospective purchasers of New VMTP Shares, upon request, information with respect to the Fund satisfying the requirements of subsection (d)(4) of Rule 144A. See Available
Information.
Ratings Risk.
The Fund expects that, at issuance, the New VMTP Shares will
be rated at a certain minimum level by a Rating Agency designated by the Board of Trustees, and that such rating will be a requirement of issuance of such shares by the holders of the New VMTP Shares pursuant to the VMTP Purchase Agreement. There
can be no assurance that the New VMTP Shares will receive any particular rating from Fitch, or that any such rating will be maintained at the level originally assigned through the term of New VMTP Shares. In the event that Fitch does not issue a
rating on the New VMTP Shares at all or at the minimum level required, the issuance and sale of New VMTP Shares in this offering may not be completed. Ratings do not eliminate or mitigate the risks of investing in New VMTP Shares. A rating issued by
a Rating Agency (including Fitch) is only the opinion of the entity issuing the rating at that time, and is not a guarantee as to quality, or an assurance of the future performance, of the rated security (in this case, VMTP Shares). In addition, the
manner in which the Rating Agency obtains and processes information about a particular security may affect the Rating Agencys ability to react in a timely manner to changes in an issuers circumstances (in this case, the Fund) that could
influence a particular rating. A Rating Agency downgrade of the New VMTP Shares that results in an increase in the Dividend Rate may make New VMTP Shares less liquid in the secondary market. There can be no assurance that any Rating Agency will not
alter its rating criteria, resulting in a downgrade of ratings, which could further adversely affect the value and liquidity of the New VMTP Shares.
Early Redemption Risk.
The Fund may voluntarily redeem New VMTP Shares or may be forced to redeem New VMTP Shares to meet regulatory requirements and the asset coverage and
effective leverage requirements of the New VMTP Shares. Such redemptions may be at a time that is unfavorable to holders of New VMTP Shares. The Fund may voluntarily redeem New VMTP Shares before the Term Redemption Date to the extent that market
conditions allow the Fund to issue other preferred shares or debt securities at a rate that is lower than the Dividend Rate on New VMTP Shares. See RedemptionOptional Redemption in the Statement for additional information relating
to early redemption.
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Multiple Series Risk.
Following the Reorganization, the Fund
will have multiple series of preferred shares outstanding, including New VMTP Shares. While all preferred shares of the Fund will rank equally with each other with respect to the payment of dividends and the distribution of assets upon liquidation,
there may be some differences among the terms applicable to outstanding preferred series and preferred series issued in the future, if any. To the extent that the terms of the various series differ with respect to required asset coverage levels,
cure periods or other events affecting the dividend rate or mandatory or optional redemption terms applicable to such series, such events may impact one series of preferred shares differently than another series of preferred shares. In addition,
none of the New VMTP Shares may be redeemed if the Fund is not current in its dividend payments on all of its outstanding preferred shares. See The Fund.
Tax RiskNew VMTP Shares.
The Fund is relying on an opinion of counsel that the New VMTP Shares will qualify as equity in the Fund for U.S. federal income tax purposes.
Because there is no direct legal authority on the classification of instruments similar to the New VMTP shares, investors should be aware that the Internal Revenue Service (IRS) could assert a contrary positionmeaning that the IRS
could classify the New VMTP Shares as debt. If the IRS prevailed on such a position, the Fund would not be able to pass through tax-exempt income to holders of the New VMTP Shares, and dividends paid on the New VMTP Shares (including dividends
already paid) could become taxable. See Federal Income Tax Matters.
Income Shortfall
Risk.
The municipal securities held in the Funds portfolio generally pay interest based on long-term yields. Long-term, as well as intermediate-term and short-term, interest rates may fluctuate. If the interest rates
paid on the municipal securities held by the Fund fall below the Dividend Rate, the Funds ability to pay dividends on New VMTP Shares could be jeopardized.
Subordination Risk.
While holders of New VMTP Shares will have equal liquidation and distribution rights to any other preferred shares, including other series of VMTP Shares,
issued or that might be issued by the Fund, they will be subordinated to the rights of holders of indebtedness, if any, and the claims of other creditors of the Fund. Therefore, dividends, distributions and other payments to holders of New VMTP
Shares in liquidation or otherwise may be subject to prior payments due, if any, to the holders of indebtedness or other creditors of the Fund. Creditors of the Fund may include lenders and counterparties in connection with any borrowings, delayed
delivery purchases and/or forward delivery contracts or derivatives, including interest rate swaps or caps, entered into by the Fund.
In addition, the 1940 Act may provide debt holders with voting rights that are superior to the voting rights of holders of preferred shares, including holders of New VMTP Shares. Currently, the Fund, as a
fundamental policy, may not issue debt securities or preferred shares that rank senior to the New VMTP Shares. See Investment Restrictions.
Credit Crisis and Liquidity Risk.
The financial crisis in the U.S. and global economies over the past several years, including the European sovereign debt crisis, has
resulted, and may continue to result, in an unusually high degree of volatility in the financial markets, both domestic and foreign, and in the net asset values of many investment companies, including, to some extent, the Fund. Conditions in the
U.S. and global economies have resulted, and may continue to result, in fixed income instruments experiencing unusual liquidity issues, increased price volatility and, in some cases, credit downgrades and increased likelihoods of default. The
financial condition of federal, state and local governments may be sensitive to market events, which may, in turn, adversely affect the marketability of notes and bonds they issue. Recent declines in real estate prices and general business activity
are
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reducing tax revenues of many state and local governments and could affect the economic viability of projects that are the sole source of revenue to support various private activity bonds. In
addition, global economies and financial markets are becoming increasingly interconnected, which increases the possibilities that the conditions in one country or region might adversely impact issuers in a different country or region. Because the
situation is widespread and largely unprecedented, it may be unusually difficult to identify both risks and opportunities using past models of the interplay of market forces, or to predict the duration of these market conditions. The severity or
duration of these conditions may also be affected by policy changes made by governments or quasi-governmental organizations. If there is a significant decline in the value of the Funds portfolio, this may impact the asset coverage levels for
the New VMTP Shares and any other outstanding leverage (whether through other preferred shares or tender option bonds) the Fund may have. In addition, illiquidity and volatility in the credit markets may directly and adversely affect the Funds
distributions and/or the liquidity of the Term Redemption Liquidity Account (as defined in the Statement). See Term Redemption Liquidity Account and Liquidity Requirement in the Statement for additional information relating to the Term
Redemption Liquidity Account.
Inflation Risk.
Inflation is the reduction in the purchasing
power of money resulting from the increase in the price of goods and services. Inflation risk is the risk that the inflation-adjusted (or real) value of an investment in New VMTP Shares or the income from that investment will be worth
less in the future.
Reinvestment RiskNew VMTP Shares.
Given the three-year term and
potential for early redemption of New VMTP Shares, holders of New VMTP Shares may face an increased reinvestment risk, which is the risk that the return on an investment purchased with proceeds from the sale or redemption of New VMTP Shares may be
lower than the return previously obtained from an investment in New VMTP Shares.
Other Dividend
Risks.
In addition to the interest rate risks noted above, the Fund may otherwise be unable to pay dividends on New VMTP Shares in extraordinary circumstances.
General Risks of Investing in the Fund
Credit and
Below-Investment-Grade Risk.
Credit risk is the risk that one or more municipal securities in the Funds portfolio will decline in price, or the issuer thereof will fail to pay interest or principal when due, because
the issuer of the security experiences a decline in its financial status. In general, lower-rated municipal securities carry a greater degree of risk that the issuer will lose its ability to make interest and principal payments, which could have a
negative impact on the Funds net asset value or dividends. Credit risk is increased when a portfolio security is downgraded or the perceived creditworthiness of the issuer deteriorates. If a downgrade occurs, the Adviser will consider what
action, including the sale of the security, is in the best interests of the Fund and its shareholders. Municipal securities of below-investment-grade quality, commonly referred to as junk bonds, are regarded as having predominantly speculative
characteristics with respect to the issuers capacity to pay interest and repay principal when due, and they are more susceptible to default or decline in market value due to adverse economic and business developments than investment-grade
municipal securities. Also, to the extent that the rating assigned to a municipal security in the Funds portfolio is downgraded by any NRSRO, the market price and liquidity of such security may be adversely affected. The market values for
municipal securities of below-investment-grade quality tend to be volatile, and these securities are less liquid, than investment-grade municipal securities. For these reasons, an
7
investment in the Fund, compared with a portfolio consisting solely of investment-grade securities, may experience the following:
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increased price sensitivity resulting from a deteriorating economic environment and/or changing interest rates;
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greater risk of loss due to default or declining credit quality;
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adverse issuer-specific events that are more likely to render the issuer unable to make interest and/or principal payments; and
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the possibility that a negative perception of the below-investment-grade market develops, resulting in the price and liquidity of
below-investment-grade securities becoming depressed, and this negative perception could last for a significant period of time.
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Adverse changes in economic conditions are more likely to lead to a weakened capacity of a below-investment-grade issuer to make principal payments and interest payments compared to an investment-grade
issuer. The principal amount of below-investment-grade securities outstanding has proliferated in the past decade as an increasing number of issuers have used below-investment-grade securities for financing. The recent economic downturn may severely
affect the ability of highly leveraged issuers to service their debt obligations or to repay their obligations upon maturity. As the national economy slowly recovers from the recent economic downturn, with decreased tax and other revenue streams of
municipal issuers, or in the event interest rates rise sharply, increasing the interest cost on variable rate instruments and negatively impacting economic activity, the number of defaults by below-investment-grade municipal issuers is likely to
increase. Similarly, prolonged downturns in profitability in specific industries could adversely affect private activity bonds. The market values of lower-quality debt securities tend to reflect individual developments of the issuer to a greater
extent than do higher-quality securities, which react primarily to fluctuations in the general level of interest rates. Factors having an adverse impact on the market value of lower-quality securities may have an adverse impact on the Funds
net asset value and the market value of its preferred shares. In addition, the Fund may incur additional expenses to the extent it is required to seek recovery upon a default in payment of principal or interest on its portfolio holdings. In certain
circumstances, the Fund may be required to foreclose on an issuers assets and take possession of its property or operations. In such circumstances, the Fund would incur additional costs in disposing of such assets and potential liabilities
from operating any business acquired.
The secondary market for below-investment-grade securities may not be as liquid as the
secondary market for more highly rated securities, a factor that may have an adverse effect on the Funds ability to dispose of a particular security. There are fewer dealers in the market for below-investment-grade municipal securities than
the market for investment-grade municipal securities. The prices quoted by different dealers for below-investment-grade municipal securities may vary significantly, and the spread between the bid and ask price is generally much larger for
below-investment-grade municipal securities than for higher-quality instruments. Under adverse market or economic conditions, the secondary market for below-investment-grade securities could contract further, independent of any specific adverse
changes in the condition of a particular issuer, and these instruments may become illiquid. As a result, the Fund could find it more difficult to sell these securities or may be able to sell the securities only at prices lower than if such
securities were widely traded. Prices realized upon the sale of such lower-rated or unrated securities, under these circumstances, may be less than the prices used in calculating the Funds net asset value.
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Issuers of such below-investment-grade securities are highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risk associated with acquiring the securities of such issuers generally is greater than is the case with higher-rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, highly leveraged issuers of below-investment-grade securities may experience financial stress. During such periods, such issuers may not have sufficient revenues to meet their interest payment obligations.
The issuers ability to service its debt obligations also may be adversely affected by specific developments, the issuers inability to meet specific projected forecasts or the unavailability of additional financing. The risk of loss from
default by the issuer is significantly greater for the holders of below-investment-grade securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. Prices and yields of
below-investment-grade securities will fluctuate over time and, during periods of economic uncertainty, volatility of below-investment-grade securities may adversely affect the Funds net asset value. In addition, investments in
below-investment-grade zero coupon bonds, rather than income-bearing below-investment-grade securities, may be more speculative and may be subject to greater fluctuations in value due to changes in interest rates.
The Fund may invest in distressed securities, which are securities issued by companies that are involved in bankruptcy or insolvency
proceedings or are experiencing other financial difficulties at the time of acquisition by the Fund. The issuers of such securities may be in transition, out of favor, financially leveraged or troubled, or potentially troubled, and may be or have
recently been involved in major strategic actions, restructurings, bankruptcy, reorganization or liquidation. These characteristics of these companies can cause their securities to be particularly risky, although they also may offer the potential
for high returns. These companies securities may be considered speculative, and the ability of the companies to pay their debts on schedule could be affected by adverse interest rate movements, changes in the general economic climate, economic
factors affecting a particular industry or specific developments within the companies. Distressed securities frequently do not produce income while they are outstanding and may require the Fund to bear certain extraordinary expenses in order to
protect and recover its investment.
Investments in lower-rated or unrated securities may present special tax issues for the
Fund, including where the issuers of these securities default on their obligations pertaining thereto, and the federal income tax consequences to the Fund as a holder of such distressed securities may not be clear.
Municipal Securities Market Risk.
Investing in the municipal securities market involves certain risks. The
municipal securities market is one in which dealer firms make markets in bonds on a principal basis using their proprietary capital, and during the recent market turmoil these firms capital became severely constrained. As a result, some firms
were unwilling to commit their capital to purchase and to serve as a dealer for municipal securities. The amount of public information available about the municipal securities in the Funds portfolio is generally less than that for corporate
equities or bonds, and the Funds investment performance may therefore be more dependent on the Advisers analytical abilities than if the Fund were to invest in a stock fund or taxable bond fund. The secondary market for municipal
securities, particularly the below-investment-grade bonds in which the Fund may invest, also tends to be less well-developed or liquid than many other securities markets, which may adversely affect the Funds ability to sell its municipal
securities at attractive prices or at prices approximating those at which the Fund currently values them. Municipal securities may contain redemption provisions, which may allow the securities to be called or redeemed prior to their stated maturity,
potentially resulting in the distribution of principal and a reduction in subsequent interest distributions.
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The ability of municipal issuers to make timely payments of interest and principal may be
diminished during general economic downturns and as governmental cost burdens are reallocated among federal, state and local governments. In addition, laws enacted in the future by Congress or state legislatures or referenda could extend the time
for payment of principal and/or interest, or impose other constraints on enforcement of such obligations, or on the ability of municipalities to levy taxes. Issuers of municipal securities might seek protection under the bankruptcy laws. In the
event of bankruptcy of such an issuer, the Fund could experience delays in collecting principal and interest and the Fund may not, in all circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in
the event of a default in the payment of interest or repayment of principal, or both, the Fund may take possession of and manage the assets securing the issuers obligations on such securities, which may increase the Funds operating
expenses. Any income derived from the Funds ownership or operation of such assets may not be tax-exempt and may not be of the type that would allow the Fund to continue to qualify as a regulated investment company under Subchapter
M of the Code.
Interest Rate Risk.
Generally, when market interest rates rise, bond prices
fall, and vice versa. Interest rate risk is the risk that the municipal securities in the Funds portfolio will decline in value because of increases in market interest rates. As interest rates decline, issuers of municipal securities may
prepay principal earlier than scheduled, forcing the Fund to reinvest in lower-yielding securities and potentially reducing the Funds income. As interest rates increase, slower-than-expected principal payments may extend the average life of
securities, potentially locking in a below-market interest rate and reducing the Funds value. In typical market interest rate environments, the prices of longer-term municipal securities generally fluctuate more than prices of shorter-term
municipal securities as interest rates change. Because the Fund primarily invests in longer-term municipal securities, the Funds net asset value will fluctuate more in response to changes in market interest rates than if the Fund invested
primarily in shorter-term municipal securities. Because the values of lower-rated and comparable unrated debt securities are affected both by credit risk and interest rate risk, the price movements of such lower-grade securities typically have not
been highly correlated to the fluctuations of the prices of investment-grade-quality securities in response to changes in market interest rates. The Funds use of leverage, as described herein, will tend to increase interest rate risk.
Reinvestment Riskthe Fund.
Reinvestment risk is the risk that income from the Funds
portfolio will decline if and when the Fund invests the proceeds from matured, traded or called bonds at market interest rates that are below the Funds portfolios current earnings rate.
Investment and Market Risk.
An investment in the Funds shares is subject to investment risk,
including the possible loss of the entire principal amount that you invest. Your investment in New VMTP Shares represents an indirect investment in the municipal securities owned by the Fund, which generally trade in the over-the-counter markets.
Your New VMTP Shares at any point in time may be worth less than your original investment.
Recent Market
Conditions.
The financial crisis in the U.S. and global economies over the past several years, including the European sovereign debt crisis, has resulted, and may continue to result, in an unusually high degree of
volatility in the financial markets, both domestic and foreign, and in the net asset values of many investment companies, including to some extent the Fund. Conditions in the U.S. and global economies have resulted, and may continue to result, in
fixed income instruments experiencing unusual liquidity issues, increased price volatility and, in some cases, credit downgrades and increased likelihood of default. The financial condition of federal, state and local governments may be sensitive to
market events, which may, in turn, adversely affect the marketability of notes and bonds
10
they issue. Recent declines in real estate prices and general business activity are reducing tax revenues of many state and local governments and could affect the economic viability of projects
that are the sole source of revenue to support various municipal securities. Further, some state and local governments have been and in the future may be subject to direct ballot referenda that could limit their financial flexibility, or their
ability to levy taxes or raise tax revenues, which may adversely affect the marketability of notes and bonds issued by those state and local governments. In addition, global economies and financial markets are becoming increasingly interconnected,
which increases the possibilities that conditions in one country or region might adversely impact issuers in a different country or region. Because the situation is widespread and largely unprecedented, it may be unusually difficult to identify both
risks and opportunities using past models of the interplay of market forces, or to predict the duration of these market conditions. The severity or duration of these conditions may also be affected by policy changes made by governments or
quasi-governmental organizations. In addition, on August 5, 2011, S&P lowered its long-term sovereign credit rating on the U.S. federal government debt to AA+ from AAA. The downgrade by S&P could increase
volatility in both stock and bond markets, result in higher interest rates and higher U.S. Treasury yields and increase the costs of all kinds of debt. These events could have significant adverse effects on the economy generally. See Risk
FactorsGeneral Risks of Investing in the FundMunicipal Securities Market Risk.
Inverse Floating
Rate Securities Risk.
The Fund may invest in inverse floating rate securities. See The Funds InvestmentsMunicipal SecuritiesInverse Floating Rate Securities. Typically, inverse floating rate
securities represent beneficial interests in a special purpose trust (sometimes called a tender option bond trust) formed by a third-party sponsor for the purpose of holding municipal bonds. In general, income on inverse floating rate
securities will decrease when interest rates increase and increase when interest rates decrease. Investments in inverse floating rate securities subject the Fund to the risks of reduced or eliminated interest payments and losses of principal.
The Fund may invest in inverse floating rate securities issued by special purpose trusts that have recourse to the Fund. In
Nuveen Asset Managements discretion, the Fund may enter into a separate shortfall and forbearance agreement with the third-party sponsor of a special purpose trust. The Fund may enter into such recourse agreements: (i) when the liquidity
provider to the special purpose trust requires such an agreement because the level of leverage in the trust exceeds the level that the liquidity provider is willing to support absent such an agreement; and/or (ii) to seek to prevent the
liquidity provider from collapsing the trust in the event that the municipal obligation held in the trust has declined in value. Such an agreement would require the Fund to reimburse the third-party sponsor of the trust, upon termination of the
trust issuing the inverse floater, the difference between the liquidation value of the bonds held in the trust and the principal amount due to the holders of floating rate interests. In such instances, the Fund may be at risk of loss that exceeds
its investment in the inverse floating rate securities.
Inverse floating rate securities may increase or decrease in value at
a greater rate than the underlying interest rate, which effectively leverages the Funds investment. As a result, the market value of such securities generally will be more volatile than that of fixed rate securities.
The Funds investments in inverse floating rate securities issued by special purpose trusts that have recourse to the Fund may be
highly leveraged. The structure and degree to which the Funds inverse floating rate securities are highly leveraged will vary based upon a number of factors, including the size of the trust itself and the terms of the underlying municipal
security. An inverse floating rate
11
security generally is considered highly leveraged if the principal amount of the short-term floating rate interests issued by the related special purpose trust has a three to one gearing to the
principal amount of the inverse floating rate securities owned by the trust. In the event of a significant decline in the value of an underlying security, the Fund may suffer losses in excess of the amount of its investment (up to an amount equal to
the value of the municipal securities underlying the inverse floating rate securities) as a result of liquidating special purpose trusts or other collateral required to maintain the Funds anticipated effective leverage ratio.
The Funds investment in inverse floating rate securities will create effective leverage. Any effective leverage achieved through
the Funds investment in inverse floating rate securities will create an opportunity for increased common share net income and returns, but will also create the possibility that common share long-term returns will be diminished if the cost of
leverage exceeds the return on the inverse floating rate securities purchased by the Fund.
The amount of fees paid to Nuveen
Asset Management for investment advisory services will be higher if the Fund uses leverage because the fees will be calculated based on the Funds Managed Assetsthis may create an incentive for Nuveen Asset Management to leverage the
Fund. As previously described, Managed Assets means the total assets of the Fund, minus the sum of its accrued liabilities (other than liabilities incurred for the express purpose of creating effective leverage). Total assets for this purpose shall
include assets attributable to the Funds use of effective leverage (whether or not those assets are reflected in the Funds financial statements for purposes of generally accepted accounting principles), such as, but not limited to, the
portion of assets in special purpose trusts of which the Fund owns the inverse floater certificates that has been effectively financed by the trusts issuance of floating rate certificates.
There is no assurance that the Funds strategy of investing in inverse floating rate securities will be successful.
Inverse floating rate securities have varying degrees of liquidity based, among other things, upon the liquidity of the underlying
securities deposited in a special purpose trust. The market price of inverse floating rate securities is more volatile than the underlying securities due to leverage. The leverage attributable to such inverse floating rate securities may be
called away on relatively short notice and therefore may be less permanent than more traditional forms of leverage. The Fund may be required to sell its inverse floating rate securities at less than favorable prices, or liquidate other
Fund portfolio holdings in certain circumstances, including, but not limited to, the following:
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If the Fund has a need for cash and the securities in a special purpose trust are not actively trading due to adverse market conditions;
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If special purpose trust sponsors (as a collective group or individually) experience financial hardship and consequently seek to terminate their
respective outstanding trusts; and
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If the value of an underlying security declines significantly (to a level below the notional value of the floating rate securities issued by the trust)
and if additional collateral has not been posted by the Fund.
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Leverage
Risk.
Leverage risk is the risk associated with the use of borrowings, the issuance of preferred shares or the use of inverse floating rate securities to leverage the common shares. There can be no assurance that the
Funds leveraging strategy will be successful. Through the use of financial
12
leverage, the Fund seeks to enhance potential common share earnings over time by borrowing or issuing preferred shares at short-term municipal rates and investing at long-term municipal rates
which are typically, though not always, higher. The types of leverage used by the Fund may pay fixed rates of interest or dividends or may fluctuate with short- to intermediate-term yields. The income benefit from leverage will be reduced
(increased) to the extent that the difference narrows (widens) between the net earnings on the Funds portfolio securities and its cost of leverage. If short- or intermediate-term rates rise and the Funds leverage costs fluctuate, the
Funds cost of leverage could exceed the fixed rate of return on longer-term bonds held by the Fund that were acquired during periods of lower interest rates reducing ability of the Fund to pay dividends on the New VMTP Shares. This could occur
even if short- or intermediate-term and long-term municipal rates rise. Because of the costs of leverage, the Fund may incur losses even if the Fund has positive returns, if they are not sufficient to cover the costs of leverage. The Funds
cost of leverage includes both the interest rate paid on its borrowings or dividends on preferred shares as well as any ongoing fees and expenses associated with those borrowings or preferred shares.
The Fund is required to maintain certain regulatory and rating agency asset coverage requirements in connection with its outstanding
preferred shares, in order to be able to maintain the ability to declare and pay common share distributions and to maintain the rating of its preferred shares. In order to maintain required asset coverage levels, the Fund may be required to alter
the composition of its investment portfolio or take other actions, such as redeeming preferred shares with the proceeds from portfolio transactions, at what might be an inopportune time in the market.
The Fund may invest in the securities of other investment companies, which may themselves be leveraged and therefore present similar
risks to those described above. In addition, the Funds investments in leveraged investment companies magnify the Funds leverage risk.
The amount of fees paid to the Adviser (which in turn pays a portion of its fees to the Sub-Adviser) for investment and advisory services will be higher when the Fund uses financial leverage because the
advisory fees are calculated based on the Funds Managed Assetsthis may create an incentive for the Adviser and the Sub-Adviser to leverage the Fund.
Tax Riskthe Fund.
To qualify for the favorable U.S. federal income tax treatment generally accorded to regulated investment companies, among other things, the Fund must
derive in each taxable year at least 90% of its gross income from certain prescribed sources and satisfy a diversification test on a quarterly basis. If the Fund fails to satisfy the qualifying income or diversification requirements in any taxable
year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is
provided for certain de minimis failures of the diversification requirements where the Fund corrects the failure within a specified period. In order to be eligible for the relief provisions with respect to a failure to meet the diversification
requirements, the Fund may be required to dispose of certain assets. If these relief provisions are not available to the Fund and it fails to qualify for treatment as a regulated investment company under Subchapter M of the Code, all of its taxable
income (including its net capital gain) would be subject to federal income tax at regular corporate rates without any deduction for distributions to shareholders, and all distributions from the Fund (including underlying distributions attributable
to tax exempt interest income) would be taxable to shareholders as ordinary dividends to the extent of the Funds current and accumulated earnings and profits.
13
The value of the Funds investments and its net asset value may be adversely affected
by changes in tax rates and policies. Because interest income from municipal securities held by the Fund is normally not subject to regular federal income tax, the attractiveness of municipal securities in relation to other investment alternatives
is affected by changes in federal income tax rates or changes in the tax-exempt status of interest income from municipal securities. Any proposed or actual changes in such rates or exempt status, therefore, can significantly affect the demand for
and supply, liquidity and marketability of municipal securities. This could in turn affect the Funds net asset value and ability to acquire and dispose of municipal securities at desirable yield and price levels. Additionally, the Fund is not
suitable investments for individual retirement accounts, for other tax-exempt or tax-deferred accounts or for investors who are not sensitive to the federal income tax consequences of their investments.
Borrowing Risk.
The Fund may borrow money for the repurchase of its shares or for temporary or emergency
purposes, such as for the payment of dividends or the settlement of portfolio transactions. Borrowing may affect the Funds net income. When the Fund borrows money, it must pay interest and other fees, which will reduce the Funds returns
if such costs exceed the returns on the portfolio securities purchased or retained with such borrowings. Any such borrowings are intended to be temporary. However, under certain market conditions, including periods of low demand or decreased
liquidity in the municipal bond market, such borrowings might be outstanding for longer periods of time.
Sector and
Industry Risk.
The Fund may invest up to 25% of its net assets in municipal securities in any one industry or in any one state of origin. In addition, subject to the concentration limits of the Funds investment
policies and guidelines, the Fund may invest a significant portion of its net assets in certain sectors of the municipal securities market, such as hospitals and other health care facilities, charter schools and other private educational facilities,
special taxing districts and start-up utility districts, and private activity bonds including industrial development bonds on behalf of transportation companies such as airline companies, whose credit quality and performance may be more susceptible
to economic, business, political, regulatory and other developments than other sectors of municipal issuers. If the Fund invests a significant portion of its net assets in the sectors noted above, the Funds performance may be subject to
additional risk and variability. To the extent that the Fund focuses its net assets in the hospital and healthcare facilities sector, for example, the Fund will be subject to risks associated with such sector, including adverse government regulation
and reduction in reimbursement rates, as well as government approval of products and services and intense competition. Securities issued with respect to special taxing districts will be subject to various risks, including real-estate development
related risks and taxpayer concentration risk. Further, the fees, special taxes or tax allocations and other revenues established to secure the obligations of securities issued with respect to special taxing districts are generally limited as to the
rate or amount that may be levied or assessed and are not subject to increase pursuant to rate covenants or municipal or corporate guarantees. Charter schools and other private educational facilities are subject to various risks, including the
reversal of legislation authorizing or funding charter schools, the failure to renew or secure a charter, the failure of a funding entity to appropriate necessary funds and competition from alternatives such as voucher programs. Issuers of municipal
utility securities can be significantly affected by government regulation, financing difficulties, supply and demand of services or fuel and natural resource conservation. The transportation sector, including airports, airlines, ports and other
transportation facilities, can be significantly affected by changes in the economy, fuel prices, labor relations, insurance costs and government regulation.
14
The Fund presently intends to limit investments in tobacco settlement bonds to 10% of its
net assets. Tobacco settlement bonds are municipal securities that are backed solely by expected revenues to be derived from lawsuits involving tobacco related deaths and illnesses which were settled between certain states and American tobacco
companies. Tobacco settlement bonds are secured by an issuing states proportionate share in the Master Settlement Agreement (MSA). The MSA is an agreement, reached out of court in November 1998 between 46 states and nearly all of
the U.S. tobacco manufacturers. Under the terms of the MSA, the actual amount of future settlement payments by tobacco manufacturers is dependent on many factors, including, but not limited to, annual domestic cigarette shipments, reduced cigarette
consumption, increased taxes on cigarettes, inflation, financial capability of tobacco companies, continuing litigation and the possibility of tobacco manufacturer bankruptcy. Payments made by tobacco manufacturers could be negatively impacted if
the decrease in tobacco consumption is significantly greater than the forecasted decline.
Special Risks Related to Certain
Municipal Obligations.
The Fund may invest in municipal leases and certificates of participation in such leases. Municipal leases and certificates of participation involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional sale contracts (which normally provide for title to the leased asset to pass eventually to the governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and statutory requirements for the issuance of debt. The debt issuance limitations are deemed to be inapplicable because of the inclusion in many leases or contracts of
non-appropriation clauses that relieve the governmental issuer of any obligation to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body on a yearly or other
periodic basis. In addition, such leases or contracts may be subject to the temporary abatement of payments in the event the governmental issuer is prevented from maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligations may be secured by the leased equipment or facilities, the disposition of the property in the event of non-appropriation or foreclosure might prove difficult, time consuming and costly, and may result in a delay in recovering
or the failure to fully recover the Funds original investment. In the event of non-appropriation, the issuer would be in default and taking ownership of the assets may be a remedy available to the Fund, although the Fund does not anticipate
that such a remedy would normally be pursued. To the extent that the Fund invests in unrated municipal leases or participates in such leases, the credit quality rating and risk of cancellation of such unrated leases will be monitored on an ongoing
basis. Certificates of participation, which represent interests in unmanaged pools of municipal leases or installment contracts, involve the same risks as the underlying municipal leases. In addition, the Fund may be dependent upon the municipal
authority issuing the certificates of participation to exercise remedies with respect to the underlying securities. Certificates of participation also entail a risk of default or bankruptcy, both of the issuer of the municipal lease and also the
municipal agency issuing the certificate of participation.
Taxability Risk.
The Fund will
invest in municipal securities in reliance at the time of purchase on an opinion of bond counsel to the issuer that the interest paid on those securities will be excludable from gross income for regular federal income tax purposes, and the Adviser
will not independently verify that opinion. Subsequent to the Funds acquisition of such a municipal security, however, the security may be determined to pay, or to have paid, taxable income. As a result, the treatment of dividends previously
paid or to be paid by the Fund as exempt-interest dividends could be adversely affected, subjecting the Funds shareholders to increased federal income tax liabilities. In certain circumstances, the Fund will make payments to holders of
preferred shares to offset the tax effects of a taxable distribution.
15
Under highly unusual circumstances, the IRS may determine that a municipal bond issued as
tax-exempt should in fact be taxable. If the Fund held such a bond, it might have to distribute taxable ordinary income dividends or reclassify as taxable income amounts previously distributed as exempt-interest dividends. In addition, future
legislation may change the tax treatment of municipal bond interest.
For federal income tax purposes, distributions of
ordinary taxable income (including any net short-term capital gain) will be taxable to shareholders as ordinary income (and will not be eligible for favorable taxation as qualified dividend income), and capital gain dividends will be
taxed at long-term capital gain rates.
Hedging Risk.
The Funds use of derivatives or
other transactions to reduce risk involves costs and will be subject to the Advisers ability to predict correctly changes in the relationships of such hedge instruments to the Funds portfolio holdings or other factors. No assurance can
be given that the Advisers judgment in this respect will be correct. In addition, no assurance can be given that the Fund will enter into hedging or other transactions at times or under circumstances in which it may be advisable to do so.
Other Investment Companies Risk.
The Fund may invest in the securities of other investment
companies. Such securities may be leveraged. As a result, the Fund may be indirectly exposed to leverage through an investment in such securities. Utilization of leverage is a speculative investment technique and involves certain risks. An
investment in securities of other investment companies that are leveraged may expose the Fund to higher volatility in the market value of such securities and the possibility that the Funds long-term returns on such securities will be
diminished.
Deflation Risk.
Deflation risk is the risk that prices throughout the economy
decline over time, which may have an adverse effect on the market valuation of companies, their assets and revenues. In addition, deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more likely, which
may result in a decline in the value of the Funds portfolio.
Insurance Risk.
The Fund may
purchase municipal securities that are secured by insurance, bank credit agreements or escrow accounts. The credit quality of the companies that provide such credit enhancements will affect the value of those securities. Certain significant
providers of insurance for municipal securities have incurred significant losses as a result of exposure to sub-prime mortgages and other lower credit quality investments that have experienced recent defaults or otherwise suffered extreme credit
deterioration. As a result, such losses have reduced the insurers capital and called into question their continued ability to perform their obligations under such insurance if they are called upon to do so in the future. While an insured
municipal security will typically be deemed to have the rating of its insurer, if the insurer of a municipal security suffers a downgrade in its credit rating or the market discounts the value of the insurance provided by the insurer, the rating of
the underlying municipal security will be more relevant and the value of the municipal security would more closely, if not entirely, reflect such rating. In such a case, the value of insurance associated with a municipal security would decline and
may not add any value. The insurance feature of a municipal security does not guarantee the full payment of principal and interest through the life of an insured obligation, the market value of the insured obligation or the net asset value of the
Fund represented by such insured obligation.
Counterparty Risk.
Changes in the credit quality
of the companies that serve as the Funds counterparties with respect to derivatives, insured municipal securities or other transactions supported
16
by another partys credit will affect the value of those instruments. Certain entities that have served as counterparties in the markets for these transactions have recently incurred
significant financial hardships including bankruptcy and losses as a result of exposure to sub-prime mortgages and other lower-quality credit investments that have experienced recent defaults or otherwise suffered extreme credit deterioration. As a
result, such hardships have reduced these entities capital and called into question their continued ability to perform their obligations under such transactions. By using such derivatives or other transactions, the Fund assumes the risk that
its counterparties could experience similar financial hardships. In the event of insolvency of a counterparty, the Fund may sustain losses or be unable to liquidate a derivatives position.
Call Risk or Prepayment Risk.
During periods of declining interest rates or for other purposes, issuers may
exercise their option to prepay principal earlier than scheduled, forcing the Fund to reinvest in lower-yielding securities. This is known as call or prepayment risk.
Derivatives Risk.
The Funds use of derivatives involves risks different from, and possibly greater than, the risks associated with investing directly in the investments
underlying the derivatives. Whether the Funds use of derivatives is successful will depend on, among other things, if the Adviser correctly forecasts market values, interest rates and other applicable factors. If the Adviser incorrectly
forecasts these and other factors, the investment performance of the Fund will be unfavorably affected.
The Fund may enter
into debt-related derivatives instruments including credit default swap contracts and interest rate swaps. Like most derivative instruments, the use of swaps is a highly specialized activity that involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. In addition, the use of swaps requires an understanding by the Adviser of not only of the referenced asset, rate or index, but also of the swap itself. Because they are two-party
contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. It is possible that developments in the swaps market, including potential government regulation, could adversely affect the Funds ability to terminate existing swap agreements or to
realize amounts to be received under such agreements. The derivatives market is subject to a changing regulatory environment. It is possible that regulatory or other developments in the derivatives market could adversely affect the Funds
ability to successfully use derivative instruments.
Illiquid Securities Risk.
The Fund may
invest in municipal securities and other instruments that, at the time of investment, are illiquid. Illiquid securities are securities that are not readily marketable and may include restricted securities, which are securities that may not be resold
unless they have been registered under the Securities Act or can be sold in a private transaction pursuant to an exemption from registration. Illiquid securities involve the risk that the securities will not be able to be sold at the time desired by
the Fund or at prices approximating the value at which the Fund is carrying the securities on its books.
Income
Risk.
The Funds income is based primarily on the interest it earns from its investments, which can vary widely over the short-term and long-term. If interest rates drop, the Funds income available over time to
make dividend payments could drop as well if the Fund purchases securities with lower interest coupons.
Reliance on
Investment Adviser.
The Fund is dependent upon services and resources provided by the Adviser, and therefore the Advisers parent, Nuveen Investments. Nuveen Investments, through
17
its own business or the financial support of its affiliates, may not be able to generate sufficient cash flow from operations or ensure that future borrowings will be available in an amount
sufficient to enable it to pay its indebtedness or to fund its other liquidity needs.
Certain
Affiliations.
Certain broker-dealers may be considered to be affiliated persons of the Fund, the Adviser, the Sub-Adviser and/or Nuveen Investments, Inc. (Nuveen Investments). Absent an exemption from the SEC
or other regulatory relief, the Fund generally is precluded from effecting certain principal transactions with affiliated brokers, and its ability to purchase securities being underwritten by an affiliated broker or a syndicate including an
affiliated broker, or to utilize affiliated brokers for agency transactions, is subject to restrictions. This could limit the Funds ability to engage in securities transactions and take advantage of market opportunities.
Anti-Takeover Provisions.
The Declaration of Trust and the By-Laws (as defined below) include provisions
that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to open-end status.
THE FUND
The Fund is a diversified, closed-end management investment company registered under the 1940 Act. The Fund was organized as a Massachusetts business trust on October 8, 2003 and commenced investment
operations on November 19, 2003. The Funds common shares are listed on the NYSE MKT under the symbol NMZ. The Funds principal office is located at 333 West Wacker Drive, Chicago, Illinois 60606, and its telephone number
is (800) 257-8787.
The following provides information about the Funds outstanding shares as of March 18,
2013.
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Title of Class
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Amount
Authorized
|
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Amount Held by
the Fund or for its
Account
|
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Amount
Outstanding
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Common
|
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Unlimited
|
|
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31,336,775
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VMTP Shares
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510
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510
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The following provides information about the Funds outstanding preferred shares, as adjusted to
reflect the issuance of the Series 2016 #1 VMTP Shares following the completion of the Reorganization as if such Reorganization had been completed as of March 18, 2013.
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|
|
|
|
|
|
Title of Class
|
|
Amount
Authorized
|
|
Amount Held by
the Fund or for its
Account
|
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Amount
Outstanding
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VMTP Shares
|
|
870
|
|
|
|
870
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Series 2016
|
|
510
|
|
|
|
510
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Series 2016 #1
|
|
360
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|
|
|
360
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DESCRIPTION OF NEW VMTP SHARES
For a complete description of the preferences, voting powers, restrictions, limitations as to dividends, qualification, and terms and
condition of redemption, of New VMTP Shares please see the Statement attached hereto as Appendix A and incorporated herein by reference.
18
DESCRIPTION OF VMTP PURCHASE AGREEMENT
The Fund will enter into a Purchase Agreement with the Initial Holder of Series 2016 #1 VMTP Shares that is substantially identical to
the purchase agreement in effect for the shares for which the Series 2016 #1 VMTP Shares are exchanged in the Reorganization. Among other things, the Purchase Agreement provides certain information and consent rights to the Initial Holder of the
Series 2016 #1 VMTP Shares. The holders of New VMTP Shares will also be granted demand registration rights with respect to the New VMTP Shares pursuant to a Registration Rights Agreement between the Fund and the Initial Holder of New VMTP Shares,
that are substantially identical to the registration rights afforded to holders of High Income 2 VMTP Shares . The holders of a majority of the New VMTP Shares are granted a demand right with respect to their beneficially owned New VMTP Shares and
the Fund is required to use its commercially reasonable best efforts to effect registration of such holders registrable securities in accordance with and pursuant to the Registration Rights Agreement.
BOOK-ENTRY PROCEDURES AND SETTLEMENT
None of the Fund, the Adviser, or the Redemption and Paying Agent takes any responsibility for the accuracy of the information in this
section concerning DTC and DTCs book-entry system, makes any representation as to the completeness of such information or makes any representation as to the absence of material changes in such information subsequent to the date hereof.
The New VMTP Shares will be book-entry (global) securities. Upon issuance, all book-entry securities will be represented
by one or more fully-registered global securities. Each global security will be deposited with, or on behalf of, DTC, a securities depository, and will be registered in the name of DTC or a nominee of DTC. DTC will thus be the only registered holder
of New VMTP Shares.
Purchasers of New VMTP Shares may only hold interests in the global securities directly through DTC if
they are participants in the DTC system. Purchasers may also hold interests through a securities intermediarybanks, brokerage houses and other institutions that maintain securities accounts for customersthat has an account with DTC or
its nominee. DTC will maintain accounts showing the security holdings of its Agent Members, and these Agent Members will in turn maintain accounts showing the security holdings of their customers. Some of these customers may themselves be securities
intermediaries holding securities for their customers. Thus, each Beneficial Owner of a book-entry security will hold that security indirectly through various intermediaries.
The interest of each Beneficial Owner in a book-entry security will be evidenced solely by entries on the books of the Beneficial Owners securities intermediary or Agent Member. The actual purchaser
of the securities will generally not be entitled to have the securities represented by the global securities registered in its name and will not be considered the owner under the terms of the securities and their governing documents. That means that
the Fund and the Redemption and Paying Agent or any other agent of the Fund will be entitled to treat the registered holder, DTC or its nominee, as the holder of the securities for all purposes. In most cases, the Beneficial Owner will also not be
able to obtain a paper certificate evidencing its ownership of New VMTP Shares. The laws of some jurisdictions require some purchasers of securities to take physical delivery of their securities in definitive form. These laws may impair the ability
to own, transfer or pledge beneficial interests in book-entry securities.
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A Beneficial Owner of book-entry securities represented by a global security may exchange
the securities for definitive (paper) securities only if:
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DTC is unwilling or unable to continue as depositary for such global security and the Fund does not appoint a qualified replacement for DTC within 90
days; or
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the Fund in its sole discretion decides to allow some or all book-entry securities to be exchangeable for definitive securities in registered form.
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Unless indicated otherwise, any global security that is so exchangeable will be exchangeable in whole for
definitive securities in registered form, with the same terms and of an equal aggregate amount. Definitive securities will be registered in the name or names of the person or persons specified by DTC in a written instruction to the registrar of the
New VMTP Shares. DTC may base its written instruction upon directions that it receives from Agent Members.
In this
Information Memorandum, in the case of book-entry securities, references to actions taken by Beneficial Owners will mean actions taken by DTC upon instructions from its Agent Members, and references to payments and notices relating to redemptions or
the tendering of New VMTP Shares will mean payments and notices related to the redemption or tender of New VMTP Shares to DTC as the registered holder of the securities for distribution to Agent Members in accordance with DTCs procedures. If
fewer than all the New VMTP Shares are being redeemed, DTCs practice is to determine by lot the amount of the interest of each Agent Member in the VMTP Shares to be redeemed.
Each sale of a book-entry security will settle in immediately available funds through DTC unless otherwise stated. Neither the Fund nor
the Redemption and Paying Agent, or any agent of either, will have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in any book-entry securities or for
maintaining, supervising or reviewing any records relating to such beneficial ownership interests.
Neither DTC nor DTCs
nominee will consent or vote with respect to the New VMTP Shares unless authorized by a participant in accordance with DTCs procedures. Under its usual procedures, DTC mails an omnibus proxy (the Omnibus Proxy) to the Fund as soon
as possible after the record date. The Omnibus Proxy assigns DTCs nominee consenting or voting rights to the Agent Members to whose accounts the New VMTP Shares are credited on the record date (identified in a listing attached to the Omnibus
Proxy).
Dividend payments on the New VMTP Shares and payments upon redemption of New VMTP Shares will be made to DTCs
nominee or such other nominee as may be requested by an authorized representative of DTC. DTCs practice is to credit participants accounts upon DTCs receipt of funds and corresponding detail information from the Fund or the
Redemption and Paying Agent on the payment date in accordance with their respective holdings shown on DTC records. Payments by Agent Members to Beneficial Owners will be governed by standing instructions and customary practices. Payment of dividends
or redemption proceeds to DTCs nominee is the responsibility of the Fund or the Redemption and Paying Agent, disbursement of such payments to participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial
Owners will be the responsibility of Agent Members or securities intermediaries who hold through an Agent Member.
THE
INFORMATION IN THIS SECTION CONCERNING DTC AND DTCS BOOK-ENTRY SYSTEM HAS BEEN OBTAINED FROM SOURCES THAT THE FUND BELIEVES TO
20
BE RELIABLE. THE FUND, THE ADVISER AND THE REDEMPTION AND PAYING AGENT TAKE NO RESPONSIBILITY FOR THE ACCURACY OF THE INFORMATION IN THIS SECTION CONCERNING DTC AND DTCS BOOK-ENTRY
SYSTEM. NO REPRESENTATION IS MADE BY THE FUND, THE ADVISER OR THE REDEMPTION AND PAYING AGENT AS TO THE COMPLETENESS OR ACCURACY OF SUCH INFORMATION OR AS TO THE ABSENCE OF MATERIAL ADVERSE CHANGES IN SUCH INFORMATION SUBSEQUENT TO THE DATE HEREOF.
NO ATTEMPT HAS BEEN MADE BY THE FUND, THE ADVISER OR THE REDEMPTION AND PAYING AGENT TO DETERMINE WHETHER DTC IS OR WILL BE FINANCIALLY OR OTHERWISE CAPABLE OF FULFILLING ITS OBLIGATIONS. THE FUND AND THE ADVISER WILL NOT HAVE ANY RESPONSIBILITY OR
OBLIGATIONS TO ANY DTC AGENT MEMBER, SECURITIES INTERMEDIARIES, OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO DIVIDEND PAYMENTS TO OR THE PROVIDING OF NOTICE FOR THE DTC AGENT MEMBERS, THE SECURITIES INTERMEDIARIES OR THE BENEFICIAL
OWNERS.
IT IS THE DUTY OF EACH BENEFICIAL OWNER TO ARRANGE WITH THE DTC AGENT MEMBER OR SECURITIES INTERMEDIARIES TO RECEIVE
FROM SUCH DTC AGENT MEMBER OR SECURITIES INTERMEDIARY DIVIDEND PAYMENTS AND ALL OTHER COMMUNICATIONS. THE FUND IS ALSO OBLIGATED TO DELIVER DIRECTLY TO BANC OF AMERICA PREFERRED FUNDING CORPORATION CERTAIN INFORMATION, AS SET FORTH IN THE VMTP
PURCHASE AGREEMENT.
THE FUNDS INVESTMENTS
Investment Objectives and Policies
The Funds primary investment objective is to provide high current income exempt from regular federal income tax. The Funds secondary investment objective is to seek attractive total return
consistent with its primary objective.
Under normal circumstances, the Fund will invest at least 80% of its Managed Assets in
municipal securities that pay interest exempt from regular federal income tax. The foregoing investment policy is a fundamental policy. Under normal circumstances, the Fund expects to be fully invested (at least 95% of its Managed Assets) in such
tax-exempt municipal securities. Up to 30% of the Funds Managed Assets may be invested in municipal securities that pay interest that is taxable under the federal alternative minimum tax applicable to individuals.
The Fund invests at least 50% of its Managed Assets in investment-grade-quality municipal securities. A security is considered
investment-grade quality if it is rated within the four highest grades (Baa or BBB or better by Moodys, S&P or Fitch) by all NRSROs that rate such security, or if it is unrated but judged to be of comparable quality by the Adviser. The
Fund may invest up to 50% of its Managed Assets in municipal securities that at the time of investment are rated below investment grade. Below-investment-grade-quality municipal securities include those municipal securities that are rated investment
grade by one or more NRSRO but rated below investment grade by at least one NRSRO. No more than 5% of the Funds Managed Assets may be invested in municipal securities rated below B3/B- or that are unrated but judged to be of comparable quality
by the Adviser. This means that the Fund may invest in municipal securities that are involved in bankruptcy or insolvency proceedings or are experiencing other financial difficulties at the time of acquisition (such securities
21
are commonly referred to as distressed securities). Municipal securities of below-investment-grade quality are regarded as having predominately speculative characteristics with respect to
capacity to pay interest and repay principal and are commonly referred to as junk bonds. The relative percentages of the value of the investments attributable to investment-grade municipal securities and to below-investment-grade municipal
securities could change over time as a result of rebalancing of the Funds assets by the Adviser, market value fluctuations, issuance of additional shares and other events. If a municipal security satisfies the ratings requirements described
above at the time of purchase, the Fund will not be required to dispose of the security upon a downgrade.
The Fund may also
invest in securities of other open- or closed-end investment companies that invest primarily in municipal securities of the types in which the Fund may invest directly. In addition, the Fund may purchase municipal securities that are additionally
secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies that provide such credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for insured obligations may reduce the Funds income. The Fund may use any insurer, regardless of its rating. A municipal security with an insurance feature will be deemed to have the
rating of its insurer. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the Fund.
The Fund may enter into certain derivative instruments in pursuit of its investment objectives, including to seek to enhance return, to hedge some of the risk of the Funds investments in municipal
securities or as a substitute for a position in the underlying asset. Such instruments include financial futures contracts, swap contracts (including interest rate and credit default swaps), options on financial futures, options on swap contracts or
other derivative instruments. The Fund may not enter into a futures contract or related options or forward contracts if more than 30% of the Funds net assets would be represented by futures contracts or more than 5% of the Funds net
assets would be committed to initial margin deposits and premiums on futures contracts or related options.
The Fund may
invest up to approximately 15% of its Managed Assets in inverse floating rate securities. Inverse floating rate securities represent a leveraged investment in the underlying municipal bond deposited. Inverse floating rate securities offer the
opportunity for higher income than the underlying bond, but will subject the Fund to the risk of lower or even no income if short-term interest rates rise sufficiently. By investing in an inverse floating rate security rather than directly in the
underlying bond, the Fund will experience a greater increase in its common share net asset value if the underlying municipal bond increases in value, but will also experience a correspondingly larger decline in its common share net asset value if
the underlying bond declines in value.
The Fund may borrow money for the repurchase of its shares or for temporary or
emergency purposes, such as for the payment of dividends or the settlement of portfolio transactions. During temporary defensive periods and in order to keep the Funds cash fully invested, the Fund may deviate from its investment objectives
and invest up to 100% of its net assets in short-term investments including high-quality, short-term securities that may be either tax-exempt or taxable. The Fund intends to invest in taxable short-term investments only in the event that suitable
tax-exempt short-term investments are not available at reasonable prices and yields.
There is no assurance that the Fund will
achieve its investment objectives.
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Certain Trading Strategies of the Fund
When-Issued and Delayed Delivery Transactions.
The Fund may buy and sell municipal securities on a
when-issued or delayed-delivery basis, making payment or taking delivery at a later date, normally within 15 to 45 days of the trade date. This type of transaction may involve an element of risk because no interest accrues on the bonds prior to
settlement and, because bonds are subject to market fluctuations, the value of the bonds at time of delivery may be less (or more) than cost. A separate account of the Fund will be established with its custodian consisting of cash, cash equivalents,
or liquid securities having a market value at all times at least equal to the amount of the commitment.
Financial Futures
and Options Transactions.
The Fund may attempt to hedge all or a portion of its investment portfolio against market risk by engaging in transactions in financial futures contracts, options on financial futures or options
that either are based on an index of long-term municipal obligations (i.e., those with remaining maturities averaging 20-30 years) or relate to debt securities whose prices Nuveen Asset Management anticipates to correlate with the prices of the
municipal obligations the Fund owns. To accomplish such hedging, the Fund may take an investment position in a futures contract or in an option which is expected to move in the opposite direction from the position being hedged. Hedging may be
utilized to reduce the risk that the value of securities the Fund owns may decline on account of an increase in interest rates and to hedge against increases in the cost of the securities the Fund intends to purchase as a result of a decline in
interest rates. The use of futures and options for hedging purposes can be expected to result in taxable income or gain. The Fund currently intends to allocate any taxable income or gain proportionately between its Common Shares and its Preferred
Stock. See Tax Matters.
The sale of financial futures or the purchase of put options on financial futures or on
debt securities or indexes is a means of hedging against the risk of rising interest rates, whereas the purchase of financial futures or of call options on financial futures or on debt securities or indexes is a means of hedging the Funds
portfolio against an increase in the price of securities such Fund intends to purchase. Writing a call option on a futures contract or on debt securities or indexes may serve as a hedge against a modest decline in prices of municipal securities held
in the Funds portfolio, and writing a put option on a futures contract or on debt securities or indexes may serve as a partial hedge against an increase in the value of municipal securities the Fund intends to acquire. The writing of these
options provides a hedge to the extent of the premium received in the writing transaction.
Although certain risks are
involved in futures and options transactions, because these transactions will be engaged in by the Fund only for hedging purposes, these futures and options portfolio strategies should not subject the Fund to those risks frequently associated with
speculation in futures or options transactions. The Fund will not purchase futures unless it has segregated cash, government securities or high grade liquid debt equal to the contract price of the futures less any margin on deposit, or unless the
long futures position is covered by the purchase of a put option. The Fund will not sell futures unless the Fund owns the instruments underlying the futures or owns options on such instruments or owns a portfolio whose market price may be expected
to move in tandem with the market price of the instruments or index underlying the futures. In addition, the Fund is subject to the tax requirement that it derive less than 30% of its gross income from the gain on the sale or other disposition of
securities held for less than three months. With respect to its engaging in transactions involving the purchase or writing of put and call options on debt securities or indexes, the Fund will not purchase such options if more than 5% of its assets
would be invested in the premiums for such options, and it will only write covered or secured options, wherein the securities or cash required
23
to be delivered upon exercise are held by the Fund, with such cash being maintained in a segregated account. These requirements and limitations may limit the Funds ability to engage in
hedging transactions.
There are certain risks associated with the use of financial futures and options to hedge investment
portfolios. There may be an imperfect correlation between price movements of the futures and options and price movements of the portfolio securities being hedged. Losses may be incurred in hedging transactions, which could reduce the portfolio gains
that might have been realized if the hedging transaction had not been entered into. The ability to close out positions in futures and options depends upon the existence of a liquid secondary market, which may not exist for all futures and options at
all times. If the Fund engages in futures transactions or in the writing of options on futures, it will be required to maintain initial margin and variation margin in accordance with applicable rules of the exchanges and the CFTC. If the Fund
purchases a financial futures contract or a call option or writes a put option in order to hedge the anticipated purchase of municipal obligations, and if the Fund fails to complete the anticipated purchase transaction, the Fund may experience a
loss or a gain on the futures or options transaction that will not be offset by price movements in the municipal obligations that were the subject of the anticipatory hedge. The cost of put options on debt securities or indexes effectively increases
the cost of the securities subject to them, thereby reducing the yield otherwise available from such securities. If the Fund decides to use futures contracts or options on futures contracts for hedging purposes, the Fund will be required to
establish an account for such purposes with one or more CFTC-registered futures commission merchants. A futures commission merchant could establish initial and maintenance margin requirements for the Fund that are greater than those which would
otherwise apply to the Fund under applicable rules of the exchanges and the CFTC. See also Financial Futures and Options below.
Portfolio Trading and Turnover Rate.
The Fund may engage in portfolio trading when considered appropriate, but short-term trading will not be used as the primary means of
achieving the Funds investment objectives. Although the Fund cannot accurately predict its annual portfolio turnover rate, it is generally not expected to exceed 25% under normal circumstances. However, there are no limits on the Funds
rate of portfolio turnover, and investments may be sold without regard to length of time held when, in the Advisers opinion, investment considerations warrant such action. A higher portfolio turnover rate would result in correspondingly
greater brokerage commissions and other transactional expenses that are borne by the Fund. Although these commissions and expenses are not reflected in the Funds Annual Expenses in the Proxy Statement (as defined below), they will
be reflected in the Funds total return. In addition, high portfolio turnover may result in the realization of net short-term capital gains by the Fund which, when distributed to shareholders, will be taxable as ordinary income. See
Federal Income Tax Matters.
PORTFOLIO COMPOSITION
Municipal Securities
General.
The Fund may
invest in various municipal securities, including municipal bonds and notes, other securities issued to finance and refinance public projects, and other related securities and derivative instruments creating exposure to municipal bonds, notes and
securities that provide for the payment of interest income that is exempt from regular federal income tax. Municipal securities are either general obligation or revenue bonds and often are issued by state and local governmental entities
24
to finance or refinance public projects such as roads, public buildings, schools, and water supply systems, to pay general operating expenses, or to refinance outstanding debt. Municipal
securities may also be issued on behalf of private entities or for private activities, such as housing, medical and educational facility construction, or for privately owned industrial development, transportation, electric utility and pollution
control projects. The repayment of such debt may be secured generally by a pledge of the full faith and credit taxing power of the issuer, a limited or special tax, or any other revenue source, including project revenues, which may include tolls,
fees and other user charges, lease payments and mortgage payments. Municipal securities may be issued on a long-term basis to provide permanent financing. Municipal securities may also be issued to finance projects on a short-term interim basis,
anticipating repayment with the proceeds of the later issuance of long-term debt.
The Fund may purchase municipal securities
in the form of bonds, notes, leases or certificates of participationstructured as callable or non-callablewith payment forms including fixed coupon, variable rate, zero coupon, capital appreciation bonds, tender option bonds, and
residual interest bonds or inverse floating rate securities; or acquired through investments in pooled vehicles, partnerships or other investment companies. Inverse floating rate securities are securities that pay interest at rates that vary
inversely with changes in prevailing short-term tax-exempt interest rates and represent a leveraged investment in an underlying municipal security, which could have the economic effect of financial leverage.
The Fund may also purchase pre-refunded municipal securities, private activity bonds and other related securities and derivative
instruments that create exposure to municipal bonds, notes and securities and that provide for the payment of interest income that is exempt from regular federal income tax.
The municipal securities in which the Fund invests are generally issued by states, cities and local authorities and certain possessions and territories of the United States (such as Puerto Rico and Guam),
and pay interest that, in the opinion of bond counsel to the issuer (or on the basis of other authority believed by the Adviser to be reliable), is exempt from regular federal income tax, although the interest may be subject to the federal
alternative minimum tax.
The yields on municipal securities depend on a variety of factors, including prevailing interest
rates and the condition of the general money market and the municipal bond market, the size of a particular offering, the maturity of the obligation, its call features and the rating of the issue. The market value of a municipal security will vary
with changes in interest rate levels and as a result of changing evaluations of the ability of its issuer to meet interest and principal payments.
Municipal securities rated Baa or BBB are considered investment grade securities; municipal securities rated Baa are considered medium-grade obligations which lack outstanding investment
characteristics and have speculative characteristics, while municipal securities rated BBB are regarded as having adequate capacity to pay principal and interest. Municipal securities rated Aaa or AAA in which the Fund may invest may have been so
rated on the basis of the existence of insurance guaranteeing the timely payment, when due, of all principal and interest. Municipal securities of below-investment-grade quality (Ba/BB or below) are commonly referred to as junk bonds.
Issuers of securities rated Ba/BB or B are regarded as having current capacity to make principal and interest payments but are subject to business, financial or economic conditions which could adversely affect such payment capacity. Municipal
securities rated below-investment-grade quality are obligations of issuers that are considered predominately speculative with respect to the issuers capacity to pay
25
interest and repay principal according to the terms of the obligation and, therefore, carry greater investment risk, including the possibility of issuer default and bankruptcy and increased
market price volatility. Municipal securities rated below investment grade tend to be less marketable than higher-quality securities because the market for them is less broad. The market for unrated municipal securities is even narrower. During
periods of thin trading in these markets, the spread between bid and asked prices is likely to increase significantly and the Fund may have greater difficulty selling its portfolio securities. The Fund will be more dependent on the Advisers
research and analysis when investing in these securities.
The Fund may invest in distressed securities, which are securities
issued by companies that are involved in bankruptcy or insolvency proceedings or are experiencing other financial difficulties at the time of acquisition by the Fund. The issuers of such securities may be in transition, out of favor, financially
leveraged or troubled, or potentially troubled, and may have been or have recently been involved in major strategic actions, restructurings, bankruptcy, reorganization or liquidation. These characteristics of these companies can cause their
securities to be particularly risky, although they also may offer the potential for high returns. These companies securities may be considered speculative, and the ability of the companies to pay their debts on schedule could be affected by
adverse interest rate movements, changes in the general economic climate, economic factors affecting a particular industry or specific developments within the companies. Distressed securities frequently do not produce income while they are
outstanding and may require the Fund to bear certain extraordinary expenses in order to protect and recover its investment.
Investments in lower-rated or unrated securities may present special tax issues for the Fund, including where the issuers of these
securities default on their obligations pertaining thereto, and the federal income tax consequences to the Fund as a holder of such distressed securities may not be clear.
The Fund will primarily invest in municipal securities with long-term maturities in order to maintain a weighted average maturity of 15 to 30 years, but the weighted average maturity of obligations held
by the Fund may be shorter, depending on market conditions. As a result, the Funds portfolio at any given time may include both long-term and intermediate-term municipal securities. In comparison to maturity (which is the date on which a debt
instrument ceases and the issuer is obligated to repay the principal amount), duration is a measure of the price volatility of a debt instrument as a result of changes in market rates of interest, based on the weighted average timing of the
instruments expected principal and interest payments. Duration differs from maturity in that it considers a securitys yield, coupon payments, principal payments and call features in addition to the amount of time until the security
finally matures. As the value of a security changes over time, so will its duration. Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations. In general, a portfolio of
securities with a longer duration can be expected to be more sensitive to interest rate changes than a portfolio with a shorter duration.
During temporary defensive periods (e.g., times when, in the Advisers opinion, temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt securities market adversely
affect the price at which long-term or intermediate-term municipal securities are available), and in order to keep the Funds cash fully invested, including the period during which the net proceeds of an offering are being invested, the Fund
may invest any percentage of its net assets in short-term investments including high quality, short-term securities that may be either tax-exempt or taxable and up to 10% of its Managed Assets in securities of other open or closed-end investment
companies that invest primarily in municipal securities of the type in which the Fund may invest directly. The Fund
26
intends to invest in taxable short-term investments only in the event that suitable tax-exempt short-term investments are not available at reasonable prices and yields. Tax-exempt short-term
investments include various obligations issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such municipal bonds maturing in three years or
less from the date of issuance) and municipal commercial paper. The Fund will invest only in taxable short-term investments which are U.S. government securities or securities rated within the highest grade by Moodys, S&P or Fitch, and
which mature within one year from the date of purchase or carry a variable or floating rate of interest. See Appendix B for a general description of Moodys, S&Ps and Fitchs ratings of securities in such categories. Taxable
short-term investments of the Fund may include certificates of deposit issued by U.S. banks with assets of at least $1 billion, or commercial paper or corporate notes, bonds or debentures with a remaining maturity of one year or less, or repurchase
agreements. To the extent the Fund invests in taxable investments, the Fund will not at such times be in a position to achieve its investment objective of tax-exempt income.
Obligations of issuers of municipal securities are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the Bankruptcy Reform Act of
1978. In addition, the obligations of such issuers may become subject to the laws enacted in the future by Congress, state legislatures or referenda extending the time for payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is also the possibility that, as a result of legislation or other conditions, the power or ability of any issuer to pay, when due, the principal of and interest on its
municipal securities may be materially affected.
Subject to rating agency guidelines, the Fund may invest a significant
portion of its Managed Assets in broad segments of the municipal securities market, such as revenue obligations of hospitals and other health care facilities, special taxing districts, securities issued to finance charter schools and other private
educational facilities, municipal utility securities, industrial development bonds and other private activity bonds. Subject to the availability of suitable investment opportunities, the Adviser will attempt to minimize the sensitivity of the
Funds portfolio to credit and other risks associated with a particular sector or industry. However, if the Fund invests a significant portion of its Managed Assets in the segments noted above, the Fund will be more susceptible to economic,
business, political, regulatory and other developments generally affecting issuers in such segments of the municipal securities market. To the extent that the Fund focuses its Managed Assets in the hospital and healthcare facilities sector, the Fund
will be subject to risks associated with such sector, including adverse government regulation and reduction in reimbursement rates, as well as government approval of products and services and intense competition. Securities issued to finance charter
schools and other private educational facilities will be subject to various risks, including the reversal of legislation authorizing or funding charter schools, the failure to renew or secure a charter, the failure of a funding entity to appropriate
necessary funds and competition from alternatives such as voucher programs. Issuers of municipal utility securities can be significantly affected by government regulation, financing difficulties, supply and demand of services or fuel and natural
resource conservation.
Municipal Leases and Certificates of Participation.
The Fund may
purchase municipal securities that represent lease obligations and certificates of participation in such leases. These carry special risks because the issuer of the securities may not be obligated to appropriate money annually to make payments under
the lease. A municipal lease is an obligation in the form of a lease or installment purchase that is issued by a state or local government to acquire equipment and facilities. Income from such obligations generally is exempt from state and local
taxes in the state of issuance. Leases and
27
installment purchase or conditional sale contracts (which normally provide for title to the leased asset to pass eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and statutory requirements for the issuance of debt. The debt issuance limitations are deemed to be inapplicable because of the inclusion in many leases or contracts of
non-appropriation clauses that relieve the governmental issuer of any obligation to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body on a yearly or other
periodic basis. In addition, such leases or contracts may be subject to the temporary abatement of payments in the event the issuer is prevented from maintaining occupancy of the leased premises or utilizing the leased equipment or facilities.
Although the obligations may be secured by the leased equipment or facilities, the disposition of the property in the event of non-appropriation or foreclosure might prove difficult, time consuming and costly, and result in a delay in recovering, or
the failure to recover fully, the Funds original investment. To the extent that the Fund invests in unrated municipal leases or participates in such leases, the credit quality rating and risk of cancellation of such unrated leases will be
monitored on an ongoing basis. In order to reduce this risk, the Fund purchases only municipal securities representing lease obligations where the Adviser believes the issuer has a strong incentive to continue making appropriations until maturity.
A certificate of participation represents an undivided interest in an unmanaged pool of municipal leases, an installment
purchase agreement or other instruments. The certificates are typically issued by a municipal agency, a trust or other entity that has received an assignment of the payments to be made by the state or political subdivision under such leases or
installment purchase agreements. Such certificates provide the Fund with the right to a pro rata undivided interest in the underlying municipal securities. In addition, such participations generally provide the Fund with the right to demand payment,
on not more than seven days notice, of all or any part of the Funds participation interest in the underlying municipal securities, plus accrued interest.
Municipal Notes.
Municipal securities in the form of notes generally are used to provide for short-term capital needs, in anticipation of an issuers receipt of other
revenues or financing, and typically have maturities of up to three years. Such instruments may include tax anticipation notes, revenue anticipation notes, bond anticipation notes, tax and revenue anticipation notes and construction loan notes. Tax
anticipation notes are issued to finance the working capital needs of governments. Generally, they are issued in anticipation of various tax revenues, such as income, sales, property, use and business taxes, and are payable from these specific
future taxes. Revenue anticipation notes are issued in expectation of receipt of other kinds of revenue, such as federal revenues available under federal revenue-sharing programs. Bond anticipation notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds then provide the funds needed for repayment of the bond anticipation notes. Tax and revenue anticipation notes combine the funding sources of both tax anticipation notes
and revenue anticipation notes. Construction loan notes are sold to provide construction financing. Mortgage notes insured by the Federal Housing Authority secure these notes; however, the proceeds from the insurance may be less than the economic
equivalent of the payment of principal and interest on the mortgage note if there has been a default. The anticipated revenues from taxes, grants or bond financings generally secure the obligations of an issuer of municipal notes. An investment in
such instruments, however, presents a risk that the anticipated revenues will not be received or that such revenues will be insufficient to satisfy the issuers payment obligations under the notes or that refinancing will be otherwise
unavailable.
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Pre-Refunded Municipal Securities.
The principal of, and
interest on, pre-refunded municipal securities are no longer paid from the original revenue source for the securities. Instead, the source of such payments is typically an escrow fund consisting of U.S. government securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds issued by the same issuer as the pre-refunded municipal securities. Issuers of municipal securities use this advance refunding technique to obtain more favorable terms with respect to
securities that are not yet subject to call or redemption by the issuer. For example, advance refunding enables an issuer to refinance debt at lower market interest rates, restructure debt to improve cash flow or eliminate restrictive covenants in
the indenture or other governing instrument for the pre-refunded municipal securities. However, except for a change in the revenue source from which principal and interest payments are made, the pre-refunded municipal securities remain outstanding
on their original terms until they mature or are redeemed by the issuer.
Private Activity
Bonds.
Private activity bonds, formerly referred to as industrial development bonds, are issued by or on behalf of public authorities to obtain funds to provide privately operated housing facilities, airport, mass transit
or port facilities, sewage disposal, solid waste disposal or hazardous waste treatment or disposal facilities and certain local facilities for water supply, gas or electricity. Other types of private activity bonds, the proceeds of which are used
for the construction, equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute municipal securities, although the current federal tax laws place substantial limitations on the size of such issues.
The Funds distribution of its interest income from private activity bonds may subject certain investors to the federal alternative minimum tax.
Inverse Floating Rate Securities.
Inverse floating rate securities (sometimes referred to as inverse floaters) are securities whose interest rates bear an inverse
relationship to the interest rate on another security or the value of an index. Generally, inverse floating rate securities represent beneficial interests in a special purpose trust formed by a third-party sponsor for the purpose of holding
municipal bonds. The special purpose trust typically sells two classes of beneficial interests or securities: floating rate securities (sometimes referred to as short-term floaters or tender option bonds) and inverse floating rate securities
(sometimes referred to as inverse floaters or residual interest securities). Both classes of beneficial interests are represented by certificates. The short-term floating rate securities have first priority on the cash flow from the municipal bonds
held by the special purpose trust. Typically, a third party, such as a bank, broker-dealer or other financial institution, grants the floating rate security holders the option, at periodic intervals, to tender their securities to the institution and
receive the face value thereof. As consideration for providing the option, the financial institution receives periodic fees. The holder of the short-term floater effectively holds a demand obligation that bears interest at the prevailing short-term,
tax-exempt rate. However, the institution granting the tender option will not be obligated to accept tendered short-term floaters in the event of certain defaults or a significant downgrade in the credit rating assigned to the bond issuer. For its
inverse floating rate investment, the Fund receives the residual cash flow from the special purpose trust. Because the holder of the short-term floater is generally assured liquidity at the face value of the security, the Fund as the holder of the
inverse floater assumes the interest rate cash flow risk and the market value risk associated with the municipal security deposited into the special purpose trust. The volatility of the interest cash flow and the residual market value will vary with
the degree to which the trust is leveraged. This is expressed in the ratio of the total face value of the short-term floaters in relation to the value of the residual inverse floaters that are issued by the special purpose trust. The Fund expects to
make limited investments in inverse floaters, with leverage ratios that may vary at inception between one and three times. In addition, all voting rights and decisions to be made with respect to any other rights relating to the municipal bonds held
in the special purpose trust are passed through to the Fund, as the holder of the residual inverse floating rate securities.
29
Because increases in the interest rate on the short-term floaters reduce the residual
interest paid on inverse floaters, and because fluctuations in the value of the municipal bond deposited in the special purpose trust affect the value of the inverse floater only, and not the value of the short-term floater issued by the trust,
inverse floaters value are more volatile than that of fixed rate bonds. The market price of inverse floating rate securities generally is more volatile than the underlying bonds due to the leveraging effect of this ownership structure. These
securities generally will underperform the market of fixed rate bonds in a rising interest rate environment (i.e., when bond values are falling), but tend to out-perform the market of fixed rate bonds when interest rates decline or remain relatively
stable. Although volatile, inverse floaters typically offer the potential for yields higher than those available on fixed rate bonds with comparable credit quality, coupon, call provisions and maturity. Inverse floaters have varying degrees of
liquidity or illiquidity based upon the ability to sell the underlying bonds deposited in a special purpose trust at an attractive price.
The Fund may invest in inverse floating rate securities issued by special purpose trusts that have recourse to the Fund. In the Advisers discretion, the Fund may enter into a separate shortfall and
forbearance agreement with the third-party sponsor of a special purpose trust. The Fund may enter into such recourse agreements: (i) when the liquidity provider to the special purpose trust requires such an agreement because the level of
leverage in the trust exceeds the level that the liquidity provider is willing to support absent such an agreement; and/or (ii) to seek to prevent the liquidity provider from collapsing the trust in the event that the municipal obligation held
in the trust has declined in value. Such an agreement would require the Fund to reimburse the third-party sponsor of such inverse floater, upon termination of the trust issuing the inverse floater, the difference between the liquidation value of the
bonds held in the trust and the principal amount due to the holders of floating rate interests. Such agreements may expose the Fund to a risk of loss that exceeds its investment in the inverse floating rate securities. Absent a shortfall and
forbearance agreement, the Fund would not be required to make such a reimbursement. If the Fund chooses not to enter into such an agreement, the special purpose trust could be liquidated and the Fund could incur a loss.
The Funds investments in inverse floating rate securities issued by special purpose trusts that have recourse to the Fund may be
highly leveraged. The structure and degree to which the Funds inverse floating rate securities are highly leveraged will vary based upon a number of factors, including the size of the trust itself and the terms of the underlying municipal
security held in the special purpose trust. An inverse floating rate security generally is considered highly leveraged if the principal amount of the short-term floating rate interests issued by the related special purpose trust is in excess of
three times the principal amount of the inverse floating rate securities owned by the trust (the ratio of the principal amount of such short-term floating rate interests to the principal amount of the inverse floating rate securities is referred to
as the gearing). In the event of a significant decline in the value of an underlying security, the Fund may suffer losses in excess of the amount of its investment (up to an amount equal to the value of the municipal securities
underlying the inverse floating rate securities) as a result of liquidating special purpose trusts or other collateral required to maintain the Funds anticipated effective leverage ratio.
Each Fund will segregate or earmark liquid assets with its custodian in accordance with the 1940 Act to cover its obligations with
respect to its investments in special purpose trusts.
Tender Option Bonds.
A tender option bond
is a municipal security (generally held pursuant to a custodial arrangement) having a relatively long maturity and bearing interest at a fixed rate substantially higher than prevailing short-term, tax-exempt rates. The bond is typically issued with
the
30
agreement of a third party, such as a bank, broker-dealer or other financial institution, which grants the security holders the option, at periodic intervals, to tender their securities to the
institution and receive the face value thereof. As consideration for providing the option, the financial institution receives periodic fees equal to the difference between the bonds fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such period, that would cause the securities, coupled with the tender option, to trade at par on the date of such determination. Thus, after payment of this fee, the security holder
effectively holds a demand obligation that bears interest at the prevailing short-term, tax-exempt rate. However, an institution will not be obligated to accept tendered bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The Fund intends to invest in tender option bonds the interest on which will, in the opinion of bond counsel, counsel for the issuer of interests therein or counsel selected by the Sub-Adviser, be exempt
from regular federal income tax. However, there can be no assurance that the IRS will agree with such counsels opinion in any particular case. There is also a risk that the Fund will not be considered the owner of such tender option bonds and
thus will not be entitled to treat such interest as exempt from such tax. Additionally, the federal income tax treatment of certain other aspects of these investments, including the proper tax treatment of tender option bonds and the associated fees
in relation to various regulated investment company tax provisions, is unclear. The Fund intends to manage its portfolio in a manner designed to eliminate or minimize any adverse impact from the tax rules applicable to these investments.
Floating Rate Securities.
The Fund may also invest in floating rate securities issued by special purpose
trusts. Floating rate securities may take the form of short-term floating rate securities or the option period may be substantially longer. Generally, the interest rate earned will be based upon the market rates for municipal securities with
maturities or remarketing provisions that are comparable in duration to the periodic interval of the tender option, which may vary from weekly, to monthly, to extended periods of one year or multiple years. Since the option feature has a shorter
term than the final maturity or first call date of the underlying bond deposited in the trust, the Fund as the holder of the floating rate security relies upon the terms of the agreement with the financial institution furnishing the option as well
as the credit strength of that institution. As further assurance of liquidity, the terms of the trust provide for a liquidation of the municipal security deposited in the trust and the application of the proceeds to pay off the floating rate
security. The trusts that are organized to issue both short-term floating rate securities and inverse floaters generally include liquidation triggers to protect the investor in the floating rate security.
Special Taxing Districts.
Special taxing districts are organized to plan and finance infrastructure
developments to induce residential, commercial and industrial growth and redevelopment. The bond financing methods such as tax increment finance, tax assessment, special services district and Mello-Roos bonds, generally are payable solely from taxes
or other revenues attributable to the specific projects financed by the bonds without recourse to the credit or taxing power of related or overlapping municipalities. They often are exposed to real estate development-related risks and can have more
taxpayer concentration risk than general tax-supported bonds, such as general obligation bonds.
Further, the fees, special
taxes, or tax allocations and other revenues that are established to secure such financings generally are limited as to the rate or amount that may be levied or assessed and are not subject to increase pursuant to rate covenants or municipal or
corporate guarantees. The bonds could default if development failed to progress as anticipated or if larger taxpayers failed to pay the assessments, fees and taxes as provided in the financing plans of the districts.
31
The foregoing information constitutes only a brief summary of some of the general factors
which may impact certain issuers of municipal bonds and does not purport to be a complete or exhaustive description of all adverse conditions to which the issuers of municipal bonds held by the Fund are subject. Additionally, many factors including
national economic, social and environmental policies and conditions, which are not within the control of the issuers of the municipal bonds, could affect or could have an adverse impact on the financial condition of the issuers. The Fund is unable
to predict whether or to what extent such factors or other factors may affect the issuers of the municipal bonds, the market value or marketability of the municipal bonds or the ability of the respective issuers of the municipal bonds acquired by
the Fund to pay interest on or principal of the municipal bonds. This information has not been independently verified.
Zero Coupon Bonds
A zero coupon bond is a bond that does not pay interest either for the entire life of the obligation or for an initial
period after the issuance of the obligation. When held to its maturity, its return comes from the difference between the purchase price and its maturity value. A zero coupon bond is normally issued and traded at a deep discount from face value. Zero
coupon bonds allow an issuer to avoid or delay the need to generate cash to meet current interest payments and, as a result, may involve greater credit risk and tend to be more volatile in price than securities that pay interest periodically. The
Fund would be required to distribute the income on any of these instruments as it accrues, even though the Fund will not receive all of the income on a current basis or in cash. Thus, the Fund may have to sell other investments, including when it
may not be advisable to do so, in order to obtain cash needed to pay income dividends in amounts necessary to avoid unfavorable tax consequences.
Structured Notes
The Fund may utilize structured notes and similar
instruments for investment purposes and also for hedging purposes. Structured notes are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset, market or interest
rate (an embedded index), such as selected securities, an index of securities or specified interest rates, or the differential performance of two assets or markets. The terms of such structured instruments normally provide that their
principal and/or interest payments are to be adjusted upwards or downwards (but not ordinarily below zero) to reflect changes in the embedded index while the structured instruments are outstanding. As a result, the interest and/or principal payments
that may be made on a structured product may vary widely, depending upon a variety of factors, including the volatility of the embedded index and the effect of changes in the embedded index on principal and/or interest payments. The rate of return
on structured notes may be determined by applying a multiplier to the performance or differential performance of the referenced index or indices or other assets. Application of a multiplier involves leverage that will serve to magnify the potential
for gain and the risk of loss. These types of investments may generate taxable income.
Other Investment Companies
The Fund may invest up to 10% of its Managed Assets in securities of other open- or closed-end investment companies (including
exchange-traded funds) that invest primarily in municipal securities of the types in which the Fund may invest directly. In addition, the Fund may invest a portion of its Managed Assets in pooled investment vehicles (other than investment companies)
that invest
32
primarily in municipal securities of the types in which the Fund may invest directly. The Fund generally expects that it may invest in other investment companies and/or other pooled investment
vehicles either during periods when it has large amounts of uninvested cash or during periods when there is a shortage of attractive, high-yielding municipal securities available in the market. The Fund may invest in investment companies that are
advised by the Adviser or its affiliates to the extent permitted by applicable law and/or pursuant to exemptive relief from the SEC. The Fund has not applied for and currently does not intend to apply for such relief. As a shareholder in an
investment company, the Fund will bear its ratable share of that investment companys expenses and would remain subject to payment of the Funds advisory and administrative fees with respect to assets so invested.
The Adviser will take expenses into account when evaluating the investment merits of an investment in an investment company relative to
available municipal security investments. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to the same leverage risks described herein. The net asset value and market value of leveraged
shares will be more volatile, and the yield to common shareholders will tend to fluctuate more than the yield generated by unleveraged shares.
Derivatives
The Fund
may invest in derivative instruments in pursuit of its investment objectives. Such instruments include financial futures contracts, swap contracts (including interest rate and credit default swaps), options on financial futures, options on swap
contracts, or other derivative instruments. Nuveen Asset Management uses derivatives to seek to enhance return, to hedge some of the risks of its investments in fixed income securities or as a substitute for a position in the underlying asset. See
Portfolio CompositionFinancial Futures and Options Transactions.
General.
The
Fund may invest in certain derivative instruments in pursuit of its investment objectives. Such instruments include financial futures contracts, swap contracts (including interest rate and credit default swaps), options on financial futures, options
on swap contracts or other derivative instruments. The Fund may also use credit default swaps and interest rate swaps. Credit default swaps may require initial premium (discount) payments as well as periodic payments (receipts) related to the
interest leg of the swap or to the default of a reference obligation. If the Fund is a seller of a contract, the Fund would be required to pay the par (or other agreed upon) value of a referenced debt obligation to the counterparty in the event of a
default or other credit event by the reference issuer, such as a U.S. or foreign corporate issuer, with respect to such debt obligations. In return, the Fund would receive from the counterparty a periodic stream of payments over the term of the
contract provided that no event of default has occurred. If no default occurs, the Fund would keep the stream of payments and would have no payment obligations. As the seller, the Fund would be subject to investment exposure on the notional amount
of the swap. If the Fund is a buyer of a contract, the Fund would have the right to deliver a referenced debt obligation and receive the par (or other agreed-upon) value of such debt obligation from the counterparty in the event of a default or
other credit event (such as a credit downgrade) by the reference issuer, such as a U.S. or foreign corporation, with respect to its debt obligations. In return, the Fund would pay the counterparty a periodic stream of payments over the term of the
contract provided that no event of default has occurred. If no default occurs, the counterparty would keep the stream of payments and would have no further obligations to the Fund. Interest rate swaps involve the exchange by the Fund with a
counterparty of their respective commitments to pay or receive interest, such as an exchange of fixed-rate payments for floating rate
33
payments. The Fund will usually enter into interest rate swaps on a net basis; that is, the two payment streams will be netted out in a cash settlement on the payment date or dates specified in
the instrument, with the Fund receiving or paying, as the case may be, only the net amount of the two payments.
The Adviser
may use derivative instruments to seek to enhance return, to hedge some of the risk of the Funds investments in municipal securities or as a substitute for a position in the underlying asset. These types of strategies may generate taxable
income.
There is no assurance that these derivative strategies will be available at any time or that the Adviser will
determine to use them for the Fund or, if used, that the strategies will be successful.
Limitations on the Use of Futures,
Futures Options and Swaps.
Pursuant to a claim for exemption filed with the National Futures Association on behalf of the Fund, the Fund is not deemed to be a commodity pool operator or a commodity pool under the Commodity
Exchange Act (CEA) and neither it nor the Adviser or Nuveen Asset Management is currently subject to registration or regulation as such under the CEA. In February 2012, the Commodity Futures Trading Commission (CFTC)
announced substantial amendments to certain exemptions, and to the conditions for reliance on those exemptions, from registration as a commodity pool operator. Under amendments to the exemption provided under CFTC Regulation 4.5, if the Fund uses
futures, options on futures, or swaps other than for bona fide hedging purposes (as defined by the CFTC), the aggregate initial margin and premiums on these positions (after taking into account unrealized profits and unrealized losses on any such
positions and excluding the amount by which options that are in-the-money at the time of purchase are in-the-money) may not exceed 5% of the Funds net asset value, or alternatively, the aggregate net notional value of
those positions may not exceed 100% of the Funds net asset value (after taking into account unrealized profits and unrealized losses on any such positions). The CFTC amendments to Regulation 4.5 took effect on December 31, 2012, and the
Fund intends to comply with amended Regulation 4.5s requirements, such that the Adviser and/or the Sub-Adviser will not be required to register with respect to the Fund as a commodity pool operator with the CFTC. The Fund reserves the right to
engage in transactions involving futures, options thereon and swaps to the extent allowed by CFTC regulations in effect from time to time and in accordance with the Funds policies. The requirements for qualification as a regulated investment
company under Subchapter M of the Code may limit the extent to which the Fund may enter into futures transactions, engage in options transactions or engage in swap transactions.
Hedging Strategies
The Fund may use various investment strategies
designed to limit the risk of bond price fluctuations and to preserve capital. These hedging strategies include using credit default swaps, interest rate swaps on taxable or tax-exempt indices, forward start interest rate swaps and options on
interest rate swaps, financial futures contracts, options on financial futures or options based on either an index of long-term municipal securities or on taxable debt securities whose prices, in the opinion of the Adviser, correlate with the prices
of the Funds investments. These hedging strategies may generate taxable income.
Repurchase Agreements
As temporary investments, the Fund may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the
seller of securities (U.S. government securities or
34
municipal securities) agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during the
Funds holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. Income generated from transactions in repurchase agreements will be taxable. See
Federal Income Tax Matters for information relating to the allocation of taxable income between common shares and VMTP Shares. The Fund will only enter into repurchase agreements with registered securities dealers or domestic banks that,
in the opinion of the Adviser, present minimal credit risk. The risk to the Fund is limited to the ability of the issuer to pay the agreed upon repurchase price on the delivery date; however, although the value of the underlying collateral at the
time the transaction is entered into always equals or exceeds the agreed upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but
the Fund might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the
seller of the security, realization upon the collateral by the Fund may be delayed or limited. The Sub-Adviser will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the
repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, the Sub-Adviser will demand additional collateral
from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest.
Segregation of
Assets
As a closed-end investment company registered with the SEC, the Fund is subject to the federal securities laws,
including the 1940 Act, the rules thereunder, and various interpretive provisions of the SEC and its staff. In accordance with these laws, rules and positions, the Fund must set aside (often referred to as asset segregation)
liquid assets, or engage in other SEC or staff-approved measures, to cover open positions with respect to certain kinds of derivatives instruments. In the case of forward currency contracts that are not contractually required to cash
settle, for example, the Fund must set aside liquid assets equal to such contracts full notional value while the positions are open. With respect to forward currency contracts that are contractually required to cash settle, however, the Fund
is permitted to set aside liquid assets in an amount equal to the Funds daily marked-to-market net obligations (i.e., the Funds daily net liability) under the contracts, if any, rather than such contracts full notional value. The
Fund reserves the right to modify its asset segregation policies in the future to comply with any changes in the positions from time to time articulated by the SEC or its staff regarding asset segregation.
The Fund generally will use its assets to cover its obligations as required by the 1940 Act, the rules thereunder, and applicable
positions of the SEC and its staff. As a result of their segregation, such assets may not be used for other operational purposes. The Adviser will monitor the Funds use of derivatives and will take action as necessary for the purpose of
complying with the asset segregation policy stated above. Such actions may include the sale of the Funds portfolio investments.
Short-Term Investments
Short-Term Taxable Fixed Income Securities.
For temporary defensive purposes or to keep cash on hand fully
invested, the Fund may invest up to 100% of its net assets in cash equivalents and short-term taxable fixed-income securities, although the Fund intends to invest in taxable short-term
35
investments only in the event that suitable tax-exempt short-term investments are not available at reasonable prices and yields. Short-term taxable fixed income investments are defined to
include, without limitation, the following:
(a) U.S.
government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S. government agencies or instrumentalities. U.S. government agency
securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to
borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality; and
(d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. government provides financial support to such U.S. government-sponsored agencies or instrumentalities, no assurance can be given that
it always will do so since it is not so obligated by law. The U.S. government, its agencies, and instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
(b) Certificates of Deposit issued against funds deposited in a bank or a
savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of
the certificate on the date specified thereon. Under current FDIC regulations, the maximum insurance payable as to any one certificate of deposit is $100,000; therefore, certificates of deposit purchased by the Fund may not be fully insured.
(c) Repurchase agreements, which involve purchases of debt
securities. At the time the Fund purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and
time. This assures a predetermined yield for the Fund during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for the Fund to invest
temporarily available cash. The Fund may enter into repurchase agreements only with respect to obligations of the U.S. government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which the Fund may invest.
Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Fund is limited to the ability of the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the
repurchase agreement provides that the Fund is entitled to sell the underlying collateral. If the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Fund could incur a loss
of both principal and interest. The Sub-Adviser monitors the value of the collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The Sub-Adviser does so in an effort to determine that the
value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of the Fund to liquidate the collateral could be delayed or
impaired because of certain provisions of the bankruptcy laws.
36
(d) Commercial paper, which
consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Fund and a corporation. There
is no secondary market for such notes. However, they are redeemable by the Fund at any time. The Sub-Adviser will consider the financial condition of the corporation (e.g., earning power, cash flow, and other liquidity measures) and will
continuously monitor the corporations ability to meet all of its financial obligations, because the Funds liquidity might be impaired if the corporation were unable to pay principal and interest on demand. Investments in commercial paper
will be limited to commercial paper rated in the highest categories by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
Short-Term Tax-Exempt Municipal Securities.
Short-term tax-exempt municipal securities are securities that
are exempt from regular federal income tax and mature within three years or less from the date of issuance. Short-term tax-exempt municipal income securities are defined to include, without limitation, the following:
1. Bond Anticipation Notes (
BANs
) are usually general
obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds. The ability of an issuer to meet its obligations on
its BANs is primarily dependent on the issuers access to the long-term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal and interest on the BANs.
2. Tax Anticipation Notes (
TANs
) are issued by state
and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuers capacity to raise
taxes due to, among other things, a decline in its tax base or a rise in delinquencies, could adversely affect the issuers ability to meet its obligations on outstanding TANs.
3. Revenue Anticipation Notes (
RANs
) are issued by
governments or governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected
revenues, such as anticipated revenues from another level of government, could adversely affect an issuers ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to
meet other obligations could affect the ability of the issuer to pay the principal and interest on RANs.
4. Construction Loan Notes are issued to provide construction financing
for specific projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration.
5. Bank Notes are notes issued by local government bodies and agencies, such as those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital project needs. These notes may have risks similar to the risks associated with TANs and RANs.
37
6. Tax-Exempt Commercial
Paper (
Municipal Paper
) represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from
various sources to the extent the funds are available therefrom. Maturities of municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of Municipal Paper.
Certain municipal securities may carry variable or floating rates of interest whereby the rate of interest is not fixed but varies with
changes in specified market rates or indices, such as a bank prime rate or a tax-exempt money market index.
While the various
types of notes described above as a group represent the major portion of the short-term tax-exempt note market, other types of notes are available in the marketplace, and the Fund may invest in such other types of notes to the extent permitted under
its investment objectives, policies and limitations. Such notes may be issued for different purposes and may be secured differently from those mentioned above.
Illiquid Securities
The Fund may invest in illiquid securities (i.e.,
securities that are not readily marketable), including, but not limited to, restricted securities (securities the disposition of which is restricted under the federal securities laws), securities that may be resold only pursuant to Rule 144A under
the Securities Act that are deemed to be illiquid, and certain repurchase agreements.
Restricted securities may be sold only
in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act. Where registration is required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to
develop, the Fund might obtain a less favorable price than that which prevailed when it decided to sell. To the extent that the Board of Trustees or its delegatee determines that the price of any illiquid security provided by the pricing service is
inappropriate, such security will be priced at a fair value as determined in good faith by the Board of Trustees or its delegatee.
Investment Restrictions
The Fund has adopted certain investment limitations designed to limit investment risk and maintain portfolio diversification. These
limitations are fundamental and may not be changed without the approval of the holders of a majority of the outstanding common and preferred shares of the Fund, voting together as a single class, and the approval of the holders of a majority of the
outstanding preferred shares, voting separately as a single class. For this purpose, a majority of the outstanding shares means the vote of (1) 67% or more of the voting securities present at a meeting, if the holders of more than
50% of the outstanding voting securities are present or represented by proxy; or (2) more than 50% of the outstanding voting securities, whichever is less.
Except as described below, the Fund, as a fundamental policy, may not:
(1) Under normal circumstances, invest less than 80% of the Funds net assets (plus
any borrowings for investment purposes) in investments the income from which is exempt from regular federal income tax;
38
(2) Issue senior securities, as defined in
the 1940 Act, other than preferred shares, except to the extent permitted under the 1940 Act and except as otherwise described in the Proxy Statement (as defined below);
(3) Borrow money, except as permitted by the 1940 Act and exemptive orders granted under the 1940 Act;
(4) Act as underwriter of another issuers securities, except to the extent that the
Fund may be deemed to be an underwriter within the meaning of the Securities Act in connection with the purchase and sale of portfolio securities;
(5) Invest more than 25% of its total assets in securities of issuers in any one industry; provided, however, that such limitation shall not apply to
municipal securities other than those municipal securities backed only by the assets and revenues of non-governmental users;
(6) Purchase or sell real estate, but this shall not prevent the Fund from investing in
municipal securities secured by real estate or interests therein or foreclosing upon and selling such real estate;
(7) Purchase or sell physical commodities unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from purchasing or selling options, futures contracts or derivative instruments or from investing in securities or other instruments backed by physical commodities);
(8) Make loans, except as permitted by the 1940 Act and exemptive orders granted under the
1940 Act;
(9) With respect to 75% of the value of the Funds total
assets, purchase any securities (other than obligations issued or guaranteed by the United States government or by its agencies or instrumentalities), if as a result more than 5% of the Funds total assets would then be invested in securities
of a single issuer or if as a result the Fund would hold more than 10% of the outstanding voting securities of any single issuer; and
(10) Invest in securities other than municipal securities and short-term securities, as described in the Proxy Statement (as defined below), except the Fund
may invest up to 5% of its net assets in tax-exempt or taxable fixed-income or equity securities for the purpose of acquiring control of an issuer whose municipal securities (a) the Fund already owns and (b) have deteriorated or are
expected shortly to deteriorate significantly in credit quality, provided the Adviser determines such investment should enable the Fund to maximize better its existing investment in such issuer.
For the purpose of applying the limitation set forth in subparagraph (2) above, the Fund may not issue senior securities not
permitted by the 1940 Act simply by describing such securities in the offering document.
For the purpose of applying the
limitation set forth in paragraph (3) above, under the 1940 Act, the Fund generally is not permitted to issue commercial paper or notes or borrow unless, immediately after the borrowing or commercial paper or note issuance, the value of the
Funds total assets less liabilities other than the principal amount represented by senior securities representing indebtedness is at least 300% of such principal amount.
39
For the purpose of applying the limitation set forth in subparagraph (9) above, an
issuer shall be deemed the sole issuer of a security when its assets and revenues are separate from other governmental entities and its securities are backed only by its assets and revenues. Similarly, in the case of a non-governmental issuer, such
as an industrial corporation or a privately owned or operated hospital, if the security is backed only by the assets and revenues of the non-governmental issuer, then such non-governmental issuer would be deemed to be the sole issuer. Where a
security is also backed by the enforceable obligation of a superior or unrelated governmental or other entity (other than a bond insurer), it shall also be included in the computation of securities owned that are issued by such governmental or other
entity. Where a security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of
such government, other entity or bank. When a municipal security is insured by bond insurance, it shall not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such municipal security will be determined in
accordance with the principles set forth above. The foregoing restrictions do not limit the percentage of the Funds assets that may be invested in municipal securities insured by any given insurer.
The Fund is diversified for purposes of the 1940 Act. Consequently, as to 75% of the Funds total assets, the Fund may not
(i) purchase the securities of any one issuer (other than cash, securities of other investment companies and securities issued by the U.S. government or its agencies or instrumentalities) if immediately after such purchase, more than 5% of the
value of the Funds total assets would be invested in securities of such issuer or (ii) purchase more than 10% of the outstanding voting securities of such issuer.
Under the 1940 Act, the Fund may invest up to 10% of its Managed Assets in the aggregate in shares of other investment companies and only up to 5% of its Managed Assets in any one investment company,
provided the investment does not represent more than 3% of the voting stock of the acquired investment company at the time such shares are purchased. As a stockholder in any investment company, the Fund will bear its ratable share of that investment
companys expenses and will remain subject to payment of the Funds management, advisory and administrative fees with respect to assets so invested. Holders of common shares of the Fund would therefore be subject to duplicative expenses to
the extent the Fund invests in other investment companies. In addition, the securities of other investment companies may be leveraged and therefore will be subject to the same leverage risks described herein.
In addition to the foregoing fundamental investment policies, the Fund is also subject to the following non-fundamental restrictions and
policies, which may be changed by the Board of Trustees. The Fund may not:
(1) Sell securities short, unless the Fund owns or has the right to obtain securities
equivalent in kind and amount to the securities sold at no added cost, and provided that transactions in options, futures contracts, options on futures contracts, or other derivative instruments are not deemed to constitute selling securities short;
(2) Purchase securities of open-end or closed-end investment companies except
in compliance with the 1940 Act or any exemptive relief obtained thereunder;
(3) Enter into futures contracts or related options or forward contracts, if more than 30%
of the Funds net assets would be represented by futures contracts or more than 5% of the Funds net assets would be committed to initial margin deposits and premiums on futures contracts and related options;
40
(4) Purchase securities when borrowings
exceed 5% of its total assets if and so long as preferred shares are outstanding; and
(5) Purchase securities of companies for the purpose of exercising control, except as
otherwise permitted in the Funds Proxy Statement (as defined below).
The restrictions and other limitations set forth
above will apply only at the time of purchase of securities and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of an acquisition of securities.
The Fund may be subject to certain restrictions imposed by either guidelines of one or more NRSROs that may issue ratings for preferred
shares, including VMTP Shares, or, if issued, commercial paper or notes, or, if the Fund borrows from a lender, by the lender. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those
imposed on the Fund by the 1940 Act. If these restrictions were to apply, it is not anticipated that these covenants or guidelines would impede the Adviser from managing the Funds portfolio in accordance with the Funds investment
objectives and policies. A copy of the current Rating Agency Guidelines will be provided to any holder of New VMTP Shares promptly upon request therefor made by such holder to the Fund by writing the Fund at 333 West Wacker Drive, Chicago, Illinois
60606.
MANAGEMENT OF THE FUND
Trustees and Officers
The management of the Fund, including general
supervision of the duties performed for the Fund under the investment management agreement with Nuveen Fund Advisors, Inc. (the Management Agreement), is the responsibility of the Board of Trustees of the Fund. The Fund has ten trustees,
one of whom is an interested person (as the term interested person is defined in the 1940 Act) and nine of whom are not interested persons (referred to herein as Independent Trustees). Information concerning the
trustees and officers of the Fund, including, as applicable, their principal occupations and other affiliations, the number of portfolios each oversees, other directorships they hold and their compensation and share ownership is incorporated into
this Information Memorandum by reference to the Funds Annual Report for the fiscal year ended October 31, 2012 and the Proxy Statement with respect to holders of VMTP Shares of the Fund and High Income 2 relating to the Funds 2013
Annual Meeting as filed with the SEC (the Proxy Statement).
Investment Adviser and Sub-Adviser
The Adviser, Nuveen Fund Advisors, is responsible for investing the Funds assets. The Adviser oversees the management of the
Funds portfolio, manages the Funds business affairs and provides certain clerical, bookkeeping and other administrative services. The Adviser is located at 333 West Wacker Drive, Chicago, Illinois 60606.
The Adviser, a registered investment adviser, is a wholly-owned subsidiary of Nuveen Investments. Founded in 1898, Nuveen Investments and
its affiliates had approximately $220 billion of assets under management as of September 30, 2012. On November 13, 2007, Nuveen Investments was acquired by investors led by Madison Dearborn Partners, LLC (the MDP Acquisition).
41
The Adviser has selected its affiliate, Nuveen Asset Management, located at 333 West Wacker
Drive, Chicago, IL 60606, to serve as a sub-adviser to the Fund. Nuveen Asset Management manages the investment of the Funds assets on a discretionary basis, subject to the supervision of the Adviser. Nuveen Asset Management, is a wholly-owned
subsidiary of the Adviser and was appointed as sub-adviser effective in January 2011 as part of an internal restructuring of the Adviser.
The Fund is dependent upon services and resources provided by its Adviser, and therefore the Advisers parent, Nuveen Investments. Nuveen Investments significantly increased its level of debt in
connection with the MDP Acquisition. While Nuveen Investments believes that monies generated from operations and cash on hand will be adequate to fund debt service requirements, capital expenditures and working capital requirements for the
foreseeable future, there can be no assurance that Nuveen Investments business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable Nuveen Investments to pay its
indebtedness (with scheduled maturities beginning in 2014) or to fund its other liquidity needs. Nuveen Investments believes that potential adverse changes to its overall financial position and business operations would not adversely affect its or
its affiliates portfolio management operations and would not otherwise adversely affect its ability to fulfill its obligations to the Funds under the investment management agreements.
Portfolio Management
Subject to the supervision of Nuveen Fund Advisors,
Nuveen Asset Management is responsible for execution of specific investment strategies and day-to-day investment operations. Nuveen Asset Management manages the Funds using a team of analysts and a portfolio manager that focuses on a specific group
of funds.
John V. Miller, CFA, is the portfolio manager of the Fund. Information about Mr. Millers compensation,
other accounts managed and any material conflicts of interest is contained in the Funds most recent Form N-CSR. See Available Information.
Mr. Miller has been the portfolio manager for the Fund since its inception in 2003. He joined Nuveens investment management team as a credit analyst in 1996, with three years prior experience
in the municipal market with a private account management firm. He has been responsible for analysis of high yield credits in the utility, solid waste and energy related sectors. Mr. Miller is a Managing Director of Nuveen (since 2007), and
Co-Head of Fixed Income of Nuveen Asset Management (since 2011). He was previously an analyst with C.W. Henderson & Assoc., a municipal bond manager for private accounts. Mr. Miller earned a B.A. in economics and political science from
Duke University, an M.A. in economics from Northwestern University and an M.B.A. in finance with honors from the University of Chicago. He holds the Chartered Financial Analyst designation and is a member of the CFA Institute and the CFA Society of
Chicago. He manages 10 Nuveen-sponsored investment companies, with a total of approximately $14.27 billion under management as of December 31, 2012.
Investment Management Agreement and Sub-Advisory Agreement
Pursuant to an
investment management agreement between Nuveen Fund Advisors and the Fund, the Fund has agreed to pay an annual management fee for the services and facilities provided by Nuveen Fund Advisors, payable on a monthly basis, based on the sum of a
fund-level fee and a complex-level fee, as described below, according to the following schedule:
42
Fund-Level Fee.
The fund-level fee shall be applied according to the following
schedule:
|
|
|
|
|
Average Daily Managed Assets*
|
|
Fund-Level
Fee Rate
|
|
For the first $125 million
|
|
|
0.5500
|
%
|
For the next $125 million
|
|
|
0.5375
|
%
|
For the next $250 million
|
|
|
0.5250
|
%
|
For the next $500 million
|
|
|
0.5125
|
%
|
For the next $1 billion
|
|
|
0.5000
|
%
|
For managed assets over $2 billion
|
|
|
0.4750
|
%
|
Complex-Level Fee
. The effective rates of the complex-level fee at various specified complex-wide
asset levels are as indicated in the following table:
|
|
|
|
|
Complex-Level Managed Asset Breakpoint Level*
|
|
Effective Rate At
Breakpoint
Level
|
|
$55 billion
|
|
|
0.2000
|
%
|
$56 billion
|
|
|
0.1996
|
%
|
$57 billion
|
|
|
0.1989
|
%
|
$60 billion
|
|
|
0.1961
|
%
|
$63 billion
|
|
|
0.1931
|
%
|
$66 billion
|
|
|
0.1900
|
%
|
$71 billion
|
|
|
0.1851
|
%
|
$76 billion
|
|
|
0.1806
|
%
|
$80 billion
|
|
|
0.1773
|
%
|
$91 billion
|
|
|
0.1691
|
%
|
$125 billion
|
|
|
0.1599
|
%
|
$200 billion
|
|
|
0.1505
|
%
|
$250 billion
|
|
|
0.1469
|
%
|
$300 billion
|
|
|
0.1445
|
%
|
*
|
The complex-level fee is calculated based upon the aggregate daily eligible assets of all Nuveen Funds. Eligible assets do not include assets attributable
to investments in other Nuveen Funds or assets in excess of a determined amount (originally $2 billion) added to the Nuveen fund complex in connection with Nuveen Fund Advisors assumption of the management of the former First American
Funds effective January 1, 2011. With respect to closed-end funds, eligible assets include assets managed by Nuveen Fund Advisors that are attributable to financial leverage. For these purposes, financial leverage includes the use of preferred
stock and borrowings and certain investments in the residual interest certificates in tender option bond (TOB) trusts, including the portion of assets held by a TOB trust that has been effectively financed by issuance of floating rate
securities, subject to an agreement by Nuveen Fund Advisors as to certain funds to limit the amount of such assets for determining eligible assets for determining eligible assets in certain circumstances.
|
Based on eligible assets as of July 31, 2012, the complex-level fee was 0.1709% of Managed Assets.
Pursuant to an investment sub-advisory agreement between Nuveen Fund Advisors and Nuveen Asset Management, Nuveen Asset Management will
receive from Nuveen Fund Advisors a management fee equal to 46.667% of Nuveen Fund Advisors net management fee from the Fund.
In addition to Nuveen Fund Advisors management fee, the Fund pays all other costs and expenses of its operations, including compensation of its trustees (other than those affiliated with
43
Nuveen Fund Advisors), custodian, transfer agency and dividend disbursing expenses, legal fees, expenses of its independent registered accounting firm, expenses of repurchasing shares, expenses
of issuing any VMTP Shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies, listing fees and taxes, if any. All fees and expenses are accrued daily and deducted
before payment of distributions to shareholders.
The following table sets forth the management fee paid by the Fund for the
last three fiscal years and the six months ended April 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
Management Fee Net of
Expense Reimbursement
|
|
|
Expense Reimbursement
|
|
Fiscal year ended October 31, 2009
|
|
$
|
1,632,993
|
|
|
$
|
826,108
|
|
Fiscal year ended October 31, 2010
|
|
$
|
2,225,110
|
|
|
$
|
665,011
|
|
Fiscal year ended October 31, 2011
|
|
$
|
2,572,871
|
|
|
$
|
353,870
|
|
Six months ended April 30, 2012
|
|
$
|
1,687,711
|
|
|
$
|
30,160
|
|
The basis for the Board of Trustees continuation of the Funds investment management agreement
will be provided in Annual or Semi-Annual Reports to shareholders for the periods during which such continuations occur.
DESCRIPTION OF BORROWINGS
The Declaration of Trust authorizes the Fund, without prior approval of holders of common
shares or Preferred Shares, including VMTP Shares, to borrow money. In this connection, the Fund may issue notes or other evidence of indebtedness (including bank borrowings or commercial paper) and may secure any such borrowings subject to the
requirements of the 1940 Act. Any borrowings will rank senior to the Funds Preferred Shares, including the New VMTP Shares. The Fund, as a fundamental policy, may not issue debt securities that rank senior to the New VMTP Shares, except for
emergency or temporary purposes.
Limitations.
Under the requirements of the 1940 Act, the Fund,
immediately after issuing any borrowings that are senior securities representing indebtedness (as defined in the 1940 Act), must have an asset coverage of at least 300%. With respect to any such borrowings, asset coverage for this purpose means the
ratio which the value of the total assets of the Fund, less all liabilities and indebtedness not represented by senior securities, bears to the aggregate amount of any such borrowings that are senior securities representing indebtedness, issued by
the Fund. Certain types of borrowings may also result in the Fund being subject to covenants in credit agreements relating to asset coverages or portfolio composition or otherwise. In addition, the Fund may be subject to certain restrictions imposed
by guidelines of one or more rating agencies which may issue ratings for Preferred Shares, including the New VMTP Shares, or indebtedness, if any, such as commercial paper or notes issued by the Fund. Such restrictions may be more stringent than
those imposed by the 1940 Act.
Distribution Preference.
The rights of lenders to the Fund to
receive interest on and repayment of principal of any such borrowings will be senior to those of the holders of Preferred Shares (including the New VMTP Shares), and the terms of any such borrowings may contain provisions which limit certain
activities of the Fund, including the payment of dividends to holders of Preferred Shares in certain circumstances.
Voting
Rights.
The 1940 Act does (in certain circumstances) grant to the lenders to the Fund certain voting rights in the event of default in the payment of interest on or repayment of principal. In
44
the event that such provisions would impair the Funds status as a regulated investment company under the Code, the Fund, subject to its ability to liquidate its portfolio, intends to repay
the borrowings.
HOW THE FUND MANAGES PORTFOLIO RISK
Investment Limitations
The Fund has adopted certain investment limitations designed to limit investment risk and maintain portfolio diversification. These
limitations are fundamental and may not be changed without the approval of the holders of a majority of the outstanding common shares and preferred shares voting together as a single class, and the approval of the holders of a
majority of the outstanding preferred shares voting as a separate class. When used with respect to particular shares of the Fund, a majority of the outstanding shares means (i) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the shares are present or represented by proxy, or (ii) more than 50% of the shares, whichever is less. Among other restrictions, the Fund may not invest more than 25% of total Fund assets in
securities of issuers in any one industry, except that this limitation does not apply to municipal securities backed by the assets and revenues of governments or political subdivisions of governments, or invest more than 5% of its total assets in
securities of any one issuer, except that this limitation does not apply to bonds issued by the United States government, its agencies and instrumentalities or to the investment of 25% of its total assets. The Fund may become subject to guidelines
which are more limiting than the investment restrictions set forth above in order to obtain and maintain ratings from Moodys or S&P on the Funds VMTP Shares. See The Funds InvestmentsInvestment Restrictions
for a complete list of the fundamental and non-fundamental investment policies of the Fund.
The Fund seeks to reduce credit
risk by buying municipal securities which, at the time of purchase, are (i) rated BBB/Baa or better by an NRSRO or covered by insurance from insurers with a claims-paying ability rated BBB/Baa or better by an NRSRO; (ii) unrated, but
judged to be of comparable quality by the Adviser; or (iii) backed by an escrow or trust account containing sufficient U.S. government or U.S. government agency securities to ensure timely payment of principal and interest.
Hedging Strategies
The
Fund may use various investment strategies designed to limit the risk of bond price fluctuations and to preserve capital. These hedging strategies include using financial futures contracts, options on financial futures or options based on either an
index of long-term municipal securities or on taxable debt securities whose prices, in the opinion of the Adviser, correlate with the prices of the Funds investments. Successful implementation of most hedging strategies would generate taxable
income. See The Funds InvestmentsDerivatives and Hedging Strategies.
DESCRIPTION OF OUTSTANDING SHARES
Common Shares
The Funds Declaration of Trust authorizes the
issuance of an unlimited number of common shares of beneficial interest. All common shares have equal rights to the payment of dividends and the
45
distribution of assets upon liquidation. Common shares are, when issued, fully paid and non-assessable, and have no pre-emptive or conversion rights except as the trustees may determine or rights
to cumulative voting. At any time when Preferred Shares are outstanding, common shareholders will not be entitled to receive any cash distributions from the Fund unless all accrued dividends on Preferred Shares have been paid, and unless Asset
Coverage with respect to Preferred Shares would be at least 200% after giving effect to the distributions. The Fund pays monthly dividends, typically on the first business day of the following month. If the Reorganization is consummated, the Fund
will issue additional common shares to the common shareholders of High Income 2 based on the relative per share net asset value of the Fund and the net asset value of the assets of High Income 2 that are transferred in the Reorganization, in each
case as of the Valuation Time (as defined in the Agreement and Plan of Reorganization for the Reorganization).
From time to
time, the Fund may engage in sales of its common shares through at-the-market, syndicated or privately negotiated offerings (collectively, the Shelf Offerings). Common shares of the Fund sold through Shelf Offerings will not be sold for
less than current net asset value per common share, although they may be sold for less than the current closing market price of the Funds common shares on the day prior to such offering date. For more information on sales of the Funds
common shares through Shelf Offerings, please refer to the Funds registration statement (Registration No. 333-161462) filed with the SEC. The registration statement may be downloaded from the EDGAR database on the SECs internet
website at www.sec.gov. During the pendency of the Proposed Merger, sales of the Funds common shares in connection with such offerings have been suspended.
The common shares are listed on the NYSE Amex. The Fund intends to hold annual meetings of shareholders so long as the Funds shares are listed on a national securities exchange and such meetings are
required as a condition to such listing.
The terms of the Fund common shares to be issued pursuant to the Reorganization will
be identical to the terms of the Fund common shares that are then outstanding. All the Fund common shares have equal rights with respect to the payment of dividends and the distribution of assets upon liquidation. The Fund common shares, when
issued, will be fully paid and non-assessable and have no preemptive, conversion or exchange rights or rights to cumulative voting.
VMTP
Shares
General
The Fund currently has outstanding 510 VMTP Shares, par value $0.01 per share, with a total liquidation value of $51,000,000, which will remain outstanding following the completion of the Reorganization.
The VMTP Shares were offered and sold by the Fund to qualified institutional buyers pursuant to Rule 144A under the Securities Act, with all proceeds, net of offering expenses, used to redeem all of the Funds outstanding borrowings with its
custodian bank.
Dividends
Holders of VMTP Shares are entitled to receive cash dividends when, as and if declared by the Funds Board of Trustees. The amount of dividends per VMTP Share payable on any dividend payment date
will equal the sum of dividends accumulated but not yet paid for each rate period during the relevant monthly dividend period. The dividend rate applicable to any rate period (which typically
46
consists of seven days) is an index rate based on the SIFMA Municipal Swap Index plus an applicable spread. The applicable spread is subject to adjustment in certain circumstances, including a
change in the credit rating assigned to the VMTP Shares.
Redemption
The VMTP Shares are subject to optional and mandatory redemption in certain circumstances. The Fund is obligated to redeem the VMTP
Shares on January 1, 2016, unless earlier redeemed or repurchased by the Fund, at a redemption price per share equal to the liquidation value per share ($100,000) plus any accumulated but unpaid dividends. VMTP Shares also may be redeemed in
whole or in part at the option of the Fund at a redemption price per share equal to the liquidation value per share plus any accumulated but unpaid dividends plus, if the VMTP Shares are redeemed prior to June 21, 2014, an optional redemption
premium per share equal to the product of (a) 1.00% and (b) the liquidation value per share. In the event the Fund fails to comply with asset coverage and/or effective leverage ratio requirements and any such failure is not cured within
the applicable cure period, the Fund may become obligated to redeem such number of preferred shares as are necessary to achieve compliance with such requirements.
Voting and Consent Rights
Except as otherwise provided in the
Declaration of Trust, the Statement Establishing and Fixing the Rights and Preferences of the outstanding VMTP Shares, or as otherwise required by applicable law, (i) each holder of VMTP Shares is entitled to one vote for each VMTP Share held
on each matter submitted to a vote of shareholders of the Fund, and (ii) the holders of VMTP Shares, along with holders of other outstanding preferred shares of the Fund vote with holders of common shares of the Fund as a single class;
provided, however, that holders of preferred shares, including VMTP Shares, are entitled as a class to elect two trustees of the Fund at all times. The holders of outstanding common shares and preferred shares, including VMTP Shares, voting as a
single class, elect the balance of the trustees of the Fund.
Holders of VMTP Shares, as a separate class, have voting and
consent rights with respect to actions that would materially and adversely affect any preference, right or power of the VMTP Shares or holders of VMTP Shares. In addition, holders of VMTP Shares have certain consent rights under the purchase
agreement for the VMTP Shares with respect to certain actions that would affect their investment in the Fund. Holders of VMTP Shares also are entitled to vote as a class with holders of other preferred shares of the Fund on matters that relate to
the conversion of the Fund to an open-end investment company, certain plans of reorganization adversely affecting holders of the preferred shares or any other action requiring a vote of security holders of the Fund under Section 13(a) of the
1940 Act. In certain circumstances, holders of preferred shares, including VMTP Shares, are entitled to elect additional trustees in the event at least two full years dividends are due and unpaid and sufficient cash or specified securities
have not been deposited for their payment, or at any time holders of preferred shares are entitled under the 1940 Act to elect a majority of the trustees of the Fund.
Priority of Payment
The VMTP Shares are senior in priority to the
Funds common shares as to the payment of dividends and as to the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Fund. The VMTP Shares have equal priority as to the payment of dividends and as to
distribution of assets upon dissolution, liquidation or winding up of the affairs of the Fund with other preferred shares of the Fund, including the VMTP Shares to be issued in the Reorganization.
47
NET ASSET VALUE
The Funds net asset value per common share is determined as of the close of the regular session trading (normally 4:00 p.m.
Eastern time) on each day the NYSE is open for business. Net asset value is calculated by taking the market value of the Funds total assets, including interest or dividends accrued but not yet collected, less all liabilities, and dividing by
the total number of shares outstanding. The result, rounded to the nearest cent, is the net asset value per share. All valuations are subject to review by such Funds Board or its delegate.
In determining net asset value per common share, expenses are accrued and applied daily and securities and other assets for which market
quotations are available are valued at market value. The prices of municipal bonds are provided by a pricing service approved by such Funds Board. When market price quotes are not readily available (which is usually the case for municipal
securities), the pricing service, or, in the absence of a pricing service for a particular security, the Board of such Fund, or its designee, may establish fair market value using a wide variety of market data including yields or prices of municipal
bonds of comparable quality, type of issue, coupon, maturity and rating, market quotes or indications of value from securities dealers, evaluations of anticipated cash flows or collateral, general market conditions and other information and
analysis, including the obligors credit characteristics considered relevant by the pricing service or the Boards designee.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST AND BY-LAWS
Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for debts or obligations of the Fund and requires that notice of such limited liability be given in each agreement, obligation or instrument entered into or executed by the Fund or the trustees. The Declaration of Trust further
provides for indemnification out of the assets and property of the Fund for all loss and expense of any shareholder held personally liable for the obligations of the Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations. The Fund believes that the likelihood of such circumstances is remote.
The Declaration of Trust includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or
to convert the Fund to open-end status. Specifically, the Declaration of Trust requires a vote by holders of at least two-thirds of the outstanding common shares and preferred shares, voting as a single class, except as described below, to authorize
(1) a conversion of the Fund from a closed-end to an open-end investment company, (2) a merger or consolidation of the Fund, or a series or class of the Fund, with any corporation, association, trust or other organization or a
reorganization or recapitalization of the Fund, or a series or class of the Fund, (3) a sale, lease or transfer of all or substantially all of the Funds assets (other than in the regular course of the Funds investment activities),
(4) in certain circumstances, a termination of the Fund, or a series or class of the Fund, or (5) a removal of trustees by shareholders, and then only for cause, unless, with respect to (1) through (4), such transaction has already
been authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration of Trust or the Funds by-laws, as amended and restated (the By-Laws), in which case the affirmative vote
of the holders of at least a majority of the Funds outstanding common shares and preferred shares, voting as a single class, is required, provided, however, that, where only a particular class or series is affected (or, in the case of
48
removing a trustee, when the trustee has been elected by only one class), only the required vote by the applicable class or series will be required. The voting provisions of the Declaration of
Trust are not to be construed as requiring shareholder approval for any transaction, whether deemed a merger, consolidation, reorganization or otherwise, whereby the Fund issues shares in connection with the acquisition of assets (including those
subject to liabilities) from any other investment company or similar entity. In the case of the conversion of the Fund to an open-end investment company, or in the case of any of the foregoing transactions constituting a plan of reorganization (as
that term is used in the 1940 Act) which adversely affects the holders of preferred shares, the action in question will also require the affirmative vote of the holders of at least two-thirds of the Funds preferred shares outstanding at the
time, voting as a separate class, or, if such action has been authorized by the affirmative vote of two-thirds of the total number of trustees fixed in accordance with the Declaration of Trust or the By-Laws, the affirmative vote of the holders of
at least a majority of the Funds preferred shares outstanding at the time, voting as a separate class. None of the foregoing voting provisions may be amended or repealed except by the vote of at least two-thirds of the common shares and
preferred shares, voting as a single class. The votes required to approve the conversion of the Fund from a closed-end to an open-end investment company or to approve transactions constituting a plan of reorganization which adversely affects the
holders of preferred shares are higher than those required by the 1940 Act. The Funds Board believes that the provisions of the Declaration of Trust relating to such higher votes are in the best interest of the Fund.
The Declaration of Trust provides that the obligations of the Fund are not binding upon the Funds trustees individually, but only
upon the assets and property of the Fund, and that the trustees shall not be liable for errors of judgment or mistakes of fact or law. Nothing in the Declaration of Trust, however, protects a trustee against any liability to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
In addition, the By-Laws require the Board be divided into three classes with staggered terms. This provision of the By-Laws could delay for up to two years the replacement of a majority of the Board.
Holders of preferred shares, voting as a separate class, are entitled to elect two of the Funds trustees.
The
provisions of the Declaration of Trust and By-Laws described above could have the effect of depriving the common shareholders of opportunities to sell their common shares at a premium over the then-current market price of the common shares by
discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third
party. They provide, however, the advantage of potentially requiring persons seeking control of the Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Funds investment objectives and
policies. The Funds Board has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund.
The Declaration of Trust provides that common shareholders shall have no right to acquire, purchase or subscribe for any shares or securities of the Fund, other than such right, if any, as the Funds
Board in its discretion may determine.
Reference should be made to the Declaration of Trust on file with the SEC for the full
text of these provisions.
49
FEDERAL INCOME TAX MATTERS
Below is a discussion of the anticipated U.S. federal income tax consequences of acquiring, holding, and disposing of New VMTP Shares.
This discussion is based on the current provisions and interpretations of the Internal Revenue Code of 1986, as amended (the Code), and the accompanying Treasury regulations and on current judicial and administrative rulings. All of
these authorities are subject to change and any change can apply retroactively.
Upon issuance of New VMTP Shares, and subject
to certain assumptions and conditions, and based upon certain representations made by the Fund, including representations regarding the nature of the Funds assets and the conduct of the Funds business, K&L Gates LLP (Special
Tax Counsel) will deliver its opinion that for federal income tax purposes New VMTP Shares will qualify as equity in the Fund. In accordance with such opinion, distributions made with respect to the New VMTP Shares will qualify as
exempt-interest dividends to the extent they are properly reported by the Fund and not otherwise limited under section 852(b)(5)(A) of the Code (under which the total amount of dividends that may be treated as exempt-interest dividends is
limited, based on the total amount of net tax-exempt income generated by the Fund). The Funds qualification and taxation as a regulated investment company depend upon the Funds ability to meet on a continuing basis, through actual annual
operating results, certain requirements in the federal tax laws. Special Tax Counsel will not review the Funds compliance with those requirements. Accordingly, no assurance can be given that the actual results of the Funds operations for
any particular taxable year will satisfy such requirements.
Vedder Price P.C. will provide an opinion on the anticipated U.S.
federal income tax consequences of certain aspects of the Reorganization, including an opinion substantially to the effect that the Fund will not recognize gain or loss upon the receipt of substantially all the assets of High Income 2 in exchange
for shares of the Fund (including the New VMTP Shares) and the assumption of substantially all the liabilities of High Income 2 and a holder of High Income 2 VMTP Shares will not recognize gain or loss upon the exchange of such shares solely for New
VMTP Shares. Such opinion will be based, in part, on Special Tax Counsels opinion that the New VMTP Shares will constitute equity in the Fund for federal income tax purposes.
The following is intended to be a general summary of the material U.S. federal income tax consequences of investing in New VMTP Shares.
The discussion generally applies only to holders of New VMTP Shares who are U.S. holders. You will be a U.S. holder if you are an individual who is a citizen or resident alien (as defined for federal income tax purposes) of the United States, a U.S.
domestic corporation, or any other person that is subject to U.S. federal income tax on a net income basis in respect of an investment in New VMTP Shares. This summary deals only with U.S. holders that hold New VMTP Shares as capital assets. It does
not address considerations that may be relevant to you if you are an investor that is subject to special tax rules, such as a financial institution, insurance company, regulated investment company, real estate investment trust, investor in
pass-through entities, U.S. holder of New VMTP Shares whose functional currency is not the United States dollar, tax-exempt organization, dealer in securities or currencies, trader in securities or commodities that elects mark to market
treatment, person who holds New VMTP Shares in a qualified tax-deferred account such as an IRA, or person that will hold New VMTP Shares as a position in a straddle, hedge or as part of a constructive sale for
federal income tax purposes. This is not intended to be a complete discussion of all federal income tax consequences, nor does it purport to deal with all categories of investors. This discussion reflects applicable tax laws of the United States as
of the date of this
50
Information Memorandum, which tax laws may change or be subject to new interpretation by the courts or the Internal Revenue Service (IRS), possibly with retroactive effect. INVESTORS
ARE THEREFORE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS BEFORE MAKING AN INVESTMENT IN THE FUND.
Federal Income Tax Treatment of the
Fund
The Fund has elected to be treated and intends to qualify each year as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, the Fund generally will not be subject to any federal income tax on the income and gains it distributes to its shareholders.
The Fund primarily invests in municipal securities whose income is exempt from regular federal income tax. Thus, substantially all of the
Funds dividends to the holders of common shares and preferred shares is expected to qualify as exempt-interest dividends. A shareholder treats an exempt-interest dividend as interest on state and local bonds exempt from regular
federal income tax. Some or all of an exempt-interest dividend, however, may be subject to federal alternative minimum tax imposed on the shareholder. Different federal alternative minimum tax rules apply to individuals and to corporations.
In addition to exempt-interest dividends, the Fund may also distribute amounts that are treated as long-term capital gain or
ordinary income to its shareholders. The Fund will allocate distributions to shareholders that are treated as tax-exempt interest, long-term capital gain and ordinary income, if any, proportionately among its common and preferred shares. In certain
circumstances, the Fund will make payments to holders of New VMTP Shares to offset the tax effects of a taxable distribution.
To qualify for the favorable federal income tax treatment generally accorded to regulated investment companies, the Fund must, among
other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of stock, securities or non-U.S. currencies, or
other income derived with respect to its business of investing in such stock, securities or currencies, or net income derived from interests in qualified publicly traded partnerships, as defined in the Code; (b) diversify its
holdings so that, at the end of each quarter of each taxable year, (i) at least 50% of the value of the Funds total assets is represented by cash and cash items (including receivables), U.S. government securities, the securities of other
regulated investment companies and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Funds total assets and not greater than 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or the securities of other regulated investment companies) of a
single issuer or of two or more issuers that the Fund controls and that are engaged in the same, similar or related trades or businesses, or the securities of one or more qualified publicly traded partnerships; and (c) distribute each year an
amount equal to or greater than the sum of 90% of its investment company taxable income (as that term is defined in the Code, but without regard to the deduction for dividends paid) and 90% of its net tax-exempt interest income.
As a regulated investment company, the Fund generally will not be subject to federal income tax on its investment company taxable income
and net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, that it distributes to shareholders. The Fund may retain for investment its net capital gain. However, if the Fund retains any net capital gain
or any investment
51
company taxable income, it will be subject to tax at regular corporate rates on the amount retained. If the Fund retains any net capital gain, it may report the retained amount as undistributed
capital gains in a written statement to its shareholders who, if subject to federal income tax on long-term capital gains, (i) will be required to include in income for federal income tax purposes, as long-term capital gain, their share of such
undistributed amount, and (ii) will be entitled to credit their proportionate shares of the tax paid by the Fund on such undistributed amount against their federal income tax liabilities, if any, and to claim refunds to the extent the credit
exceeds such liabilities. For federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be increased by an amount equal to the difference between the amount of undistributed capital gains included in the
shareholders gross income and the tax deemed paid by the shareholder under clause (ii) of the preceding sentence. The Fund intends to distribute to its shareholders, at least annually, substantially all of its investment company taxable
income and the net capital gain not otherwise retained by the Fund.
Amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4% excise tax. To prevent imposition of the excise tax, the Fund must distribute during each calendar year an amount at least equal to the sum of (1) 98% of its
ordinary taxable income (not taking into account any capital gains or losses) for the calendar year, (2) 98.2% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for the one-year period ending
October 31 of the calendar year, and (3) any ordinary taxable income and capital gains for previous years that were not distributed during those years and on which the Fund paid no federal income tax. To prevent application of the excise
tax, the Fund intends to make its distributions in accordance with the calendar year distribution requirement.
If at any time
when the Funds New VMTP Shares are outstanding the Fund fails to meet the Asset Coverage (as defined in the Statement), the Fund will be required to suspend distributions to holders of its common shares until such asset coverage is restored.
This may prevent the Fund from distributing at least 90% of its investment company taxable income (as that term is defined in the Code determined without regard to the deduction for dividends paid) and net tax-exempt income, and may therefore
jeopardize the Funds qualification for taxation as a regulated investment company or cause the Fund to incur a tax liability or a non-deductible 4% excise tax on the undistributed taxable income (including gain), or both. Upon failure to meet
the Asset Coverage, the Fund will be required to redeem New VMTP Shares in order to maintain or restore such asset coverage and avoid the adverse consequences to the Fund and its shareholders of failing to qualify as a regulated investment company.
There can be no assurance, however, that any such redemption would achieve such objectives.
If the Fund failed to qualify as
a regulated investment company or failed to satisfy the 90% distribution requirement in any taxable year, and was unable to cure such failure, the Fund would be taxed in the same manner as an ordinary corporation on its taxable income (even if such
income were distributed to its shareholders) and distributions to shareholders would not be deductible by the Fund in computing its taxable income. Additionally, all distributions out of earnings and profits would be taxed to shareholders as
ordinary dividend income. Such distributions generally would be eligible (i) to be treated as qualified dividend income, as discussed below in the case of non-corporate shareholders, and (ii) for the dividends received
deduction under section 243 of the Code (the Dividends Received Deduction) in the case of corporate shareholders.
The Fund intends to qualify to pay exempt-interest dividends, as defined in the Code, by satisfying the requirement that, at the close of each quarter of its taxable year, at least 50% of the
value of its total assets consist of tax-exempt municipal bonds. Exempt-interest dividends are dividends or
52
any part thereof (other than a capital gain dividend) paid by the Fund which are attributable to interest on municipal bonds and are so reported by the Fund. Exempt-interest dividends will be
exempt from federal income tax, subject to the possible application of the federal alternative minimum tax.
A portion of the
Funds expenditures that would otherwise be deductible may not be allowed as deductions by reason of the Funds investment in municipal securities (with such disallowed portion, in general, being the same percentage of the Funds
aggregate expenses as the percentage of the Funds aggregate income (other than capital gain income) that constitutes exempt-interest income from municipal securities). A similar disallowance rule also applies to interest expense paid or
incurred by the Fund, if any. Such disallowed deductions, if any, will reduce the amount that the Fund can report as exempt-interest dividends by the disallowed amount. As a result, income distributions by the Fund in excess of the amount of the
Funds exempt-interest dividends may be taxable as ordinary income.
The Funds investment in zero coupon bonds will
cause it to realize income prior to the receipt of cash payments with respect to these bonds. Such income will be accrued daily by the Fund and, in order to avoid a tax payable by the Fund, the Fund may be required to liquidate securities that it
might otherwise continue to hold in order to generate cash so that the Fund may make required distributions to its shareholders.
Certain of the Funds investment practices are subject to special provisions of the Code that, among other things, may disallow, limit or defer the use of certain deductions or losses of the Fund,
affect the holding period of securities held by the Fund and alter the character of the gains or losses realized by the Fund. These provisions may also require the Fund to recognize income or gain without receiving cash with which to make
distributions in the amounts necessary to satisfy the requirements for maintaining regulated investment company status and for avoiding income and excise taxes. The Fund will monitor its transactions and may make certain tax elections in order to
mitigate the effect of these rules and prevent disqualification of the Fund as a regulated investment company.
Federal Income Tax
Treatment of Holders of New VMTP Shares
The Fund has elected to be treated, and intends to qualify each year, as a
regulated investment company, under Subchapter M of the Code, and to satisfy conditions which enable dividends on common shares and preferred shares which are attributable to interest on municipal securities to be exempt from federal income tax in
the hands of owners of such stock, subject to the possible application of the federal alternative minimum tax.
In order for
any distributions to holders of New VMTP Shares to be eligible to be treated as exempt-interest dividends, New VMTP Shares must be treated as equity for federal income tax purposes. Under present law, Special Tax Counsel is of the opinion that New
VMTP Shares of the Fund will constitute equity of the Fund, and thus distributions with respect to New VMTP Shares (other than distributions in redemption of New VMTP Shares subject to section 302(b) of the Code) will generally constitute
dividends to the extent of the Funds current or accumulated earnings and profits, as calculated for federal income tax purposes. Because the treatment of a corporate security as debt or equity is determined on the basis of the facts and
circumstances of each case, and no controlling precedent exists for the New VMTP Shares, there can be no assurance that the IRS will not question Special Tax Counsels opinion and the Funds treatment of New VMTP Shares as equity. If the
IRS were to succeed in such a challenge, holders of New VMTP Shares could be treated as receiving taxable interest income rather than exempt-interest or other dividends, possibly requiring
53
them to file amended income tax returns and retroactively to recognize additional amounts of ordinary income or to pay additional tax, interest, and penalties.
Except in the case of exempt-interest dividends and capital gain dividends, if any, dividends paid by the Fund generally will be taxable
to holders at ordinary income tax rates. Dividends derived from net capital gain and reported by the Fund as capital gain dividends will be treated as long-term capital gains in the hands of holders regardless of the length of time such holders have
held their shares. Distributions in excess of the Funds earnings and profits, if any, will first reduce a shareholders adjusted tax basis in his or her shares and, after the adjusted tax basis is reduced to zero, will constitute capital
gains to a holder who holds such shares as a capital asset. A holder of New VMTP Shares will be required to report the dividends declared by the Fund for each day on which such holder is the shareholder of record. The Fund intends to notify holders
of New VMTP Shares in advance if it will allocate to them income that is not exempt from regular federal income tax. In certain circumstances, the Fund will make payments to holders of New VMTP Shares to offset the tax effects of the taxable
distribution.
The IRS currently requires that a regulated investment company that has two or more classes of shares allocate
to each such class proportionate amounts of each type of its income (such as ordinary income and capital gains). Accordingly, the Fund intends to report dividends made with respect to common shares and preferred shares, including New VMTP Shares, as
consisting of particular types of income (e.g., exempt-interest dividends, net capital gain, or ordinary income) in accordance with each class proportionate share of the total dividends paid by the Fund during or with respect to the year.
Although dividends generally will be treated as distributed when paid, a distribution will be treated as having been paid on
December 31 if it is declared by the Fund in October, November or December with a record date in such months and is paid by the Fund in January of the following year. Accordingly, such distributions will be treated as received by
shareholders in the calendar year in which the distributions are declared.
Distributions to shareholders of ordinary income
other than tax-exempt interest (including net investment income received by the Fund from taxable temporary investments, if any, certain income from financial futures and options transactions and market discount realized by the Fund on the sale of
municipal securities) and of net short-term capital gains realized by the Fund, if any, will be taxable to shareholders as ordinary income. Distributions by the Fund of net capital gain (i.e., the excess of net long-term capital gain over net
short-term capital loss), if any, are taxable as long-term capital gain, regardless of the length of time the shareholder has owned the shares with respect to which such distributions are made. The amount of taxable income allocable to the
Funds shares will depend upon the amount of such income realized by the Fund, but is not generally expected to be significant. Qualified dividend income received by non-corporate shareholders is taxed at rates equivalent to
long-term capital gain tax rates, which reach a maximum of 15%, or for certain high income individuals, 20% (plus the additional tax on net investment income described below). Qualified dividend income generally includes dividends from
domestic corporations and dividends from non-U.S. corporations that meet certain specified criteria. As long as the Fund qualifies as a regulated investment company under the Code, it is not expected that any part of its distributions to
shareholders from its investments will qualify for the Dividends Received Deduction available to corporate shareholders or as qualified dividend income in the case of non-corporate shareholders.
The Code provides that interest on indebtedness incurred or continued to purchase or carry the Funds shares to which
exempt-interest dividends are allocated is not deductible. Under rules used by
54
the IRS for determining when borrowed funds are considered used for the purpose of purchasing or carrying particular assets, the purchase or ownership of shares may be considered to have been
made with borrowed funds even though such funds are not directly used for the purchase or ownership of such shares.
The
interest on private activity bonds in most instances is not federally tax-exempt to a person who is a substantial user of a facility financed by such bonds or a related person of such substantial user. As a
result, the Fund may not be an appropriate investment for a shareholder who is considered either a substantial user or a related person within the meaning of the Code. In general, a substantial user of a facility
includes a nonexempt person who regularly uses a part of such facility in his trade or business. Related persons are in general defined to include persons among whom there exists a relationship, either by family or business,
which would result in a disallowance of losses in transactions among them under various provisions of the Code (or if they are members of the same controlled group of corporations under the Code), including a partnership and each of its partners
(and certain members of their families), an S corporation and each of its shareholders (and certain members of their families) and various combinations of these and other relationships. The foregoing is not a complete description of all of the
provisions of the Code covering the definitions of substantial user and related person.
Federal
income tax law imposes an alternative minimum tax with respect to corporations, individuals, trusts and estates. Interest on certain municipal bonds is included as an item of tax preference in determining the amount of a taxpayers alternative
minimum taxable income. To the extent that the Fund receives income from municipal securities subject to the federal alternative minimum tax, a portion of the dividends paid by the Fund, although otherwise exempt from federal income tax, would be
taxable to its shareholders to the extent that their tax liability is determined under the federal alternative minimum tax. The Fund will annually provide a report indicating the percentage of the Funds income attributable to municipal
securities subject to the federal alternative minimum tax. In addition, for certain corporations, federal alternative minimum taxable income is increased by 75% of the difference between an alternative measure of income (adjusted current
earnings) and the amount otherwise determined to be the alternative minimum taxable income. Interest on all municipal securities, and therefore a distribution by the Fund that would otherwise be tax-exempt, is included in calculating a
corporations adjusted current earnings. Certain small corporations are not subject to the federal alternative minimum tax.
Tax-exempt income, including exempt-interest dividends paid by the Fund, is taken into account in calculating the amount of social security and railroad retirement benefits that may be subject to federal
income tax.
For taxable years beginning after December 31, 2012, certain non-corporate shareholders are subject to an
increased rate of tax on some or all of their net investment income, which will include dividends (other than exempt-interest dividends) received from the Fund, as well as net gain from the disposition of Fund shares. This tax will
generally apply to the extent net investment income, when added to other modified adjusted gross income, exceeds $200,000 for an unmarried individual, $250,000 for a married taxpayer filing a joint return (or a surviving spouse), or $125,000 for a
married individual filing a separate return. Shareholders should consult their tax advisors regarding the applicability of this tax in respect of their shares.
55
Sale of Shares
Gain or loss on the sale or other disposition of New VMTP Shares, if any (other than redemptions, the rules for which are described below) will generally be treated as capital gain or loss, except that a
portion of the amount received on the disposition of New VMTP Shares may be characterized as an accumulated but unpaid dividend subject to the rules described above. Gain or loss will generally be treated as long-term if the New VMTP Shares have
been held for more than one year and otherwise will be treated as short-term. Present law taxes both long-term and short-term capital gains of corporations at the rates applicable to ordinary income. For non-corporate taxpayers, however, under
current law short-term capital gains and ordinary income will be taxed at a maximum rate of 39.6% while long-term capital gains generally will be taxed at a maximum rate of 15% (or 20% for certain high income individuals). In addition, a 3.8% tax on
net investment income may apply to certain shareholders (see section above). Losses realized by a shareholder on the sale or exchange of shares of the Fund held for six months or less are disallowed to the extent of any distribution of
exempt-interest dividends received with respect to such shares, unless the Fund declares exempt-interest dividends on a daily basis in an amount equal to at least 90% of its net tax-exempt interest and distributes such dividends on a monthly or more
frequent basis. If not disallowed, such losses are treated as long-term capital losses to the extent of any distribution of long-term capital gain received (or amounts reported as undistributed capital gains) with respect to such shares. Any loss
realized on a sale or exchange of shares of the Fund will be disallowed to the extent those shares of the Fund are replaced by other substantially identical shares within a period of 61 days beginning 30 days before and ending 30 days after the date
of disposition of the original shares. In that event, the basis of the replacement shares will be adjusted to reflect the disallowed loss.
The Fund may, at its option, redeem New VMTP Shares in whole or in part, and is required to redeem New VMTP Shares to the extent required to maintain the Effective Leverage Ratio and the Asset Coverage.
Gain or loss, if any, resulting from a redemption will generally be taxed as capital gain or loss from a sale or exchange under section 302 of the Code rather than as a dividend, but only if the redemption distribution (a) is deemed not to
be essentially equivalent to a dividend, (b) is in complete redemption of a holders interest in the Fund, (c) is substantially disproportionate with respect to the owner, or (d) with respect to non-corporate holders, is in
partial liquidation of the Fund. For purposes of (a), (b) and (c) above, a holders ownership of the common shares and preferred shares will be taken into account. As in the case of a sale or exchange, a portion of the amount received
on the redemption of New VMTP Shares may be characterized as a dividend distribution subject to the rules discussed above.
Backup
Withholding
The Fund may be required to withhold, for U.S. federal income tax purposes, 28% of all distributions
(including exempt-interest dividends and redemption proceeds) payable to shareholders who fail to provide the Fund with their correct taxpayer identification number, who fail to make required certifications or who have been notified by the IRS that
they are subject to backup withholding (or if the Fund has been so notified). Certain corporate and other shareholders specified in the Code and the regulations thereunder are exempt from backup withholding. Backup withholding is not an additional
tax; any amounts withheld may be credited against the shareholders U.S. federal income tax liability provided the appropriate information is furnished to the IRS.
56
Investors are advised to consult their own tax advisors with respect to the application to
their own circumstances of the above-described general federal income taxation rules and with respect to other federal, state, local or foreign tax consequences to them before making an investment in New VMTP Shares.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REDEMPTION AND PAYING AGENT
The custodian of the assets of the Fund is State Street Bank and Trust Company (
State Street
), One Lincoln Street,
Boston, Massachusetts 02111. The custodian performs custodial, fund accounting and portfolio accounting services. The Funds transfer, shareholder services and dividend disbursing agent and redemption and paying agent with respect to the common
shares is also State Street, 250 Royall Street, Canton, Massachusetts 02021. State Street has subcontracted the transfer agency servicing of the Fund to Computershare, Inc. The redemption and paying agent for the New VMTP Shares also will be State
Street, Canton, Massachusetts.
LEGAL OPINIONS
Certain legal matters in connection with New VMTP Shares will be passed upon for the Fund by Vedder Price P.C., Chicago, Illinois. Vedder
Price P.C. may rely as to certain matters of Massachusetts law on the opinion of Bingham McCutchen LLP, Boston, Massachusetts.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The financial statements of the Fund appearing in the Funds Annual Report for the year ended October 31, 2012 are incorporated
by reference into this Information Memorandum. The financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm, as set forth in their report thereon and incorporated herein by reference.
Such financial statements are incorporated by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing. Ernst & Young LLP provides auditing services to the Fund. The principal business
address of Ernst & Young LLP is 155 North Wacker Drive, Chicago, Illinois 60606.
MISCELLANEOUS
To the extent that a holder of New VMTP Shares is directly or indirectly a beneficial owner of more than 10% of any class of the Funds outstanding shares (meaning for purposes of holders of New VMTP
Shares, more than 10% of the Funds outstanding Preferred Shares), such a 10% beneficial owner would be subject to the short-swing profit rules that are imposed pursuant to Section 16 of the Exchange Act (and related reporting
requirements). These rules generally provide that such a 10% beneficial owner may have to disgorge any profits made on purchases and sales, or sales and purchases, of the Funds Preferred Shares (including New VMTP Shares) within any six month
time period. Investors should consult with their own counsel to determine the applicability of these rules.
57
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Exchange Act and the 1940 Act and is required to file reports, proxy
statements and other information with the SEC. These documents can be accessed through the SECs Internet site at www.sec.gov or can be inspected and copied for a fee at the SECs public reference room, 100 F Street, N.E., Washington, D.C.
20549.
The Funds audited financial statements for the fiscal year ended October 31, 2012, together with the report
of Ernst & Young LLP thereon, are incorporated in this Information Memorandum by reference to its 2012 Annual Report. Copies of the Annual Report may be obtained from www.sec.gov or by visiting www.nuveen.com. Other than the financial
statements included in the Funds Annual Report, the information contained in, or that can be accessed through, the SECs or the Funds website is not part of this Information Memorandum.
If at any time the Fund is not subject to Section 13(a) or 15(d) of the Exchange Act, the Fund will furnish to holders of New VMTP
Shares and prospective investors, upon their request, the information specified in Rule 144A(d)(4) under the Securities Act in order to permit compliance with Rule 144A in connection with resales of New VMTP Shares.
Statements in this Information Memorandum about the contents of any contract or other document are not necessarily complete. In each
instance reference is made to the copy of any contract or other document attached hereto as an appendix or otherwise available upon request from the Fund, each such statement is qualified in all respects by reference to such document.
58
APPENDIX A
NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND
STATEMENT ESTABLISHING AND FIXING THE RIGHTS AND PREFERENCES OF VARIABLE RATE MUNIFUND TERM PREFERRED SHARES
Table of Contents
NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND
STATEMENT ESTABLISHING AND FIXING THE RIGHTS AND PREFERENCES OF VARIABLE RATE MUNIFUND TERM PREFERRED SHARES
Nuveen Municipal High Income Opportunity Fund (the
Fund
), a Massachusetts business trust, certifies that:
RECITALS
FIRST: The Fund is authorized under Article IV of the Funds Declaration of Trust, as amended (which, as
hereafter restated or amended from time to time, is herein called the
Declaration
), to issue an unlimited number of preferred shares, par value $.01 per share.
SECOND: Pursuant to the authority expressly vested in the Board of Trustees of the Fund by Article IV of the
Declaration, the Board of Trustees has, by resolution, authorized the issuance of a series of preferred shares, $.01 par value per share, of the Fund, such shares to be classified as Variable Rate MuniFund Term Preferred Shares
(
VMTP
), and such VMTP to be issued in one or more series (each such series, a
Series
). The terms related to a Series may be set forth in this Statement through an Appendix (as defined below) attached hereto or
in a separate Statement.
THIRD: The number of shares, preferences, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of redemption, of each Series of VMTP that are subject to this Statement are set forth in this Statement, as modified, amended or supplemented in the appendix to this Statement
(each an
Appendix
and collectively the
Appendices
) specifically relating to such Series as now or hereafter filed by the Fund with the Secretary of the Commonwealth of The Commonwealth of Massachusetts (each
such Series being referred to herein as a
Series of VMTP Shares
,
VMTP Shares of a Series
or a
Series
), and shares of all such Series being referred to herein individually as a
VMTP
Share
and collectively as the
VMTP Shares
).
DEFINITIONS
1.1
Definitions
. Unless the
context or use indicates another or different meaning or intent and except with respect to any Series as specifically provided in the Appendix applicable to such Series, each of the following terms when used in this Statement shall have the meaning
ascribed to it below, whether such term is used in the singular or plural and regardless of tense:
1940
Act
means the Investment Company Act of 1940, as amended, or any successor statute.
1940 Act Asset
Coverage
means asset coverage, as defined for purposes of Section 18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior securities of the Fund which are shares of stock for purposes of the 1940
Act, including all outstanding VMTP Shares (or such other asset coverage as may in the future be specified in or under the 1940 Act or by rule, regulation or order of United States Securities and Exchange Commission as the minimum asset coverage for
senior securities which are shares of stock of a closed-end investment company).
Additional Amount Payment
means a payment to a Holder of VMTP Shares of an amount which, when taken together with the aggregate amount of Taxable Allocations made to such Holder to which such Additional Amount Payment relates, would cause such Holders dividends in
dollars (after
federal income tax consequences) from the aggregate of such Taxable Allocations and the related Additional Amount Payment to be equal to the dollar amount of the dividends that would have been
received by such Holder if the amount of such aggregate Taxable Allocations would have been excludable (for federal income tax purposes) from the gross income of such Holder. Such Additional Amount Payment shall be calculated (i) without
consideration being given to the time value of money; (ii) assuming that no Holder of VMTP Shares is subject to the federal alternative minimum tax with respect to dividends received from the Fund; and (iii) assuming that each Taxable
Allocation and each Additional Amount Payment (except to the extent such Additional Amount Payment is reported as an exempt-interest dividend for purposes of Section 852(b)(5) of the Code) would be taxable in the hands of each Holder of VMTP
Shares at the maximum marginal regular federal individual income tax rate (taking account of the tax imposed under Section 1411 of the Code or any successor provision) applicable to ordinary income or net capital gain, as applicable, or the
maximum marginal regular federal corporate income tax rate applicable to ordinary income or net capital gain, as applicable, whichever is greater, in effect at the time such Additional Amount Payment is paid.
Adviser
means Nuveen Fund Advisors, Inc., a Delaware corporation, or such other entity as shall be then serving as the
investment adviser of the Fund, and shall include, as appropriate, any sub-adviser duly appointed by the Adviser.
Agent Member
means a Person with an account at the Securities Depository that holds one or more VMTP Shares through
the Securities Depository, directly or indirectly, for a Designated Owner and that will be authorized and instructed, directly or indirectly, by a Designated Owner to disclose information to the Redemption and Paying Agent with respect to such
Designated Owner.
Appendices
and
Appendix
shall have the respective meanings as set
forth in the Recitals of this Statement.
Applicable Spread
means, with respect to any Rate Period for any
Series of VMTP Shares, the percentage per annum set forth opposite the highest applicable credit rating most recently assigned to such Series by any Rating Agency in the table set forth directly below on the Rate Determination Date for such Rate
Period:
|
|
|
|
|
|
|
|
|
Long-Term Ratings*
|
|
|
|
Standard & Poors
|
|
Fitch
|
|
Applicable
Percentage**
|
|
AAA to AA
|
|
AAA to A+
|
|
|
1.15
|
%
|
AA-
|
|
A to A-
|
|
|
1.65
|
%
|
A+
|
|
BBB+ to BBB-
|
|
|
3.15
|
%
|
A
|
|
BB+ or lower***
|
|
|
6.15
|
%
|
*
|
And/or the equivalent ratings of an Other Rating Agency then rating the VMTP Shares utilizing the highest of the ratings of the Rating Agencies then rating the VMTP
Shares.
|
**
|
Unless an Increased Rate Period is in effect and is continuing, in which case the Applicable Spread shall be 6.15% for such period.
|
Asset Coverage
means asset coverage of a class of senior security which is a stock, as defined for
purposes of Section 18(h) of the 1940 Act as in effect on the date hereof, determined on the basis of values calculated as of a time within 48 hours (only including Business Days) next preceding the time of such determination.
2
Asset Coverage Cure Date
means, with respect to the failure by the Fund
to maintain Asset Coverage of at least 225% as of the close of business on a Business Day (as required by
Section 2.4(a)
hereof), the date that is thirty (30) calendar days following such Business Day.
Banks
shall have the meaning as set forth in
Section 2.18(a)
.
Below Investment Grade
means, with respect any Series of VMTP Shares and as of any date, the following ratings with
respect to each Rating Agency (to the extent it is a Rating Agency on such date):
(i) lower than BBB-, in the case of Fitch;
(ii) lower than an equivalent long-term credit rating to that set forth
in clause (i), in the case of any Other Rating Agency; and
(iii) unrated, if no Rating Agency is rating the VMTP Shares.
Board of Trustees
means the Board of Trustees of the Fund or any duly authorized committee thereof as permitted by
applicable law.
Business Day
means any day (a) other than a day on which commercial banks in The City
of New York, New York are required or authorized by law or executive order to close and (b) on which the New York Stock Exchange is not closed.
By-Laws
means the By-Laws of the Fund as amended from time to time.
Closed-End Funds
shall have the meaning as set forth in
Section 2.18(a)
.
Code
means the Internal Revenue Code of 1986, as amended.
Common Shares
means the common shares of beneficial interest, par value $.01 per share, of the Fund.
Custodian
means a bank, as defined in Section 2(a)(5) of the 1940 Act, that has the qualifications prescribed in
paragraph 1 of Section 26(a) of the 1940 Act, or such other entity as shall be providing custodian services to the Fund as permitted by the 1940 Act or any rule, regulation, or order thereunder, and shall include, as appropriate, any similarly
qualified sub-custodian duly appointed by the Custodian.
Custodian Agreement
means, with respect to any
Series, the Custodian Agreement by and between the Custodian and the Fund with respect to such Series.
Date of
Original Issue
means, with respect to any Series, the date specified as the Date of Original Issue for such Series in the Appendix for such Series.
Declaration
shall have the meaning as set forth in the Recitals of this Statement.
Default
shall mean a Dividend Default or a Redemption Default.
3
Deposit Securities
means, as of any date, any United States
dollar-denominated security or other investment of a type described below that either (i) is a demand obligation payable to the holder thereof on any Business Day or (ii) has a maturity date, mandatory redemption date or mandatory payment
date, on its face or at the option of the holder, preceding the relevant Redemption Date, Dividend Payment Date or other payment date in respect of which such security or other investment has been deposited or set aside as a Deposit Security:
(1) cash or any cash equivalent;
(2) any U.S. Government Obligation;
(3) any Municipal Security that has a credit rating from at least one NRSRO that is the
highest applicable rating generally ascribed by such NRSRO to Municipal Securities with substantially similar terms as of the date of this Statement (or such ratings future equivalent), including (A) any such Municipal Security that has
been pre-refunded by the issuer thereof with the proceeds of such refunding having been irrevocably deposited in trust or escrow for the repayment thereof and (B) any such fixed or variable rate Municipal Security that qualifies as an eligible
security under Rule 2a-7 under the 1940 Act;
(4) any investment in any money
market fund registered under the 1940 Act that qualifies under Rule 2a-7 under the 1940 Act, or similar investment vehicle described in Rule 12d1-1(b)(2) under the 1940 Act, that invests principally in Municipal Securities or U.S. Government
Obligations or any combination thereof; or
(5) any letter of credit from a
bank or other financial institution that has a credit rating from at least one NRSRO that is the highest applicable rating generally ascribed by such NRSRO to bank deposits or short-term debt of similar banks or other financial institutions as of
the date of this Statement (or such ratings future equivalent).
Designated Owner
means a Person in
whose name VMTP Shares of any Series are recorded as beneficial owner of such VMTP Shares by the Securities Depository, an Agent Member or other securities intermediary on the records of such Securities Depository, Agent Member or securities
intermediary, as the case may be.
Dividend Default
shall have the meaning as set forth in
Section 2.2(g)(i)
.
Dividend Payment Date
means, with respect to any Series, the first Business
Day of each calendar month that any shares of such Series are outstanding;
provided
,
however
, that with respect to any Series for which the first Dividend Period, as specified in the Appendix relating to such Series, is longer than one
month, the first Dividend Payment Date for such Series shall be the first Business Day of the calendar month immediately following the end of such Dividend Period.
Dividend Period
means, with respect to any Series, the Dividend Period for such Series set forth in the Appendix for such Series.
Dividend Rate
means, with respect to any Rate Period for a Series of VMTP Shares and subject to the adjustment
described in
Section 2.10(a)
hereof, the Index Rate for such Rate Period
plus
the Applicable Spread for such Rate Period;
provided
,
however
, that with respect to any Increased Rate Period, the Dividend Rate shall
mean the Increased Rate for such Increased Rate Period; and
provided further
that the Dividend Rate for any Rate Period shall in no event exceed the Maximum Rate.
4
Effective Leverage Ratio
shall have the meaning as set forth in
Section 2.4(d)
.
Effective Leverage Ratio Cure Date
shall have the meaning as set forth in
Section 2.5(b)(ii)(A)
.
Electronic Means
means email transmission, facsimile transmission or
other similar electronic means of communication providing evidence of transmission (but excluding online communications systems covered by a separate agreement) acceptable to the sending party and the receiving party, in any case if operative as
between any two parties, or, if not operative, by telephone (promptly confirmed by any other method set forth in this definition), which, in the case of notices to the Redemption and Paying Agent and the Custodian, shall be sent by such means to
each of its representatives set forth in the Redemption and Paying Agent Agreement and the Custodian Agreement, respectively.
Exchange Act
means the U.S. Securities Exchange Act of 1934, as amended.
Fitch
means Fitch Ratings, a part of the Fitch Group, which is jointly owned by Fimalac, S.A. and Hearst Corporation,
and any successor or successors thereto.
Fund
shall have the meaning as set forth in the Preamble to this
Statement.
Holder
means, with respect to the VMTP Shares of any Series or any other security issued by the
Fund, a Person in whose name such security is registered in the registration books of the Fund maintained by the Redemption and Paying Agent or otherwise.
Increased Rate
means, with respect to any Increased Rate Period for a Series of VMTP Shares, the Index Rate for such Rate Period
plus
an Applicable Spread of 6.15%.
Increased Rate Period
shall have the meaning as set forth in
Section 2.2(g)(i)
.
Index Rate
means, with respect to any Rate Period for a Series of VMTP Shares, the SIFMA Municipal Swap Index made
available by 3:00 p.m., New York City time, on the Rate Determination Date for such Rate Period.
Initial Rate
Period
means, with respect to the VMTP Shares of any Series, the period commencing on and including the Date of Original Issue thereof and ending on, and including, the next succeeding calendar day that is a Wednesday (or if such Wednesday
is not a Business Day, the next succeeding Business Day).
Liquidation Preference
means, with respect to
any Series, the amount specified as the liquidation preference per share for that Series in the Appendix for such Series.
Liquidity Account Initial Date
means, with respect to any Series, the date designated as the Liquidity Account Initial
Date in the Appendix for such Series.
Liquidity Account Investments
means Deposit Securities or any other
security or investment owned by the Fund that is rated not less than A3 by Moodys, A- by Standard and Poors, A- by Fitch or an equivalent rating by any other NRSRO (or any such ratings future equivalent).
Liquidity Requirement
shall have the meaning as set forth in
Section 2.11(b)
.
5
Mandatory Redemption Price
shall have the meaning as set forth in
Section 2.5(b)(i)(A)
.
Market Value
of any asset of the Fund means, for securities for which market
quotations are readily available, the market value thereof determined by an independent third-party pricing service designated from time to time by the Board of Trustees, which pricing service shall be Standard & Poors Securities
Evaluations, Inc./J. J. Kenny Co., Inc. (or any successor thereto), International Data Corporation (or any successor thereto) or such other independent third-party pricing service broadly recognized in the tax-exempt fund market. Market Value of any
asset shall include any interest accrued thereon. The pricing service values portfolio securities at the mean between the quoted bid and asked price or the yield equivalent when quotations are readily available. Securities for which quotations are
not readily available are valued at fair value as determined by the pricing service using methods that include consideration of: yields or prices of Municipal Securities of comparable quality, type of issue, coupon, maturity and rating; state of
issuance; indications as to value from dealers; and general market conditions. The pricing service may employ electronic data processing techniques or a matrix system, or both, to determine recommended valuations.
Maximum Rate
means 15% per annum.
Moodys
means Moodys Investors Service, Inc. and any successor or successors thereto.
Municipal Securities
means municipal securities as described under the heading Portfolio Composition in the prospectus or other offering document for a Series of VMTP
Shares.
Notice of Redemption
shall have the meaning as set forth in
Section 2.5(d)
.
Notice of Taxable Allocation
shall have the meaning as set forth in
Section 2.10(a)
.
NRSRO
means (a) each of Fitch, Moodys and Standard and Poors so long as such Person is a
nationally recognized statistical rating organization within the meaning of Section 3(a)(62) of the Exchange Act and (b) any other nationally recognized statistical rating organization within the meaning of Section 3(a)(62) of the
Exchange Act that is not an affiliated person (as defined in Section 2(a)(3) of the 1940 Act) of the Fund.
Optional Redemption Date
shall have the meaning as set forth in
Section 2.5(c)(i)
.
Optional Redemption Premium
means, with respect to any Series, the premium payable by the Fund upon the redemption of
VMTP Shares of such Series at the option of the Fund, as set forth in the Appendix for such Series.
Optional
Redemption Price
shall have the meaning as set forth in
Section 2.5(c)(i)
.
Other Rating
Agency
means each Rating Agency, if any, other than Fitch then providing a rating for the VMTP Shares pursuant to the request of the Fund.
Outstanding
means, as of any date with respect to VMTP Shares of any Series, the number of VMTP Shares of such Series theretofore issued by the Fund except (without duplication):
(a) any VMTP Shares of such Series theretofore cancelled or redeemed or
delivered to the Redemption and Paying Agent for cancellation or redemption in accordance with the terms hereof;
6
(b) any VMTP Shares of such Series as to
which the Fund shall have given a Notice of Redemption and irrevocably deposited with the Redemption and Paying Agent sufficient Deposit Securities to redeem such shares in accordance with
Section 2.5
hereof;
(c) any VMTP Shares of such Series as to which the Fund shall be the Holder or the
Designated Owner; and
(d) any VMTP Shares of such Series represented by any
certificate in lieu of which any new certificate has been executed and delivered by the Fund.
Person
means
and includes an individual, a partnership, a trust, a corporation, a limited liability company, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof.
Preferred Shares
means the authorized preferred shares of beneficial interest, par value $.01 per share, of the Fund,
including VMTP Shares of each Series, shares of any other series of such preferred shares now or hereafter issued by the Fund, and any other shares of beneficial interest hereafter authorized and issued by the Fund of a class having priority over
any other class as to distribution of assets or payments of dividends.
Purchase Agreement
means
(i) with respect to the initial Series of VMTP Shares issued pursuant to this Statement, the VMTP Purchase Agreement to be dated as of December 21, 2012 between the Fund and Banc of America Preferred Funding Corporation and (ii) with
respect to any subsequent Series of VMTP Shares, the purchase agreement or other similar agreement for the VMTP Shares of such Series (if any) specified in the Appendix for such Series.
Rate Determination Date
means, with respect to the Initial Rate Period for any Series of VMTP Shares, the day
immediately preceding the Date of Original Issue of such Series and, with respect to any Subsequent Rate Period for any Series of VMTP Shares, the last day of the immediately preceding Rate Period for such Series or, if such day is not a Business
Day, the next succeeding Business Day;
provided
,
however
, that the next succeeding Rate Determination Date will be determined without regard to any prior extension of a Rate Determination Date to a Business Day.
Rate Period
means, with respect to any Series of VMTP Shares, the Initial Rate Period and any Subsequent Rate Period
of the VMTP Shares of such Series.
Rating Agencies
means, as of any date and in respect of a Series of
VMTP Shares, (i) Fitch and (ii) any other NRSRO designated as a Rating Agency on such date in accordance with
Section 2.7
hereof, in each case (i) or (ii) above, to the extent it maintains a rating on the VMTP Shares
of such Series on such date and the Board of Trustees has not terminated its designation as a Rating Agency in accordance with
Section 2.7
hereof. Fitch has initially been designated as the Rating Agency for purposes of the VMTP Shares.
In the event that at any time any Rating Agency (i) ceases to be a Rating Agency for purposes of any Series of VMTP Shares and such Rating Agency has been replaced by an Other Rating Agency in accordance with
Section 2.7
hereof, any
references to any credit rating of such replaced Rating Agency in this Statement or any Appendix shall be deleted for purposes hereof as provided below and shall be deemed instead to be references to the equivalent credit rating of the Other Rating
Agency that has replaced such Rating Agency as of the most recent date on which such replacement Other Rating Agency published credit ratings for such Series of VMTP Shares or
7
(ii) designates a new rating definition for any credit rating of such Rating Agency with a corresponding replacement rating definition for such credit rating of such Rating Agency, any
references to such replaced rating definition of such Rating Agency contained in this Statement or any Appendix shall instead be deemed to be references to such corresponding replacement rating definition. In the event that at any time the
designation of any Rating Agency as a Rating Agency for purposes of any Series of VMTP Shares is terminated in accordance with
Section 2.7
hereof, any rating of such terminated Rating Agency, to the extent it would have been taken into
account in any of the provisions of this Statement or the Appendix for such Series, shall be disregarded, and only the ratings of the then-designated Rating Agencies for such Series shall be taken into account for purposes of this Statement and such
Appendix.
Rating Agency Guidelines
means the guidelines of any Rating Agency, as they may be amended or
modified from time to time, compliance with which is required to cause such Rating Agency to continue to issue a rating with respect to a Series of VMTP Shares for so long as such Series is Outstanding.
Ratings Event
shall have the meaning set forth in
Section 2.2(g)(i)
.
Redemption and Paying Agent
means, with respect to any Series, State Street Bank and Trust Company and its successors
or any other redemption and paying agent appointed by the Fund with respect to such Series.
Redemption and Paying
Agent Agreement
means, with respect to any Series, the Transfer Agency and Service Agreement dated October 7, 2002, as amended, by and among the Redemption and Paying Agent, the Fund and certain other Persons, as further amended by an
Amendment thereto dated February 24, 2011 relating to the VMTP Shares, and as the same may be amended, restated or modified from time to time, or any similar agreement between the Fund and any other redemption and paying agent appointed by the
Fund.
Redemption Date
shall have the meaning as set forth in
Section 2.5(d)
.
Redemption Default
shall have the meaning as set forth in
Section 2.2(g)(i)
.
Redemption Price
shall mean the Term Redemption Price, the Mandatory Redemption Price or the Optional Redemption
Price, as applicable.
Securities Act
means the U.S. Securities Act of 1933, as amended.
Securities Depository
shall mean The Depository Trust Company and its successors and assigns or any other securities
depository selected by the Fund that agrees to follow the procedures required to be followed by such securities depository as set forth in this Statement with respect to the VMTP Shares.
Series
and
Series of VMTP Shares
shall have the meanings as set forth in the Recitals of this
Statement.
SIFMA Municipal Swap Index
means the Securities Industry and Financial Markets Association
Municipal Swap Index, or such other weekly, high-grade index comprised of seven-day, tax-exempt variable rate demand notes produced by Municipal Market Data, Inc. or its successor, or as
8
otherwise designated by the Securities Industry and Financial Markets Association;
provided
,
however
, that if such index is no longer produced by Municipal Market Data, Inc. or its
successor, then SIFMA Municipal Swap Index shall mean (i) the S&P Weekly High Grade Municipal Index produced by Standard & Poors Financial Services LLC or its successors or (ii) if the S&P Weekly High Grade Municipal
Index is no longer produced, such other reasonably comparable index selected in good faith by the Board of Trustees of the Fund.
Standard & Poors
means Standard & Poors Ratings Services, a Standard & Poors Financial Services LLC business, and any successor or
successors thereto.
Statement
means this Statement Establishing and Fixing the Rights and Preferences of
Variable Rate MuniFund Term Preferred Shares, as it may be amended from time to time in accordance with its terms.
Subsequent Rate Period
means, with respect to any Series of VMTP Shares, the period consisting of seven days, but
adjusted in each case to reflect any changes when the regular day that is a Rate Determination Date is not a Business Day, from, and including, the first day following the Initial Rate Period of such Series to, and including, the next Rate
Determination Date for such Series and any period thereafter from, and including, the first day following a Rate Determination Date for shares of such Series to, and including, the next succeeding Rate Determination Date for shares of such Series.
Tax Event
shall have the meaning as set forth in
Section 2.2(g)(i)
.
Taxable Allocation
means, with respect to any Series, the allocation of any net capital gain or other income taxable
for regular federal individual income tax purposes to a dividend paid in respect of such Series.
Term Redemption
Amount
shall have the meaning as set forth in
Section 2.11(a)
.
Term Redemption Date
means, with respect to any Series, the date specified as the Term Redemption Date in the Appendix for such Series.
Term Redemption Liquidity Account
shall have the meaning as set forth in
Section 2.11(a)
.
Term Redemption Price
shall have the meaning as set forth in
Section 2.5(a)
.
U.S. Government Obligations
means direct obligations of the United States or of its agencies or instrumentalities that
are entitled to the full faith and credit of the United States and that, other than United States Treasury Bills, provide for the periodic payment of interest and the full payment of principal at maturity or call for redemption.
VMTP
shall have the meaning as set forth in the Recitals of this Statement.
VMTP Shares
shall have the meaning as set forth in the Recitals of this Statement.
VMTP Shares of a Series
shall have the meaning as set forth in the Recitals of this Statement.
Voting Period
shall have the meaning as set forth in
Section 2.6(b)(i)
.
9
With respect to any Series, any additional definitions specifically set forth in the
Appendix relating to such Series and any amendments to any definitions specifically set forth in the Appendix relating to such Series, as such Appendix may be amended from time to time, shall be incorporated herein and made part hereof by reference
thereto, but only with respect to such Series.
1.2
Interpretation
. The headings
preceding the text of Sections included in this Statement are for convenience only and shall not be deemed part of this Statement or be given any effect in interpreting this Statement. The use of the masculine, feminine or neuter gender or the
singular or plural form of words herein shall not limit any provision of this Statement. The use of the terms including or include shall in all cases herein mean including, without limitation or include,
without limitation, respectively. Reference to any Person includes such Persons successors and assigns to the extent such successors and assigns are permitted by the terms of any applicable agreement, and reference to a Person in a
particular capacity excludes such Person in any other capacity or individually. Reference to any agreement (including this Statement), document or instrument means such agreement, document or instrument as amended or modified and in effect from time
to time in accordance with the terms thereof and, if applicable, the terms hereof. Except as otherwise expressly set forth herein, reference to any law means such law as amended, modified, codified, replaced or re-enacted, in whole or in part,
including rules, regulations, enforcement procedures and any interpretations promulgated thereunder. Underscored references to Sections shall refer to those portions of this Statement. The use of the terms hereunder, hereof,
hereto and words of similar import shall refer to this Statement as a whole and not to any particular Article, Section or clause of this Statement.
1.3
Liability of Officers, Trustees and Shareholders
. The Declaration is on file with the Secretary
of the Commonwealth of The Commonwealth of Massachusetts, and an officer of the Fund has executed this Statement as an officer and not individually, and the obligations and rights set forth in this Statement are not binding upon any such officer, or
the trustees of the Fund or shareholders of the Fund, individually, but are binding upon the assets and property of the Fund.
TERMS APPLICABLE TO ALL SERIES OF
VARIABLE RATE MUNIFUND TERM PREFERRED SHARES
Except for such changes and amendments hereto with respect to a Series of VMTP Shares that are specifically contemplated by the Appendix relating to such Series, each Series of VMTP Shares shall have the
following terms:
2.1
Number of Shares;
Ranking
.
(a) The number of authorized shares constituting any Series of
VMTP Shares shall be as set forth with respect to such Series in the Appendix hereto relating to such Series. No fractional VMTP Shares shall be issued.
(b) The VMTP Shares of each Series shall rank on a parity with VMTP Shares of each other Series and with shares of any other series of Preferred Shares as to
the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Fund. The VMTP Shares of each Series shall have preference with respect to the payment of dividends and as to distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Fund over the Common Shares as set forth herein.
10
(c) No Holder of VMTP Shares shall have,
solely by reason of being such a Holder, any preemptive or other right to acquire, purchase or subscribe for any VMTP Shares or Common Shares or other securities of the Fund which it may hereafter issue or sell.
2.2
Dividends and Distributions
.
(a) The Holders of VMTP Shares of any Series shall be entitled to receive, when, as and
if declared by, or under authority granted by, the Board of Trustees, out of funds legally available therefor and in preference to dividends and other distributions on Common Shares, cumulative cash dividends and other distributions on each share of
such Series at the Dividend Rate for such Series, calculated as set forth herein, and no more. Dividends and other distributions on the VMTP Shares of any Series shall accumulate from the Date of Original Issue with respect to such Series. The
amount of dividends per share payable on VMTP Shares of a Series on any Dividend Payment Date shall equal the sum of the dividends accumulated but not yet paid for each Rate Period (or part thereof) in the related Dividend Period. The amount of
dividends per share of a Series accumulated for each such Rate Period (or part thereof) shall be computed by (i) multiplying the Dividend Rate in effect for VMTP Shares of such Series for such Rate Period (or part thereof) by a fraction, the
numerator of which shall be the actual number of days in such Rate Period (or part thereof) and the denominator of which shall be the actual number of days in the year in which such Rate Period (or such part thereof) occurs (365 or 366) and
(ii) multiplying the product determined pursuant to clause (i) by the Liquidation Preference for a share of such Series.
(b) Dividends on VMTP Shares of each Series with respect to any Dividend Period shall be declared to the Holders of such shares as their names shall appear
on the registration books of the Fund at the close of business on each day in such Dividend Period and shall be paid as provided in
Section 2.2(f)
hereof.
(c) (i) No full dividends and other distributions shall be declared or paid on shares of a Series of VMTP Shares for any Dividend Period or part thereof
unless full cumulative dividends and other distributions due through the most recent dividend payment dates therefor for all outstanding Preferred Shares (including shares of other Series of VMTP Shares) ranking on a parity with such Series of VMTP
Shares have been or contemporaneously are declared and paid through the most recent dividend payment dates therefor. If full cumulative dividends and other distributions due have not been declared and paid on all such outstanding Preferred Shares of
any series, any dividends and other distributions being declared and paid on VMTP Shares of a Series will be declared and paid as nearly pro rata as possible in proportion to the respective amounts of dividends and other distributions accumulated
but unpaid on each such series of Preferred Shares on the relevant dividend payment date for such series. Subject to
Section 2.10
hereof, and Section 2.4 of the Purchase Agreement, no Holders of VMTP Shares shall be entitled to any
dividends and other distributions, whether payable in cash, property or shares, in excess of full cumulative dividends and other distributions as provided in this
Section 2.2(c)(i)
on such VMTP Shares.
(ii) For so long as any VMTP Shares are Outstanding, the Fund shall not: (x) declare any dividend or other distribution (other than
a dividend or distribution paid in Common Shares) in respect of the Common Shares, (y) call for redemption, redeem, purchase or otherwise acquire for consideration any Common Shares, or (z) pay any proceeds of the liquidation of the Fund
in respect of the Common Shares, unless, in each case, (A) immediately thereafter, the Fund shall have 1940 Act Asset Coverage after deducting the amount of such dividend or distribution or redemption or
11
purchase price or liquidation proceeds, (B) all cumulative dividends and other distributions on all VMTP Shares and all other series of Preferred Shares ranking on a parity with the VMTP
Shares due on or prior to the date of the applicable dividend, distribution, redemption, purchase or acquisition shall have been declared and paid (or shall have been declared and Deposit Securities or sufficient funds (in accordance with the terms
of such Preferred Shares) for the payment thereof shall have been deposited irrevocably with the paying agent for such Preferred Shares) and (C) the Fund shall have deposited Deposit Securities pursuant to and in accordance with the
requirements of
Section 2.5(d)(ii)
hereof with respect to Outstanding VMTP Shares of any Series to be redeemed pursuant to
Section 2.5(a)
or
Section 2.5(b)
hereof for which a Notice of Redemption shall have been
given or shall have been required to be given in accordance with the terms hereof on or prior to the date of the applicable dividend, distribution, redemption, purchase or acquisition.
(iii) Any dividend payment made on VMTP Shares of a Series shall first be credited against the dividends and other distributions
accumulated with respect to the earliest Dividend Period for such Series for which dividends and other distributions have not been paid.
(d) Not later than 12:00 noon, New York City time, on the Dividend Payment Date for a Series of VMTP Shares, the Fund shall deposit with the Redemption and
Paying Agent Deposit Securities having an aggregate Market Value on such date sufficient to pay the dividends and other distributions that are payable on such Dividend Payment Date in respect of such Series. The Fund may direct the Redemption and
Paying Agent with respect to the investment or reinvestment of any such Deposit Securities so deposited prior to the Dividend Payment Date, provided that such investment consists exclusively of Deposit Securities and provided further that the
proceeds of any such investment will be available as same day funds at the opening of business on such Dividend Payment Date.
(e) All Deposit Securities paid to the Redemption and Paying Agent for the payment of
dividends payable on a Series of VMTP Shares shall be held in trust for the payment of such dividends by the Redemption and Paying Agent for the benefit of the Holders of such Series entitled to the payment of such dividends pursuant to
Section 2.2(f)
hereof. Any moneys paid to the Redemption and Paying Agent in accordance with the foregoing but not applied by the Redemption and Paying Agent to the payment of dividends, including interest earned on such moneys while so
held, will, to the extent permitted by law, be repaid to the Fund as soon as possible after the date on which such moneys were to have been so applied, upon request of the Fund.
(f) Dividends on VMTP Shares of a Series shall be paid on each Dividend Payment Date for
such Series to the Holders of shares of such Series as their names appear on the registration books of the Fund at the close of business on the day immediately preceding such Dividend Payment Date (or if such day is not a Business Day, the next
preceding Business Day). Dividends in arrears on VMTP Shares of a Series for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, to the Holders of shares of such Series as their
names appear on the registration books of the Fund on such date, not exceeding fifteen (15) calendar days preceding the payment date thereof, as may be fixed by the Board of Trustees. No interest or sum of money in lieu of interest will be
payable in respect of any dividend payment or payments on VMTP Shares of any Series which may be in arrears.
(g) (i) The Dividend Rate on a Series of VMTP Shares shall be adjusted to the Increased
Rate for each Increased Rate Period (as hereinafter defined). Subject to the cure provisions
12
of
Section 2.2(g)(iii)
hereof, a Rate Period with respect to a Series of VMTP Shares shall be deemed to be an
Increased Rate Period
if on the first day of such Rate
Period, (A) the Fund has failed to deposit with the Redemption and Paying Agent by 12:00 noon, New York City time, on a Dividend Payment Date for such Series, Deposit Securities (as a result of complying with
Section 2.2(c)
hereof
or otherwise) that will provide funds available to the Redemption and Paying Agent on such Dividend Payment Date sufficient to pay the full amount of any dividend on such Series payable on such Dividend Payment Date (a
Dividend
Default
) and such Dividend Default has not ended as contemplated by
Section 2.2(g)(ii)
hereof on or prior to such first day; (B) the Fund has failed to deposit with the Redemption and Paying Agent by 12:00 noon, New York
City time, on an applicable Redemption Date for such Series, Deposit Securities that will provide funds available to the Redemption and Paying Agent on such Redemption Date sufficient to pay the full amount of the Redemption Price payable in respect
of such Series on such Redemption Date (a
Redemption Default
) and such Redemption Default has not ended as contemplated by
Section 2.2(g)(ii)
hereof on or prior to such first day; (C) any Rating Agency has
withdrawn the credit rating required to be maintained with respect to such Series pursuant to
Section 2.7
hereof other than due to the Rating Agency ceasing to rate tax-exempt closed-end management investment companies generally and such
withdrawal is continuing; (D) a Ratings Event (as defined below) has occurred and is continuing with respect to such Series; or (E) (i) a court or other applicable governmental authority has made a final determination that for federal
tax purposes the VMTP Shares do not qualify as equity in the Fund and (ii) such determination results from an act or failure to act on the part of the Fund (a
Tax Event
). A
Ratings Event
shall be deemed to
exist with respect to any Series of VMTP Shares at any time such VMTP Shares have a long-term credit rating from at least one-half of the Rating Agencies designated at such time that is Below Investment Grade. For the avoidance of doubt, no
determination by any court or other applicable governmental authority that requires the Fund to make an Additional Amount Payment in respect of a Taxable Allocation shall be deemed to be a Tax Event hereunder.
(ii) Subject to the cure provisions of
Section 2.2(g)(iii)
hereof, a Dividend Default or a Redemption Default on a Series of
VMTP Shares shall end on the Business Day on which, by 12:00 noon, New York City time, an amount equal to all unpaid dividends on such Series and any unpaid Redemption Price on such Series shall have been deposited irrevocably in trust in same-day
funds with the Redemption and Paying Agent.
(iii) No Increased Rate Period for a Series of VMTP Shares with respect to any
Dividend Default or Redemption Default on such Series shall be deemed to have commenced if the amount of any dividend or any Redemption Price due in respect of such Series (if such Default is not solely due to the willful failure of the Fund) is
deposited irrevocably in trust, in same-day funds, with the Redemption and Paying Agent by 12:00 noon, New York City time, on a Business Day that is not later than three (3) Business Days after the applicable Dividend Payment Date or Redemption
Date for such Series with respect to which such Default occurred, together with an amount equal to the Increased Rate on such Series applied to the amount and period of such non-payment on such Series, determined as provided in
Section 2.2(a)
hereof.
2.3
Liquidation Rights
.
(a) In the event of any liquidation, dissolution or winding up of the affairs of the
Fund, whether voluntary or involuntary, the Holders of VMTP Shares shall be entitled to receive out of the assets of the Fund available for distribution to shareholders, after satisfying claims of creditors but before any distribution or payment
shall be made in respect of the Common Shares, a liquidation
13
distribution equal to the Liquidation Preference for such shares, plus an amount equal to all unpaid dividends and other distributions on such shares accumulated to (but excluding) the date fixed
for such distribution or payment on such shares (whether or not earned or declared by the Fund, but excluding interest thereon), and such Holders shall be entitled to no further participation in any distribution or payment in connection with any
such liquidation, dissolution or winding up.
(b) If, upon any liquidation,
dissolution or winding up of the affairs of the Fund, whether voluntary or involuntary, the assets of the Fund available for distribution among the Holders of all Outstanding VMTP Shares and any other outstanding Preferred Shares ranking on a parity
with the VMTP Shares shall be insufficient to permit the payment in full to such Holders of the Liquidation Preference of such VMTP Shares plus accumulated and unpaid dividends and other distributions on such shares as provided in
Section 2.3(a)
above and the amounts due upon liquidation with respect to such other Preferred Shares, then such available assets shall be distributed among the Holders of such VMTP Shares and such other Preferred Shares ratably in
proportion to the respective preferential liquidation amounts to which they are entitled. In connection with any liquidation, dissolution or winding up of the affairs of the Fund, whether voluntary or involuntary, unless and until the Liquidation
Preference on each Outstanding VMTP Share plus accumulated and unpaid dividends and other distributions on such shares as provided in
Section 2.3(a)
above have been paid in full to the Holders of such shares, no dividends, distributions
or other payments will be made on, and no redemption, purchase or other acquisition by the Fund will be made by the Fund in respect of, the Common Shares.
(c) Neither the sale of all or substantially all of the property or business of the Fund, nor the merger, consolidation or reorganization of the Fund into or
with any other business or statutory trust, corporation or other entity, nor the merger, consolidation or reorganization of any other business or statutory trust, corporation or other entity into or with the Fund shall be a dissolution, liquidation
or winding up, whether voluntary or involuntary, for the purpose of this
Section 2.3
.
2.4
Coverage & Leverage Tests
.
(a)
Asset Coverage Requirement
. For so long as any VMTP
Shares of any Series are Outstanding, the Fund shall have Asset Coverage of at least 225% as of the close of business on each Business Day. If the Fund shall fail to maintain such Asset Coverage as of any time as of which such compliance is required
to be determined as aforesaid, the provisions of
Section 2.5(b)(i)
hereof shall be applicable, which provisions to the extent complied with shall constitute the sole remedy for the Funds failure to comply with the provisions of
this
Section 2.4(a)
.
(b)
Calculation of Asset
Coverage
. For purposes of determining whether the requirements of
Section 2.4(a)
hereof are satisfied, (i) no VMTP Shares of any Series or other Preferred Shares shall be deemed to be Outstanding for
purposes of any computation required by
Section 2.4(a)
hereof if, prior to or concurrently with such determination, sufficient Deposit Securities or other sufficient funds (in accordance with the terms of such Series or other Preferred
Shares) to pay the full redemption price for such Series or other Preferred Shares (or the portion thereof to be redeemed) shall have been deposited in trust with the paying agent for such Series or other Preferred Shares and the requisite notice of
redemption for such Series or other Preferred Shares (or the portion thereof to be redeemed) shall have been given, and (ii) the Deposit Securities or other sufficient funds that shall have been so deposited with the applicable paying agent
shall not be included as assets of the Fund for purposes of such computation.
14
(c)
Effective Leverage Ratio
Requirement
. For so long as VMTP Shares of any Series are Outstanding, the Effective Leverage Ratio shall not exceed 45% as of the close of business on any Business Day; provided, however, in the event that the Funds
Effective Leverage Ratio exceeds 45% on any Business Day solely by reason of fluctuations in the market value of the Funds portfolio securities, the Effective Leverage Ratio shall not exceed 46% on such Business Day. If the Effective Leverage
Ratio shall exceed the applicable percentage provided in the preceding sentence as of any time as of which such compliance is required to be determined as aforesaid, the provisions of
Section 2.5(b)(ii)
hereof shall be applicable, which
provisions to the extent complied with shall constitute the sole remedy for the Funds failure to comply with the provisions of this
Section 2.4(c)
.
(d)
Calculation of Effective Leverage Ratio
. For purposes of determining whether the requirements of
Section 2.4(c)
hereof are satisfied, the
Effective Leverage Ratio
on any date shall mean the quotient of:
(i) The sum of (A) the aggregate liquidation preference of the Funds senior securities (as that term is defined in the 1940 Act) that
are stock for purposes of the 1940 Act, excluding, without duplication, (1) any such senior securities for which the Fund has issued a notice of redemption and either has delivered Deposit Securities or sufficient funds (in accordance with the
terms of such senior securities) to the paying agent for such senior securities or otherwise has adequate Deposit Securities or sufficient funds on hand for the purpose of such redemption and (2) any such senior securities that are to be
redeemed with net proceeds from the sale of the VMTP Shares, for which the Fund has delivered Deposit Securities or sufficient funds (in accordance with the terms of such senior securities) to the paying agent for such senior securities or otherwise
has adequate Deposit Securities or sufficient funds on hand for the purpose of such redemption; (B) the aggregate principal amount of the Funds senior securities representing indebtedness (as that term is defined in the 1940
Act); and (C) the aggregate principal amount of floating rate securities not owned by the Fund that correspond to the associated inverse floating rate securities owned by the Fund;
divided by
(ii) The sum of (A) the Market Value of the Funds total assets (including
amounts attributable to senior securities, but excluding any assets consisting of Deposit Securities or funds referred to in clauses (A)(1) and A(2) of
Section 2.4(d)(i)
above), less the amount of the Funds accrued liabilities
(other than liabilities for the aggregate principal amount of senior securities representing indebtedness, including floating rate securities), and (B) the aggregate principal amount of floating rate securities not owned by the Fund that
correspond to the associated inverse floating rate securities owned by the Fund.
2.5
Redemption
. Each Series of
VMTP Shares shall be subject to redemption by the Fund as provided below:
(a)
Term Redemption
. The Fund shall redeem all VMTP Shares
of a Series on the Term Redemption Date for such Series, at a price per share equal to the Liquidation Preference per share of such Series plus an amount equal to all unpaid dividends and other distributions on such share of such Series accumulated
from and including the Date of Original Issue to (but excluding) the Term Redemption Date for such Series (whether or not earned or declared by the Fund, but excluding interest thereon) (the
Term Redemption Price
).
(b)
Asset Coverage and Effective Leverage Ratio Mandatory Redemption
.
(i)
Asset Coverage Mandatory Redemption
. (A) If the
Fund fails to comply with the Asset Coverage requirement as provided in
Section 2.4(a)
hereof as of any time as of
15
which such compliance is required to be determined in accordance with such
Section 2.4(a)
and such failure is not cured as of the Asset Coverage Cure Date other than as a result of
the redemption required by this
Section 2.5(b)(i)
, the Fund shall, to the extent permitted by the 1940 Act and Massachusetts law, by the close of business on the Business Day next following such Asset Coverage Cure Date, cause a notice
of redemption to be issued, and cause to be deposited Deposit Securities or other sufficient funds in trust with the Redemption and Paying Agent or other applicable paying agent, in each case in accordance with the terms of the Preferred Shares to
be redeemed, for the redemption of a sufficient number of Preferred Shares, which at the Funds sole option (to the extent permitted by the 1940 Act and Massachusetts law) may include any number or proportion of VMTP Shares of any Series, to
enable it to meet the requirements of
Section 2.5(b)(i)(B)
hereof. In the event that any VMTP Shares of a Series then Outstanding are to be redeemed pursuant to this
Section 2.5(b)(i)
, the Fund shall redeem such shares at a
price per share equal to the Liquidation Preference per share of such Series plus an amount equal to all unpaid dividends and other distributions on such share of such Series accumulated from and including the Date of Original Issue to (but
excluding) the date fixed for such redemption by the Board of Trustees (whether or not earned or declared by the Fund, but excluding interest thereon) (the
Mandatory Redemption Price
).
(B) On the Redemption Date for a redemption contemplated by
Section 2.5(b)(i)(A)
hereof, the Fund shall redeem at the Mandatory Redemption Price, out of funds legally available therefor, such number of Preferred Shares (which may include at the sole option of the Fund any number or proportion of
VMTP Shares of any Series) as shall be equal to the lesser of (x) the minimum number of Preferred Shares, the redemption of which, if deemed to have occurred immediately prior to the opening of business on the Asset Coverage Cure Date, would
result in the Fund having Asset Coverage on such Asset Coverage Cure Date of at least 225% (provided, however, that if there is no such minimum number of VMTP Shares and other Preferred Shares the redemption or retirement of which would have such
result, all VMTP Shares and other Preferred Shares then outstanding shall be redeemed), and (y) the maximum number of Preferred Shares that can be redeemed out of funds expected to be legally available therefor in accordance with the
Declaration and applicable law. Notwithstanding the foregoing, in the event that Preferred Shares are redeemed pursuant to this
Section 2.5(b)(i)
, the Fund may at its sole option, but is not required to, redeem a sufficient number of
VMTP Shares of any Series pursuant to this
Section 2.5(b)(i)
that, when aggregated with other Preferred Shares redeemed by the Fund, would result, if deemed to have occurred immediately prior to the opening of business on the Asset
Coverage Cure Date, in the Fund having Asset Coverage on such Asset Coverage Cure Date of up to and including 250%. The Fund shall effect such redemption on the date fixed by the Fund therefor, which date shall not be later than thirty
(30) calendar days after such Asset Coverage Cure Date, except that if the Fund does not have funds legally available for the redemption of all of the required number of VMTP Shares and other Preferred Shares which have been designated to be
redeemed or the Fund otherwise is unable to effect such redemption on or prior to thirty (30) calendar days after such Asset Coverage Cure Date, the Fund shall redeem those VMTP Shares and other Preferred Shares which it was unable to redeem on
the earliest practicable date on which it is able to effect such redemption. If fewer than all of the Outstanding VMTP Shares of a Series are to be redeemed pursuant to this
Section 2.5(b)(i)
, the number of VMTP Shares of such Series to
be redeemed shall be redeemed (A) pro rata among the Outstanding shares of such Series, (B) by lot or (C) in such other manner as the Board of Trustees may determine to be fair and equitable that is in accordance with the 1940 Act;
provided, in each such case, that such method of redemption as set forth in clause (A), (B) or (C) of this
Section 2.5(b)(i)(B)
shall be subject to any applicable procedures established by the Securities Depository.
16
(ii)
Effective Leverage Ratio Mandatory
Redemption.
(A) If (x) the Fund fails to comply with the Effective Leverage Ratio requirement as provided in
Section 2.4(c)
hereof as of any time as of which such compliance is required to be
determined in accordance with such
Section 2.4(c)
, (y) with respect to the initial Series of VMTP Shares issued pursuant to this Statement, the Fund fails to comply with the Effective Leverage Ratio requirement determined as set
forth in Section 6.13 of the Purchase Agreement applicable to such Series if such requirement shall still be in effect in accordance with the terms of such Purchase Agreement, or (z) with respect to any other Series of VMTP Shares issued
pursuant to the Statement, the Fund fails to comply with any additional requirements relating to the determination of the Effective Leverage Ratio requirement determined pursuant to the Purchase Agreement or Appendix applicable to such Series and,
in any such case, such failure is not cured as of the close of business on the date that is seven Business Days following the Business Day on which such non-compliance is first determined (the
Effective Leverage Ratio Cure Date
)
other than as a result of the redemption required by this
Section 2.5(b)(ii)
, the Fund shall not later than the close of business on the Business Day next following the Effective Leverage Ratio Cure Date cause the Effective Leverage
Ratio (determined in accordance with the requirements applicable to the determination of the Effective Leverage Ratio under this Statement, and under the Appendix and Purchase Agreement for any applicable Series of VMTP Shares in respect of which
the Effective Leverage Ratio is being determined) to not exceed the Effective Leverage Ratio required under
Section 2.4(c)
hereof as so determined, by (x) engaging in transactions involving or relating to the floating rate
securities not owned by the Fund and/or the inverse floating rate securities owned by the Fund, including the purchase, sale or retirement thereof, (y) to the extent permitted by the 1940 Act and Massachusetts law, cause a notice of redemption
to be issued, and cause to be deposited Deposit Securities or other sufficient funds in trust with the Redemption and Paying Agent or other applicable paying agent, in each case in accordance with the terms of the Preferred Shares to be redeemed,
for the redemption at the redemption price specified in the terms of such Preferred Shares of a sufficient number of Preferred Shares, which at the Funds sole option (to the extent permitted by the 1940 Act and Massachusetts law) may include
any number or proportion of VMTP Shares of any Series, or (z) engaging in any combination of the actions contemplated by clauses (x) and (y) of this sentence of
Section 2.5(b)(ii)(A)
. In the event that any VMTP Shares of a
Series are to be redeemed pursuant to clause (y) of the penultimate sentence of this
Section 2.5(b)(ii)(A)
, the Fund shall redeem such VMTP Shares at a price per VMTP Share equal to the Mandatory Redemption Price.
(B) On the Redemption Date for a redemption contemplated by clause (y) of the
penultimate sentence of
Section 2.5(b)(ii)(A)
hereof, the Fund shall not redeem more than the maximum number of Preferred Shares that can be redeemed out of funds expected to be legally available therefor in accordance with the
Declaration and applicable law. If the Fund is unable to redeem the required number of VMTP Shares and other Preferred Shares which have been designated to be redeemed in accordance with clause (y) of the penultimate sentence of
Section 2.5(b)(ii)(A)
hereof due to the unavailability of legally available funds, the Fund shall redeem those VMTP Shares and other Preferred Shares which it was unable to redeem on the earliest practicable date on which it is able to
effect such redemption. If fewer than all of the Outstanding VMTP Shares of a Series are to be redeemed pursuant to clause (y) of the penultimate sentence of
Section 2.5(b)(ii)(A)
hereof , the number of VMTP Shares of such Series to
be redeemed shall be redeemed (A) pro rata among the Outstanding shares of such Series, (B) by lot or (C) in such other manner as the Board of Trustees may determine to be fair and equitable that is in accordance with the 1940 Act;
provided, in each such case, that such method of redemption as set forth in clause (A), (B) or (C) of this
Section 2.5(b)(ii)(B)
shall be subject to any applicable procedures established by the Securities Depository.
17
(c)
Optional Redemption
.
(i) Subject to the provisions of
Section 2.5(c)(ii)
hereof, the Fund may at
its option on any Business Day (an
Optional Redemption Date
) redeem in whole or from time to time in part the Outstanding VMTP Shares of any Series, at a redemption price per VMTP Share (the
Optional Redemption
Price
) equal to (x) the Liquidation Preference per VMTP Share of such Series
plus
(y) an amount equal to all unpaid dividends and other distributions on such VMTP Share of such Series accumulated from and including the
Date of Original Issue to (but excluding) the Optional Redemption Date (whether or not earned or declared by the Fund, but excluding interest thereon)
plus
(z) the Optional Redemption Premium per share (if any) that is applicable to an
optional redemption of VMTP Shares of such Series that is effected on such Optional Redemption Date as set forth in the Appendix relating to such Series.
(ii) If fewer than all of the outstanding VMTP Shares of a Series are to be redeemed pursuant to
Section 2.5(c)(i)
hereof, the shares of such
Series to be redeemed shall be selected either (A) pro rata among the Holders of such Series, (B) by lot or (C) in such other manner as the Board of Trustees may determine to be fair and equitable. Subject to the provisions of this
Statement and applicable law, the Board of Trustees will have the full power and authority to prescribe the terms and conditions upon which VMTP Shares will be redeemed pursuant to this
Section 2.5(c)
from time to time.
(iii) The Fund may not on any date deliver a Notice of Redemption pursuant to
Section 2.5(d)
hereof in respect of a redemption contemplated to be effected pursuant to this
Section 2.5(c)
unless on such date the Fund has available Deposit Securities for the Optional Redemption Date contemplated by such
Notice of Redemption having a Market Value not less than the amount (including any applicable premium) due to Holders of VMTP Shares by reason of the redemption of such VMTP Shares on such Optional Redemption Date.
(d)
Procedures for Redemption
.
(i) If the Fund shall determine or be required to redeem, in whole or in part, VMTP
Shares of a Series pursuant to
Section 2.5(a), (b)
or
(c)
hereof, the Fund shall deliver a notice of redemption (the
Notice of Redemption
), by overnight delivery, by first class mail, postage prepaid
or by Electronic Means to Holders thereof, or request the Redemption and Paying Agent, on behalf of the Fund, to promptly do so by overnight delivery, by first class mail, postage prepaid or by Electronic Means. A Notice of Redemption shall be
provided not more than forty-five (45) calendar days prior to the date fixed for redemption and not less than ten (10) Business Days prior to the date fixed for redemption pursuant to
Section 2.5(c)
hereof in such Notice of
Redemption (the
Redemption Date
). Each such Notice of Redemption shall state: (A) the Redemption Date; (B) the Series and number of VMTP Shares to be redeemed; (C) the CUSIP number for VMTP Shares of such Series;
(D) the applicable Redemption Price on a per share basis; (E) if applicable, the place or places where the certificate(s) for such shares (properly endorsed or assigned for transfer, if the Board of Trustees requires and the Notice of
Redemption states) are to be surrendered for payment of the Redemption Price; (F) that dividends on the VMTP Shares to be redeemed will cease to accumulate from and after such Redemption Date; and (G) the provisions of this Statement under
which such redemption is made. If fewer than all VMTP Shares held by any Holder are to be redeemed, the Notice of Redemption delivered to such Holder shall also specify the number of VMTP Shares to be redeemed from such Holder and, if applicable,
the method of determining such number. The Fund may provide in any
18
Notice of Redemption relating to a redemption contemplated to be effected pursuant to this Statement that such redemption is subject to one or more conditions precedent and that the Fund shall
not be required to effect such redemption unless each such condition has been satisfied at the time or times and in the manner specified in such Notice of Redemption. No defect in the Notice of Redemption or delivery thereof shall affect the
validity of redemption proceedings, except as required by applicable law.
(ii) If the Fund shall give a Notice of Redemption, then at any time from and after the
giving of such Notice of Redemption and prior to 12:00 noon, New York City time, on the Redemption Date (so long as any conditions precedent to such redemption have been met or waived by the Fund), the Fund shall (A) deposit with the Redemption
and Paying Agent Deposit Securities having an aggregate Market Value on the date thereof no less than the Redemption Price of the VMTP Shares to be redeemed on the Redemption Date and (B) give the Redemption and Paying Agent irrevocable
instructions and authority to pay the applicable Redemption Price to the Holders of the VMTP Shares called for redemption on the Redemption Date. The Fund may direct the Redemption and Paying Agent with respect to the investment of any Deposit
Securities consisting of cash so deposited prior to the Redemption Date, provided that the proceeds of any such investment shall be available at the opening of business on the Redemption Date as same day funds. Notwithstanding the provisions of
clause (A) of the preceding sentence, if the Redemption Date is the Term Redemption Date, then such deposit of Deposit Securities (which may come in whole or in part from the Term Redemption Liquidity Account) shall be made no later than
fifteen (15) calendar days prior to the Term Redemption Date.
(iii) Upon
the date of the deposit of such Deposit Securities, all rights of the Holders of the VMTP Shares so called for redemption shall cease and terminate except the right of the Holders thereof to receive the Redemption Price thereof and such VMTP Shares
shall no longer be deemed Outstanding for any purpose whatsoever (other than (A) the transfer thereof prior to the applicable Redemption Date and (B) the accumulation of dividends thereon in accordance with the terms hereof up to (but
excluding) the applicable Redemption Date, which accumulated dividends, unless previously declared and paid as contemplated by the last sentence of
Section 2.5(d)(vi)
below, shall be payable only as part of the applicable Redemption
Price on the Redemption Date). The Fund shall be entitled to receive, promptly after the Redemption Date, any Deposit Securities in excess of the aggregate Redemption Price of the VMTP Shares called for redemption on the Redemption Date. Any Deposit
Securities so deposited that are unclaimed at the end of three hundred sixty-five (365) calendar days from the Redemption Date shall, to the extent permitted by law, be repaid to the Fund, after which the Holders of the VMTP Shares so called
for redemption shall look only to the Fund for payment of the Redemption Price thereof. The Fund shall be entitled to receive, from time to time after the Redemption Date, any interest on the Deposit Securities so deposited.
(iv) On or after the Redemption Date, each Holder of VMTP Shares in certificated form (if
any) that are subject to redemption shall surrender the certificate(s) evidencing such VMTP Shares to the Fund at the place designated in the Notice of Redemption and shall then be entitled to receive the Redemption Price for such VMTP Shares,
without interest, and, in the case of a redemption of fewer than all the VMTP Shares represented by such certificate(s), a new certificate representing the VMTP Shares that were not redeemed.
(v) Notwithstanding the other provisions of this
Section 2.5
, except as
otherwise required by law, the Fund shall not redeem any VMTP Shares or other series of Preferred
19
Shares ranking on a parity with the VMTP Shares with respect to dividends and other distributions unless all accumulated and unpaid dividends and other distributions on all Outstanding VMTP
Shares and such other series of Preferred Shares for all applicable past dividend periods (whether or not earned or declared by the Fund) (x) shall have been or are contemporaneously paid or (y) shall have been or are contemporaneously
declared and Deposit Securities or sufficient funds (in accordance with the terms of such VMTP Shares or other Preferred Shares) for the payment of such dividends and other distributions shall have been or are contemporaneously deposited with the
Redemption and Paying Agent or other applicable paying agent for such VMTP Shares or other Preferred Shares in accordance with the terms of such VMTP Shares or other Preferred Shares,
provided
,
however
, that the foregoing shall not
prevent the purchase or acquisition of Outstanding VMTP Shares pursuant to an otherwise lawful purchase or exchange offer made on the same terms to Holders of all Outstanding VMTP Shares and any such other series of Preferred Shares for which all
accumulated and unpaid dividends and other distributions have not been paid.
(vi) To the extent that any redemption for which Notice of Redemption has been provided
is not made by reason of the absence of legally available funds therefor in accordance with the Declaration, the Statement, and applicable law, such redemption shall be made as soon as practicable to the extent such funds become available. In the
case of any redemption pursuant to
Section 2.5(c)
hereof, no Redemption Default shall be deemed to have occurred if the Fund shall fail to deposit in trust with the Redemption and Paying Agent the Redemption Price with respect to any
shares where (1) the Notice of Redemption relating to such redemption provided that such redemption was subject to one or more conditions precedent and (2) any such condition precedent shall not have been satisfied at the time or times and
in the manner specified in such Notice of Redemption. Notwithstanding the fact that a Notice of Redemption has been provided with respect to any VMTP Shares, dividends may be declared and paid on such VMTP Shares in accordance with their terms if
Deposit Securities for the payment of the Redemption Price of such VMTP Shares shall not have been deposited in trust with the Redemption and Paying Agent for that purpose.
(e)
Redemption and Paying Agent as Trustee of Redemption Payments by Fund
. All Deposit Securities transferred to the Redemption
and Paying Agent for payment of the Redemption Price of VMTP Shares called for redemption shall be held in trust by the Redemption and Paying Agent for the benefit of Holders of VMTP Shares so to be redeemed until paid to such Holders in accordance
with the terms hereof or returned to the Fund in accordance with the provisions of
Section 2.5(d)(iii)
above.
(f)
Compliance With Applicable Law
. In effecting any
redemption pursuant to this
Section 2.5
, the Fund shall use its best efforts to comply with all applicable conditions precedent to effecting such redemption under the 1940 Act and any applicable Massachusetts law, but shall effect no
redemption except in accordance with the 1940 Act and any applicable Massachusetts law.
(g)
Modification of Redemption Procedures
. Notwithstanding
the foregoing provisions of this
Section 2.5
, the Fund may, in its sole discretion and without a shareholder vote, modify the procedures set forth above with respect to notification of redemption for the VMTP Shares, provided that such
modification does not materially and adversely affect the Holders of the VMTP Shares or cause the Fund to violate any applicable law, rule or regulation; and provided further that no such modification shall in any way alter the rights or obligations
of the Redemption and Paying Agent without its prior consent.
20
2.6
Voting
Rights
.
(a)
One Vote Per VMTP Share
. Except
as otherwise provided in the Declaration, the Statement, or as otherwise required by law, (i) each Holder of VMTP Shares shall be entitled to one vote for each VMTP Share held by such Holder on each matter submitted to a vote of shareholders of
the Fund, and (ii) the holders of outstanding Preferred Shares, including Outstanding VMTP Shares, and Common Shares shall vote together as a single class;
provided
,
however
, that the holders of outstanding Preferred Shares,
including Outstanding VMTP Shares, shall be entitled, as a class, to the exclusion of the Holders of all other securities and Common Shares of the Fund, to elect two trustees of the Fund at all times. Subject to
Section 2.6(b)
hereof,
the Holders of outstanding Common Shares and Preferred Shares, including VMTP Shares, voting together as a single class, shall elect the balance of the trustees.
(b)
Voting For Additional Trustees
.
(i)
Voting Period
. During any period in which any one or more of the conditions described in clauses (A) or (B) of
this
Section 2.6(b)(i)
shall exist (such period being referred to herein as a
Voting Period
), the number of trustees constituting the Board of Trustees shall be automatically increased by the smallest number that, when
added to the two trustees elected exclusively by the Holders of Preferred Shares, including VMTP Shares, would constitute a majority of the Board of Trustees as so increased by such smallest number; and the Holders of Preferred Shares, including
VMTP Shares, shall be entitled, voting as a class on a one-vote-per-share basis (to the exclusion of the Holders of all other securities and classes of capital stock of the Fund), to elect such smallest number of additional trustees, together with
the two trustees that such Holders are in any event entitled to elect. A Voting Period shall commence:
(A) if, at the close of business on any dividend payment date for any outstanding
Preferred Shares including any Outstanding VMTP Shares, accumulated dividends (whether or not earned or declared) on such outstanding Preferred Shares equal to at least two (2) full years dividends shall be due and unpaid and sufficient
cash or specified securities shall not have been deposited with the Redemption and Paying Agent or other applicable paying agent for the payment of such accumulated dividends; or
(B) if at any time Holders of Preferred Shares are otherwise entitled under the 1940 Act
to elect a majority of the Board of Trustees.
Upon the termination of a Voting Period, the voting rights described in this
Section 2.6(b)(i)
shall cease, subject always, however, to the revesting of such voting rights in the Holders of Preferred Shares upon the further occurrence of any of the events described in this
Section 2.6(b)(i)
.
(ii)
Notice of Special Meeting
. As soon as
practicable after the accrual of any right of the Holders of Preferred Shares to elect additional trustees as described in
Section 2.6(b)(i)
hereof, the Fund shall call a special meeting of such Holders and notify the Redemption and
Paying Agent and/or such other Person as is specified in the terms of such Preferred Shares to receive notice (i) by mailing or delivery by Electronic Means or (ii) in such other manner and by such other means as are specified in the terms
of such Preferred Shares, a notice of such special meeting to such Holders, such meeting to be held not less than ten (10) nor more than thirty (30) calendar days after the date of the delivery by Electronic Means or mailing of such notice
or the delivery of such notice by such other
21
means as are described in clause (ii) above. If the Fund fails to call such a special meeting, it may be called at the expense of the Fund by any such Holder on like notice. The record date
for determining the Holders of Preferred Shares entitled to notice of and to vote at such special meeting shall be the close of business on the fifth (5
th
) Business Day preceding the calendar day on which such notice is mailed or otherwise delivered. At any such
special meeting and at each meeting of Holders of Preferred Shares held during a Voting Period at which trustees are to be elected, such Holders, voting together as a class (to the exclusion of the Holders of all other securities and classes of
capital stock of the Fund), shall be entitled to elect the number of trustees prescribed in
Section 2.6(b)(i)
hereof on a one-vote-per-share basis.
(iii)
Terms of Office of Existing Trustees
. The terms of office of the incumbent trustees of the Fund at the time of a special
meeting of Holders of Preferred Shares to elect additional trustees in accordance with
Section 2.6(b)(i)
hereof shall not be affected by the election at such meeting by the Holders of VMTP Shares and such other Holders of Preferred
Shares of the number of trustees that they are entitled to elect, and the trustees so elected by the Holders of VMTP Shares and such other Holders of Preferred Shares, together with the two (2) trustees elected by the Holders of Preferred
Shares in accordance with
Section 2.6(a)
hereof and the remaining trustees elected by the holders of the Common Shares and Preferred Shares, shall constitute the duly elected trustees of the Fund.
(iv)
Terms of Office of Certain Trustees to Terminate Upon Termination of Voting
Period
. Simultaneously with the termination of a Voting Period, the terms of office of the additional trustees elected by the Holders of the Preferred Shares pursuant to
Section 2.6(b)(i)
hereof shall
terminate, the remaining trustees shall constitute the trustees of the Fund and the voting rights of the Holders of Preferred Shares to elect additional trustees pursuant to
Section 2.6(b)(i)
hereof shall cease, subject to the provisions
of the last sentence of such
Section 2.6(b)(i)
.
(c)
Holders of VMTP
Shares to Vote on Certain Matters
.
(i)
Certain Amendments Requiring
Approval of VMTP Shares
. Except as otherwise permitted by the terms of this Statement, so long as any VMTP Shares are Outstanding, the Fund shall not, without the affirmative vote or consent of the Holders of at least a
majority of the VMTP Shares of all Series Outstanding at the time, voting together as a separate class, amend, alter or repeal the provisions of the Declaration, or this Statement, whether by merger, consolidation or otherwise, so as to materially
and adversely affect any preference, right or power of such VMTP Shares or the Holders thereof;
provided
,
however
, that (i) a change in the capitalization of the Fund in accordance with
Section 2.8
hereof shall not be
considered to materially and adversely affect the rights and preferences of the VMTP Shares, and (ii) a division of a VMTP Share shall be deemed to materially and adversely affect such preferences, rights or powers only if the terms of such
division materially and adversely affect the Holders of the VMTP Shares. For purposes of the foregoing, no matter shall be deemed to materially and adversely affect any preference, right or power of a VMTP Share of any Series or the Holder thereof
unless such matter (i) alters or abolishes any preferential right of such VMTP Share, or (ii) creates, alters or abolishes any right in respect of redemption of such VMTP Share (other than solely as a result of a division of a VMTP Share).
So long as any VMTP Shares are Outstanding, the Fund shall not, without the affirmative vote or consent of the Holders of at least 66 2/3% of the VMTP Shares Outstanding at the time, voting as a separate class, file a voluntary application for
relief under Federal bankruptcy law or any similar application under state law for so long as the Fund is solvent and does not foresee becoming insolvent.
22
(ii)
1940 Act
Matters
. Unless a higher percentage is provided for in the Declaration, the affirmative vote of the Holders of at least a majority of the outstanding Preferred Shares, including VMTP Shares Outstanding at the
time, voting as a separate class, shall be required (A) to approve any conversion of the Fund from a closed-end to an open-end investment company, (B) to approve any plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares, or (C) to approve any other action requiring a vote of security holders of the Fund under Section 13(a) of the 1940 Act. For purposes of the foregoing, the vote of a majority of the outstanding Preferred
Shares means the vote at an annual or special meeting duly called of (i) sixty-seven percent (67%) or more of such shares present at a meeting, if the Holders of more than fifty percent (50%) of such shares are present or
represented by proxy at such meeting, or (ii) more than fifty percent (50%) of such shares, whichever is less.
(iii)
Certain Amendments Requiring Approval of Specific Series of VMTP
Shares
. Except as otherwise permitted by the terms of this Statement, so long as any VMTP Shares of a Series are Outstanding, the Fund shall not, without the affirmative vote or consent of the Holders of at least a
majority of the VMTP Shares of such Series, Outstanding at the time, voting as a separate class, amend, alter or repeal the provisions of the Appendix relating to such Series, whether by merger, consolidation or otherwise, so as to materially and
adversely affect any preference, right or power set forth in such Appendix of the VMTP Shares of such Series or the Holders thereof;
provided
,
however
, that (i) a change in the capitalization of the Fund in accordance with
Section 2.8
hereof shall not be considered to materially and adversely affect the rights and preferences of the VMTP Shares of such Series, and (ii) a division of a VMTP Share shall be deemed to affect such preferences, rights or
powers only if the terms of such division materially and adversely affect the Holders of the VMTP Shares of such Series; and
provided
,
further
, that no amendment, alteration or repeal of the obligation of the Fund to (x) pay the
Term Redemption Price on the Term Redemption Date for a Series, or (y) accumulate dividends at the Dividend Rate (as set forth in this Statement and the applicable Appendix hereto) for a Series, shall be effected without, in each case, the
prior unanimous vote or consent of the Holders of such Series of VMTP Shares. For purposes of the foregoing, no matter shall be deemed to adversely affect any preference, right or power of a VMTP Share of a Series or the Holder thereof unless such
matter (i) alters or abolishes any preferential right of such VMTP Share, or (ii) creates, alters or abolishes any right in respect of redemption of such VMTP Share.
(d)
Voting Rights Set Forth Herein Are Sole Voting
Rights
. Unless otherwise required by law, the Declaration or this Statement, the Holders of VMTP Shares shall not have any relative rights or preferences or other special rights with respect to voting such VMTP Shares
other than those specifically set forth in this
Section 2.6
;
provided
,
however
, that nothing in this Statement shall be deemed to preclude or limit the right of the Fund (to the extent permitted by applicable law) to
contractually agree with any Holder or Designated Owner of VMTP Shares of any Series that any action or inaction by the Fund shall require the consent or approval of such Holder or Designated Owner.
(e)
No Cumulative Voting
. The Holders of VMTP Shares shall
have no rights to cumulative voting.
(f)
Voting for Trustees Sole Remedy
for Funds Failure to Declare or Pay Dividends
. In the event that the Fund fails to declare or pay any dividends on any Series of VMTP Shares on the Dividend Payment Date therefor, the exclusive remedy of the Holders
of the VMTP Shares shall be the right to vote for trustees pursuant to the provisions of this
Section 2.6
. Nothing in
23
this
Section 2.6(f)
shall be deemed to affect the obligation of the Fund to accumulate and, if permitted by applicable law, the Declaration and this Statement, pay dividends at the
Increased Rate in the circumstances contemplated by
Section 2.2(g)
hereof.
(g)
Holders Entitled to Vote
. For purposes of determining
any rights of the Holders of VMTP Shares to vote on any matter, whether such right is created by this Statement, by the Declaration, by statute or otherwise, no Holder of VMTP Shares shall be entitled to vote any VMTP Share and no VMTP Share shall
be deemed to be Outstanding for the purpose of voting or determining the number of shares required to constitute a quorum if, prior to or concurrently with the time of determination of shares entitled to vote or the time of the actual
vote on the matter, as the case may be, the requisite Notice of Redemption with respect to such VMTP Share shall have been given in accordance with this Statement and Deposit Securities for the payment of the Redemption Price of such VMTP Share
shall have been deposited in trust with the Redemption and Paying Agent for that purpose. No VMTP Share held by the Fund shall have any voting rights or be deemed to be outstanding for voting or for calculating the voting percentage required on any
other matter or other purposes.
2.7
Rating
Agencies
.
The Fund shall use commercially reasonable efforts to cause the Rating Agencies to issue long-term credit
ratings with respect to each Series of VMTP Shares for so long as such Series is Outstanding. The Fund shall use commercially reasonable efforts to comply with any applicable Rating Agency Guidelines. If a Rating Agency shall cease to rate the
securities of tax-exempt closed-end management investment companies generally, the Board of Trustees shall terminate the designation of such Rating Agency as a Rating Agency hereunder. The Board of Trustees may elect to terminate the designation of
any Rating Agency as a Rating Agency hereunder with respect to a Series of VMTP Shares so long as either (i) immediately following such termination, there would be at least one Rating Agency with respect to such Series or (ii) it replaces
the terminated Rating Agency with another NRSRO and provides notice thereof to the Holders of such Series;
provided
that such replacement shall not occur unless such replacement Other Rating Agency shall have at the time of such replacement
(i) published a rating for the VMTP Shares of such Series and (ii) entered into an agreement with the Fund to continue to publish such rating subject to the Rating Agencys customary conditions. The Board of Trustees may also elect to
designate one or more other NRSROs as Other Rating Agencies hereunder with respect to a Series of VMTP Shares by notice to the Holders of the VMTP Shares. The Rating Agency Guidelines of any Rating Agency may be amended by such Rating Agency without
the vote, consent or approval of the Fund, the Board of Trustees or any Holder of Preferred Shares, including any VMTP Shares, or Common Shares.
2.8
Issuance of Additional Preferred Shares
.
So long as any VMTP Shares are Outstanding, the Fund may, without the vote or consent of the Holders thereof, authorize, establish and create and issue and sell one or more series of Preferred Shares
ranking on a parity with VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or the winding up of the affairs of the Fund, in addition to then Outstanding Series of VMTP Shares, and authorize,
issue and sell additional shares of any such Series of Preferred Shares then outstanding or so established and created, including additional Series of VMTP Shares, in each case in accordance with applicable law, provided that the Fund shall,
immediately after giving effect to the issuance of such Preferred Shares and to its receipt and
24
application of the proceeds thereof, including to the redemption of Preferred Shares with such proceeds, have Asset Coverage (calculated in the same manner as is contemplated by
Section 2.4(b)
hereof) of at least 225%.
2.9
Status of Redeemed or Repurchased VMTP Shares
.
VMTP Shares that at any time have been redeemed or purchased by the Fund shall, after such redemption or purchase, have the
status of authorized but unissued Preferred Shares.
2.10
Distributions with respect to Taxable
Allocations
.
Whenever a Taxable Allocation is to be paid by the Fund with respect to the VMTP Shares of a Series with
respect to any Dividend Period and either the Increased Rate or the Maximum Rate is not in effect during such Dividend Period, the Fund shall comply with one of clause (a), clause (b) or clause (c) of this
Section 2.10
:
(a) The Fund may provide notice to the Redemption and Paying Agent prior to
the commencement of any Dividend Period for a Series of VMTP Shares of the amount of the Taxable Allocation that will be made in respect of shares of such Series for such Dividend Period (a
Notice of Taxable Allocation
). Such
Notice of the Taxable Allocation will state the amount of the dividends payable in respect of each VMTP Share of the applicable Series for such Dividend Period that will be treated as a Taxable Allocation and the adjustment to the Dividend Rate for
each Rate Period (or portion thereof) included in such Dividend Period that will be required to pay the Additional Amount Payment in respect of the Taxable Allocation paid on such VMTP Share for such Dividend Period. In lieu of adjusting the
Dividend Rate, the Fund may make, in addition to and in conjunction with the payment of regular dividends for such Dividend Period, a supplemental distribution in respect of each VMTP Share of such Series for such Dividend Period equal to the
Additional Amount Payment payable in respect of the Taxable Allocation paid on such VMTP Share for such Dividend Period. The Fund will use commercially reasonable efforts to effect the distribution of Taxable Allocations in respect of VMTP Shares of
each Series as provided in this
Section 2.10(a)
, and shall only effect the distribution of Taxable Allocation pursuant to
Section 2.10(b)
and/or
Section 2.10(c)
hereof if such commercially reasonable efforts do
not reasonably permit the Fund to effect the distribution of a Taxable Allocation as contemplated by this
Section 2.10(a)
.
(b) If the Fund does not provide a Notice of Taxable Allocation as provided in
Section 2.10(a)
hereof with respect to a Taxable Allocation that
is made in respect of VMTP Shares of a Series, the Fund may make one or more supplemental distributions on shares of such Series equal to the amount of such Taxable Allocation. Any such supplemental distribution in respect of VMTP Shares of a Series
may be declared and paid on any date, without reference to any regular Dividend Payment Date, to the Holders of VMTP Shares of such Series as their names appear on the registration books of the Fund on such date, not exceeding fifteen
(15) calendar days preceding the payment date of such supplemental distribution, as may be fixed by the Board of Trustees.
(c) If in connection with a redemption of VMTP Shares of a Series, the Fund makes a Taxable Allocation without having either given advance notice thereof
pursuant to
Section 2.10(a)
hereof or made one or more supplemental distributions pursuant to
Section 2.10(b)
hereof, the Fund shall direct the Redemption and Paying Agent to send an Additional Amount Payment in respect of
such Taxable Allocation to each Holder of VMTP Shares of such Series at such Holders address as the same appears or last appeared on the record books of the Fund.
25
(d) Except as required by any Purchase
Agreement applicable to a particular Series of VMTP Shares, for so long as the applicable provisions of such Purchase Agreement shall be in effect, the Fund shall not be required to pay Additional Amount Payments with respect to VMTP Shares of any
Series with respect to any net capital gain or other taxable income determined by the Internal Revenue Service to be allocable in a manner different from the manner used by the Fund.
2.11
Term Redemption Liquidity Account and Liquidity
Requirement
.
(a) On or prior to the Liquidity Account Initial Date with
respect to any Series of VMTP Shares, the Fund shall cause the Custodian to segregate, by means of appropriate identification on its books and records or otherwise in accordance with the Custodians normal procedures, from the other assets of
the Fund (the
Term Redemption Liquidity Account
) Liquidity Account Investments with a Market Value equal to at least One Hundred Ten Percent (110%) of the Term Redemption Amount with respect to such Series. The
Term
Redemption Amount
for any Series of VMTP Shares shall be equal to the Term Redemption Price to be paid on the Term Redemption Date for such Series, based on the number of shares of such Series then Outstanding, assuming for this purpose
that the Dividend Rate for such Series in effect at the time of the creation of the Term Redemption Liquidity Account for such Series will be the Dividend Rate in effect for such Series until the Term Redemption Date for such Series. If, on any date
after the Liquidity Account Initial Date, the aggregate Market Value of the Liquidity Account Investments included in the Term Redemption Liquidity Account for a Series of VMTP Shares as of the close of business on any Business Day is less than one
hundred and ten percent (110%) of the Term Redemption Amount with respect to such Series, then the Fund shall cause the Custodian and the Adviser to take all such necessary actions, including segregating additional assets of the Fund as
Liquidity Account Investments, so that the aggregate Market Value of the Liquidity Account Investments included in the Term Redemption Liquidity Account for such Series is at least equal to One Hundred Ten Percent (110%) of the Term Redemption
Amount with respect to such Series not later than the close of business on the next succeeding Business Day. With respect to assets of the Fund segregated as Liquidity Account Investments with respect to a Series of VMTP Shares, the Adviser, on
behalf of the Fund, shall be entitled to instruct the Custodian on any date to release any Liquidity Account Investments from such segregation and to substitute therefor other Liquidity Account Investments, so long as (i) the assets of the Fund
segregated as Liquidity Account Investments at the close of business on such date have a Market Value equal to at least One Hundred Ten Percent (110%) of the Term Redemption Amount with respect to such Series and (ii) the assets of the
Fund designated and segregated as Deposit Securities at the close of business on such date have a Market Value equal to at least the Liquidity Requirement (if any) determined in accordance with
Section 2.11(b)
below with respect to such
Series for such date. The Fund shall cause the Custodian not to permit any lien, security interest or encumbrance to be created or permitted to exist on or in respect of any Liquidity Account Investments included in the Term Redemption Liquidity
Account for any Series of VMTP Shares, other than liens, security interests or encumbrances arising by operation of law and any lien of the Custodian with respect to the payment of its fees or repayment for its advances.
(b) The Market Value of the Deposit Securities held in the Term Redemption Liquidity
Account for a Series of VMTP Shares, from and after the 15th day of the calendar month (or if such day is not a Business Day, the next succeeding Business Day) that is the number of months preceding the calendar month in which the Term Redemption
Date for such Series occurs, in each case as specified in the table set forth below, shall not be less than the percentage of the Term Redemption
26
Amount for such Series set forth below opposite such number of months (the
Liquidity Requirement
), but in all cases subject to the provisions of
Section 2.11(c)
below:
|
|
|
Number of Months
Preceding Month of
Term Redemption Date:
|
|
Value of Deposit
Securities as Percentage
of Term Redemption
Amount
|
5
|
|
20%
|
4
|
|
40%
|
3
|
|
60%
|
2
|
|
80%
|
1
|
|
100%
|
(c) If the aggregate Market Value of the Deposit
Securities included in the Term Redemption Liquidity Account for a Series of VMTP Shares as of the close of business on any Business Day is less than the Liquidity Requirement in respect of such Series for such Business Day, then the Fund shall
cause the segregation of additional or substitute Deposit Securities in respect of the Term Redemption Liquidity Account for such Series, so that the aggregate Market Value of the Deposit Securities included in the Term Redemption Liquidity Account
for such Series is at least equal to the Liquidity Requirement for such Series not later than the close of business on the next succeeding Business Day.
(d) The Deposit Securities included in the Term Redemption Liquidity Account for a Series of VMTP Shares may be applied by the Fund, in its discretion,
towards payment of the Term Redemption Price for such Series as contemplated by
Section 2.5(d)
hereof. Upon the deposit by the Fund with the Redemption and Paying Agent of Deposit Securities having an initial combined Market Value
sufficient to effect the redemption of the VMTP Shares of a Series on the Term Redemption Date for such Series in accordance with
Section 2.5(d)(ii)
hereof, the requirement of the Fund to maintain the Term Redemption Liquidity Account as
contemplated by this
Section 2.11
shall lapse and be of no further force and effect.
2.12
Global Certificate
.
Prior to the commencement of a Voting Period, (i) all VMTP Shares of any Series Outstanding from time to time shall be represented
by one global certificate for such Series registered in the name of the Securities Depository or its nominee and (ii) no registration of transfer of shares of such Series of VMTP Shares shall be made on the books of the Fund to any Person other
than the Securities Depository or its nominee or transferee. The foregoing restriction on registration of transfer shall be conspicuously noted on the face or back of the global certificates.
2.13
Notice
.
All notices or communications hereunder, unless otherwise specified in this Statement, shall be sufficiently given if in writing and
delivered in person, by telecopier, by Electronic Means or by overnight delivery. Notices delivered pursuant to this
Section 2.13
shall be deemed given on the date received.
2.14
Termination
.
In the event that no VMTP Shares of a Series are Outstanding, all rights and preferences of the VMTP Shares of such Series established
and designated hereunder shall cease and terminate, and all obligations of the Fund under this Statement with respect to such Series shall terminate.
27
2.15
Appendices
.
The designation of each Series of VMTP Shares shall be set forth in an Appendix to this Statement. The Board of Trustees may, by
resolution duly adopted, without shareholder approval (except as otherwise provided by this Statement or required by applicable law) (1) amend the Appendix to this Statement relating to a Series so as to reflect any amendments to the terms
applicable to such Series including an increase in the number of authorized shares of such Series and (2) add additional Series of VMTP Shares by including a new Appendix to this Statement relating to such Series.
2.16
Actions on Other than Business Days
.
Unless otherwise provided herein, if the date for making any payment, performing any act or exercising any right, in each case as
provided for in this Statement, is not a Business Day, such payment shall be made, act performed or right exercised on the next succeeding Business Day, with the same force and effect as if made or done on the nominal date provided therefor, and,
with respect to any payment so made, no dividends, interest or other amount shall accrue for the period between such nominal date and the date of payment.
2.17
Modification
.
To the extent permitted by applicable law,
Section 2.6(c)
hereof and the Purchase Agreement, the Board of Trustees, without the vote of the Holders of VMTP Shares, may interpret, supplement,
or amend the provisions of this Statement or any Appendix hereto to supply any omission, resolve any inconsistency or ambiguity or to cure, correct or supplement any defective or inconsistent provision, including any provision that becomes defective
after the date hereof because of impossibility of performance or any provision that is inconsistent with any provision of any other Preferred Shares of the Fund.
2.18
Transfers
.
(a) A Designated Owner or Holder of any VMTP Shares of any Series may sell, transfer or otherwise dispose of VMTP Shares only in whole shares and only to
(i) Persons that such Designated Owner or Holder reasonably believes are qualified institutional buyers (as defined in Rule 144A under the Securities Act or any successor provision) in accordance with Rule 144A under the Securities
Act or any successor provision that are registered closed-end management investment companies, the shares of which are traded on a national securities exchange (
Closed-End Funds
), banks or entities that are 100% direct or indirect
subsidiaries of banks publicly traded parent holding companies (collectively,
Banks
), insurance companies or registered open-end management investment companies, (ii) tender option bond trusts in which all investors are
Persons that such Designated Owner or Holder reasonably believes are qualified institutional buyers (as defined in Rule 144A under the Securities Act or any successor provision) that are Closed-End Funds, Banks, insurance companies, or
registered open-end management investment companies, or (iii) other investors with the prior written consent of the Fund. The restrictions on transfer contained in this
Section 2.18(a)
shall not apply to any VMTP Shares that are
being registered and sold pursuant to an effective registration statement under the Securities Act or to any subsequent transfer of such VMTP Shares.
28
(b) If at any time the Fund is not
furnishing information pursuant to Section 13 or 15(d) of the Exchange Act, in order to preserve the exemption for resales and transfers under Rule 144A, the Fund shall furnish, or cause to be furnished, to holders of VMTP Shares and
prospective purchasers of VMTP Shares, upon request, information with respect to the Fund satisfying the requirements of subsection (d)(4) of Rule 144A.
2.19
No Additional Rights
.
Unless otherwise required by law or the Declaration, the Holders of VMTP Shares shall not have any relative rights or preferences or other special rights with respect to such VMTP Shares other than those
specifically set forth in this Statement;
provided
,
however
, that nothing in this Statement shall be deemed to preclude or limit the right of the Fund (to the extent permitted by applicable law) to contractually agree with any Holder
or Designated Owner of VMTP Shares of any Series with regard to any special rights of such Holder or Designated Owner with respect to its investment in the Fund.
[Signature Page Begins on the Following Page]
29
IN WITNESS WHEREOF, Nuveen Municipal High Income Opportunity Fund has caused this Statement
to be signed on December 20, 2012 in its name and on its behalf by a duly authorized officer. The Declaration is on file with the Secretary of the Commonwealth of The Commonwealth of Massachusetts, and the said officer of the Fund has executed this
Statement as an officer and not individually, and the obligations and rights set forth in this Statement are not binding upon any such officer, or the trustees of the Fund or shareholders of the Fund, individually, but are binding only upon the
assets and property of the Fund.
|
|
|
NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND
|
|
|
By:
|
|
/
S
/ K
EVIN
J. M
C
C
ARTHY
|
|
|
Name: Kevin J. McCarthy
|
|
|
Title: Vice President and Secretary
|
[Signature Page to the Statement Establishing and Fixing the Rights and Preferences of Variable Rate
MuniFund Term Preferred Shares]
APPENDIX A
NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND
VARIABLE RATE MUNIFUND
TERM PREFERRED SHARES, SERIES 2016
Preliminary Statement and Incorporation By Reference
This Appendix establishes a Series of Variable Rate MuniFund Term Preferred Shares of Nuveen Municipal High Income Opportunity Fund.
Except as set forth below, this Appendix incorporates by reference the terms set forth with respect to all Series of such Variable Rate Municipal Term Preferred Shares in that Statement Establishing and Fixing the Rights and Preferences of
Variable Rate MuniFund Term Preferred Shares dated December , 2012 (the
VMTP Statement
). This Appendix has been adopted by resolution of the Board of Trustees of Nuveen Municipal High Income
Opportunity Fund. Capitalized terms used herein but not defined herein have the respective meanings therefor set forth in the VMTP Statement.
Section 1.
Designation as to Series
.
Variable Rate MuniFund Term Preferred Shares, Series 2016: A Series of Five Hundred and Ten (510) Preferred Shares classified as
Variable Rate MuniFund Term Preferred Shares is hereby designated as the Variable Rate MuniFund Term Preferred Shares, Series 2016 (the
Series 2016 VMTP Shares
). Each share of such Series shall have such preferences,
voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption, in addition to those required by applicable law and those that are expressly set forth in the Declaration and
the VMTP Statement (except as the VMTP Statement may be expressly modified by this Appendix), as are set forth in this
Appendix A
. The Series 2016 VMTP Shares shall constitute a separate series of Preferred Shares and of the Variable Rate
MuniFund Term Preferred Shares and each Series 2016 VMTP Share shall be identical. The following terms and conditions shall apply solely to the Series 2016 VMTP Shares:
Section 2.
Number of Authorized Shares of Series
.
The number of authorized shares is Five Hundred and Ten (510).
Section 3.
Date of Original Issue with respect to Series
.
The Date of Original Issue is December 21, 2012.
Section 4.
Liquidation Preference Applicable to Series
.
The Liquidation Preference is $100,000.00 per share.
Section 5.
Term Redemption Date Applicable to Series
.
The Term Redemption Date is January 1, 2016.
A-1
Section 6.
Dividend Payment Dates Applicable to
Series
.
The Dividend Payment Dates are the first Business Day of the month next following each Dividend Period.
Section 7.
Liquidity Account Initial Date Applicable to Series
.
The Liquidity Account Initial Date is July 1, 2015.
Section 8.
Exceptions to Certain Definitions Applicable to the Series
.
The following definitions contained under the heading Definitions in the VMTP Statement are hereby amended as follows:
Not applicable.
Section 9.
Additional
Definitions Applicable to the Series
.
The following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires:
Dividend Period
means, with respect to the Series 2016 VMTP Shares, in the case of the first Dividend Period, the
period beginning on the Date of Original Issue for such Series and ending on and including January 31, 2013 and for each subsequent Dividend Period, the period beginning on and including the first calendar day of the month following the month
in which the previous Dividend Period ended and ending on and including the last calendar day of such month.
Optional Redemption Premium
means with respect to each Series 2016 VMTP Share to be redeemed an amount equal to
(A) if the Optional Redemption Date for such Series 2016 VMTP Share occurs
prior to June 21, 2014, the product of (i) 1.00% and (ii) the Liquidation Preference of such VMTP Share; or
(B) if the Optional Redemption Date for such Series 2016 VMTP Share either occurs on or
after June 21, 2014, none.
Section 10.
Amendments to Terms of VMTP Shares
Applicable to the Series
.
The following provisions contained under the heading Terms of the VMTP Shares in
the VMTP Statement are hereby amended as follows:
Not applicable.
[Signature page follows.]
A-2
IN WITNESS WHEREOF, Nuveen Municipal High Income Opportunity Fund has caused this Appendix
to be signed on December 20, 2012 in its name and on its behalf by a duly authorized officer. The Declaration is on file with the Secretary of the Commonwealth of The Commonwealth of Massachusetts, and the said officer of the Fund has executed this
Statement as an officer and not individually, and the obligations and rights set forth in this Statement are not binding upon any such officer, or the trustees of the Fund or shareholders of the Fund, individually, but are binding only upon the
assets and property of the Fund.
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NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND
|
|
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By:
|
|
/
S
/ K
EVIN
J. M
C
C
ARTHY
|
|
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Name: Kevin J. McCarthy
|
|
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Title: Vice President and Secretary
|
[Signature Page to the Appendix Establishing and Fixing the Rights and Preferences of Variable Rate
MuniFund Term Preferred Shares]
APPENDIX B
NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND
VARIABLE RATE MUNIFUND
TERM PREFERRED SHARES, SERIES 2016 #1
Preliminary Statement and Incorporation By Reference
This Appendix establishes a Series of Variable Rate MuniFund Term Preferred Shares of Nuveen Municipal High Income Opportunity Fund.
Except as set forth below, this Appendix incorporates by reference the terms set forth with respect to all Series of such Variable Rate Municipal Term Preferred Shares in that Statement Establishing and Fixing the Rights and Preferences of
Variable Rate MuniFund Term Preferred Shares dated December 20, 2012 (the
VMTP Statement
). This Appendix has been adopted by resolution of the Board of Trustees of Nuveen Municipal High Income Opportunity Fund.
Capitalized terms used herein but not defined herein have the respective meanings therefor set forth in the VMTP Statement.
Section 1.
Designation as to Series
.
Variable Rate MuniFund Term Preferred Shares, Series 2016 #1: A Series of Three Hundred and Sixty (360) Preferred Shares classified
as Variable Rate MuniFund Term Preferred Shares is hereby designated as the Variable Rate MuniFund Term Preferred Shares, Series 2016 #1 (the
Series 2016 #1VMTP Shares
). Each share of such Series shall have such
preferences, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption, in addition to those required by applicable law and those that are expressly set forth in the
Declaration and the VMTP Statement (except as the VMTP Statement may be expressly modified by this Appendix), as are set forth in this
Appendix B
. The Series 2016 #1 VMTP Shares shall constitute a separate series of Preferred Shares and of
the Variable Rate MuniFund Term Preferred Shares and each Series 2016 #1 VMTP Share shall be identical. The following terms and conditions shall apply solely to the Series 2016 #1 VMTP Shares:
Section 2.
Number of Authorized Shares of Series
.
The number of authorized shares is Three Hundred and Sixty (360).
Section 3.
Date of Original Issue with respect to Series
.
The Date of Original Issue is [Closing Date].
Section 4.
Liquidation Preference Applicable to Series
.
The Liquidation Preference is $100,000.00 per share.
Section 5.
Term Redemption Date Applicable to Series
.
The Term Redemption Date is January 1, 2016.
Section 6.
Dividend Payment Dates Applicable to
Series
.
The Dividend Payment Dates are the first Business Day of the month next following each Dividend Period.
Section 7.
Liquidity Account Initial Date Applicable to Series
.
The Liquidity Account Initial Date is July 1, 2015.
Section 8.
Exceptions to Certain Definitions Applicable to the Series
.
The following definitions contained under the heading Definitions in the VMTP Statement are hereby amended as follows:
Not applicable.
Section 9.
Additional
Definitions Applicable to the Series
.
The following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires:
Dividend Period
means, with respect to the Series 2016 #1 VMTP Shares, in the case of the first Dividend Period, the
period beginning on the Date of Original Issue for such Series and ending on and including the last calendar day of the month in which the Date of Original Issue occurred and for each subsequent Dividend Period, the period beginning on and including
the first calendar day of the month following the month in which the previous Dividend Period ended and ending on and including the last calendar day of such month.
Optional Redemption Premium
means with respect to each Series 2016 #1 VMTP Share to be redeemed an amount equal to
(A) if the Optional Redemption Date for such Series 2016 #1 VMTP Share occurs prior to
June 21, 2014, the product of (i) 1.00% and (ii) the Liquidation Preference of such VMTP Share; or
(B) if the Optional Redemption Date for such Series 2016 #1 VMTP Share either occurs on or
after June 21, 2014, none.
Section 10.
Amendments to Terms of VMTP Shares
Applicable to the Series
.
The following provisions contained under the heading Terms of the VMTP Shares in
the VMTP Statement are hereby amended as follows:
Not applicable.
[Signature page follows.]
B-2
IN WITNESS WHEREOF, Nuveen Municipal High Income Opportunity Fund has caused this Appendix
to be signed on in its name and on its behalf by a duly authorized officer. The Declaration is on file with the Secretary of the
Commonwealth of The Commonwealth of Massachusetts, and the said officer of the Fund has executed this Statement as an officer and not individually, and the obligations and rights set forth in this Statement are not binding upon any such officer, or
the trustees of the Fund or shareholders of the Fund, individually, but are binding only upon the assets and property of the Fund.
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NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND
|
|
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By:
|
|
|
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Name: Kevin J. McCarthy
|
|
|
Title: Vice President and Secretary
|
[Signature Page to Appendix B Establishing and Fixing the Rights and Preferences of Variable Rate
MuniFund Term Preferred Shares]
APPENDIX B
RATINGS OF INVESTMENTS
Standard & Poors CorporationA brief description of the applicable Standard & Poors Financial Services LLC, a subsidiary of The McGraw-Hill Companies
(
Standard & Poors
or
S&P
), rating symbols and their meanings (as published by S&P) follows:
A Standard & Poors issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations,
or a specific financial program (including ratings on medium term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and
takes into account the currency in which the obligation is denominated. The opinion evaluates the obligors capacity and willingness to meet its financial commitments as they come due, and may assess terms, such as collateral security and
subordination, which could affect ultimate payment in the event of default. The issue credit rating is not a statement of fact or recommendation to purchase, sell, or hold a financial obligation or make any investment decisions. Nor is it a comment
regarding an issues market price or suitability for a particular investor.
Issue credit ratings are based on current
information furnished by the obligors or obtained by Standard & Poors from other sources it considers reliable. Standard & Poors does not perform an audit in connection with any credit rating and may, on occasion, rely
on unaudited financial information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered
short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 daysincluding commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual rating, in which the short-term rating addresses the put feature, in addition to the usual long-term rating. Medium-term notes are assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following considerations:
|
1.
|
Likelihood of paymentcapacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
|
|
2.
|
Nature of and provisions of the obligation; and
|
|
3.
|
Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other
laws affecting creditors rights.
|
The issue ratings are an assessment of default risk, but may incorporate
an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation applies when
an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
B-1
AAA
|
An obligation rated AAA has the highest rating assigned by Standard & Poors. The obligors capacity to meet its financial commitment on the obligation is
extremely strong.
|
AA
|
An obligation rated AA differs from the highest-rated obligations only to a small degree. The obligors capacity to meet its financial commitment on the obligation is very
strong.
|
A
|
An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However,
the obligors capacity to meet its financial commitment on the obligation is still strong.
|
BBB
|
An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
|
BB, B, CCC,
CC, and C
|
Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
|
BB
|
An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions, which could lead to the obligors inadequate capacity to meet its financial commitment on the obligation.
|
B
|
An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitment on the obligation.
|
CCC
|
An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
|
CC
|
An obligation rated CC is currently highly vulnerable to nonpayment.
|
C
|
A C rating is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that have payment arrearages allowed by the terms of the documents, or
obligations of an issuer that is the subject of a bankruptcy
|
B-2
|
petition or similar action which have not experienced a payment default. Among others, the C rating may be assigned to subordinated debt, preferred stock or other obligations on which
cash payments have been suspended in accordance with the instruments terms or when preferred stock is the subject of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other
instruments having a total value that is less than par.
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D
|
An obligation rated D is in payment default. The D rating category is used when payments on an obligation, including a regulatory capital instrument, are not made on the
date due, unless Standard & Poors believes that such payments will be made within the shorter of the stated grace period but not longer than five business days. Both a longer stated grace period and the absence of a stated grace
period are irrelevant. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. An obligations rating is lowered to D upon
completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
|
Plus (+) or minus (-). The ratings from AA to CCC may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
N.R.
|
This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poors does not rate a particular obligation
as a matter of policy.
|
Short-Term Issue Credit Ratings
A-1
|
A short-term obligation rated A-1 is rated in the highest category by Standard & Poors. The obligors capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligors capacity to meet its financial commitment on these obligations is extremely strong.
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A-2
|
A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating
categories. However, the obligors capacity to meet its financial commitment on the obligation is satisfactory.
|
A-3
|
A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
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B
|
A short-term obligation rated B is regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties which could lead to the obligors inadequate capacity to meet its financial commitment on the obligation.
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B-3
C
|
A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its
financial commitment on the obligation.
|
D
|
A short-term obligation rated D is in payment default. The D rating category is used when payments on an obligation, including a regulatory capital instrument, are not
made on the date due even if the applicable grace period has not expired, unless Standard & Poors believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
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Municipal Short-Term
Note Ratings Definitions
A Standard & Poors U.S. municipal note rating reflects Standard &
Poors opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than three years will most likely receive a
long-term debt rating. In determining which type of rating, if any, to assign, Standard & Poors analysis will review the following considerations:
|
1.
|
Amortization schedulethe larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
|
|
2.
|
Source of paymentthe more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note. Note rating symbols are as
follows:
|
Note rating symbols are as follows:
SP-1
|
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
|
SP-2
|
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
|
SP-3
|
Speculative capacity to pay principal and interest.
|
Moodys Investors Service, Inc.A brief description of the applicable Moodys Investors Service, Inc.
(
Moodys
) rating symbols and their meanings (as published by Moodys) follows:
Long-Term Obligation Ratings
Moodys long-term ratings are opinions of the relative credit risk of financial obligations with an original
maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings use Moodys Global Scale and reflect both the likelihood of default and any financial loss suffered in the
event of default.
Aaa
|
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level credit risk.
|
Aa
|
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
|
B-4
A
|
Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
|
Baa
|
Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
|
Ba
|
Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
|
B
|
Obligations rated B are considered speculative and are subject to high credit risk.
|
Caa
|
Obligations rated Caa are judged to be speculative, of poor standing ,and are subject to very high credit risk.
|
Ca
|
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
|
C
|
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
|
Note
: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aaa through Caa. The
modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Short-Term Obligation Ratings
Moodys short-term ratings are opinions of the ability of issuers to honor short-term financial obligations. Ratings may be assigned to issuers, short-term programs or to individual short-term debt
instruments. Such obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted. Moodys employs the following designations to indicate the relative repayment ability of rated issuers:
P-1
|
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
|
P-2
|
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
|
P-3
|
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
|
NP
|
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
|
B-5
U.S. Municipal Short-Term Obligation Ratings
There are three rating categories for short-term municipal obligations that are considered investment grade. These ratings are designated
as Municipal Investment Grade (MIG) and are divided into three levelsMIG 1 through MIG 3. In addition, those short-term obligations that are of speculative quality are designated SG, or speculative grade. MIG ratings expire at the maturity of
the obligation.
MIG 1
|
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market
for refinancing.
|
MIG2
|
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
|
MIG3
|
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
|
SG
|
This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
|
Fitch Ratings, Inc.A brief description of the applicable Fitch Ratings, Inc. (
Fitch
) ratings symbols and
meanings (as published by Fitch) follows:
Rated entities in a number of sectors, including financial and non-financial
corporations, sovereigns and insurance companies, are generally assigned Issuer Default Ratings (IDRs). IDRs opine on an entitys relative vulnerability to default on financial obligations. The threshold default risk addressed by
the IDR is generally that of the financial obligations whose non-payment would best reflect the uncured failure of that entity. As such, IDRs also address relative vulnerability to bankruptcy, administrative receivership or similar concepts,
although the agency recognizes that issuers may also make pre-emptive and therefore voluntary use of such mechanisms.
In
aggregate, IDRs provide an ordinal ranking of issuers based on the agencys view of their relative vulnerability to default, rather than a prediction of a specific percentage likelihood of default. For historical information on the default
experience of Fitch-rated issuers, please consult the transition and default performance studies available from the Fitch Ratings website.
Long-Term Credit Ratings
AAA
|
Highest credit quality
. AAA ratings denote the lowest expectation of default risk. They are assigned only in case of exceptionally strong capacity for payment of financial
commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
|
AA
|
Very high credit quality
. AA ratings denote expectations of a very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is
not significantly vulnerable to foreseeable events.
|
B-6
A
|
High credit quality
. A ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
|
BBB
|
Good credit quality
. BBB ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but
adverse business or economic conditions are more likely to impair this capacity.
|
BB
|
Speculative
. BB ratings indicate an elevated vulnerability to default risk developing, particularly in the event of adverse changes in business or economic conditions over
time; however, business or financial flexibility exists which supports the servicing of financial commitments.
|
B
|
Highly speculative
. B ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however,
capacity for continued payment is vulnerable to deterioration in the business and economic environment.
|
CCC
|
Substantial credit risk
. Default is a real possibility.
|
CC
|
Very high levels of credit risk
. Default of some kind appears probable.
|
C
|
Exceptionally high levels of credit risk
. Default is imminent or inevitable, or the issuer is in standstill. Conditions that are indicative of a C category rating for an
issuer include:
|
|
a.
|
the selective payment default on a specific class or currency of debt;
|
|
b.
|
the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or
other material financial obligation;
|
|
c.
|
the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel; or
|
|
d.
|
execution of a distressed debt exchange on one or more material financial obligations.
|
D
|
Default
. D ratings indicate an issuer that in Fitch Ratings opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal
winding-up procedure, or which has otherwise ceased business. Default ratings are not assigned prospectively to entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will
generally not be considered a default until after the expiration of the deferral or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a distressed debt exchange.
|
B-7
Imminent default typically refers to the occasion where a payment default has
been intimated by the issuer, and is all but inevitable. This may, for example, be where an issuer has missed a scheduled payment, but (as is typical) has a grace period during which it may cure the payment default. Another alternative would be
where an issuer has formally announced a distressed debt exchange, but the date of the exchange still lies several days or weeks in the immediate future.
In all cases, the assignment of a default rating reflects the agencys opinion as to the most appropriate rating category consistent with the rest of its universe of ratings, and may differ from the
definition of default under the terms of an issuers financial obligations or local commercial practice.
Note: The
modifiers + or - may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the AAA Long-Term IDR category, or to Long-Term IDR categories below
B.
Specific limitations relevant to the issuer credit rating scale include:
|
|
|
The ratings do not predict a specific percentage of default likelihood over any given time period.
|
|
|
|
The ratings do not opine on the market value of any issuers securities or stock, or the likelihood that this value may change.
|
|
|
|
The ratings do not opine on the liquidity of the issuers securities or stock.
|
|
|
|
The ratings do not opine on the possible loss severity on an obligation should an issuer default.
|
|
|
|
The ratings do not opine on the suitability of an issuer as a counterparty to trade credit.
|
|
|
|
The ratings do not opine on any quality related to an issuers business, operational or financial profile other than the agencys opinion on
its relative vulnerability to default.
|
Ratings assigned by Fitch Ratings articulate an opinion on discrete
and specific areas of risk. The above list is not exhaustive, and is provided for the readers convenience.
Short-Term Obligation
Ratings
A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the
rated entity or security stream and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as
short term based on market convention. Typically, this means up to 13 months for corporate, sovereign, and structured obligations, and up to 36 months for obligations in U.S. public finance markets.
F1
|
Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added + to denote any exceptionally strong
credit feature.
|
F2
|
Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments.
|
B-8
F3
|
Fair short-term credit quality. The intrinsic capacity for timely payment of financial commitments is adequate.
|
B
|
Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near-term adverse changes in financial and economic
conditions.
|
C
|
High short-term default risk. Default is a real possibility.
|
RD
|
Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Applicable to entity ratings
only.
|
D
|
Default. Indicates a broad-based default event for an entity, or the default of a specific short-term obligation.
|
Specific limitations relevant to the Short-Term Ratings scale include:
|
|
|
The ratings do not predict a specific percentage of default likelihood over any given time period.
|
|
|
|
The ratings do not opine on the market value of any issuers securities or stock, or the likelihood that this value may change.
|
|
|
|
The ratings do not opine on the liquidity of the issuers securities or stock.
|
|
|
|
The ratings do not opine on the possible loss severity on an obligation should an obligation default.
|
|
|
|
The ratings do not opine on any quality related to an issuer or transactions profile other than the agencys opinion on the relative
vulnerability to default of the rated issuer or obligation.
|
Ratings assigned by Fitch Ratings articulate an
opinion on discrete and specific areas of risk. The above list is not exhaustive, and is provided for the readers convenience.
Rating Watches and Rating Outlooks
Rating Watch
Rating Watches indicate that there is a heightened
probability of a rating change and the likely direction of such a change. These are designated as Positive, indicating a potential upgrade, Negative, for a potential downgrade, or Evolving, if ratings may be
raised, lowered or affirmed. However, ratings that are not on Rating Watch can be raised or lowered without being placed on Rating Watch first, if circumstances warrant such an action.
A Rating Watch is typically event-driven and, as such, it is generally resolved over a relatively short period. The event driving the
Watch may be either anticipated or have already occurred, but in both cases, the exact rating implications remain undetermined. The Watch period is typically used to gather further information and/or subject the information to further analysis.
Additionally, a Watch
B-9
may be used where the rating implications are already clear, but where a triggering event (e.g. shareholder or regulatory approval) exists. The Watch will typically extend to cover the period
until the triggering event is resolved or its outcome is predictable with a high enough degree of certainty to permit resolution of the Watch.
Rating Watches can be employed by all analytical groups and are applied to the ratings of individual entities and/or individual instruments. At the lowest categories of speculative grade (CCC,
CC and C) the high volatility of credit profiles may imply that almost all ratings should carry a Watch. Watches are nonetheless only applied selectively in these categories, where a committee decides that particular events
or threats are best communicated by the addition of the Watch designation.
Rating Outlook
Rating Outlooks indicate the direction a rating is likely to move over a one- to two-year period. They reflect financial or other trends
that have not yet reached the level that would trigger a rating action, but which may do so if such trends continue. The majority of Outlooks are generally Stable, which is consistent with the historical migration experience of ratings over a one-
to two-year period. Positive or Negative rating Outlooks do not imply that a rating change is inevitable and, similarly, ratings with Stable Outlooks can be raised or lowered without a prior revision to the Outlook, if circumstances warrant such an
action. Occasionally, where the fundamental trend has strong, conflicting elements of both positive and negative, the Rating Outlook may be described as Evolving.
Outlooks are currently applied on the long-term scale to issuer ratings in corporate finance (including sovereigns, industrials, utilities, financial institutions and insurance companies) and public
finance outside the U.S.; to issue ratings in public finance in the U.S.; to certain issues in project finance; to Insurer Financial Strength Ratings; to issuer and/or issue ratings in a number of National Rating scales; and to the ratings of
structured finance transactions. Outlooks are not applied to ratings assigned on the short-term scale and are applied selectively to ratings in the CCC, CC and C categories. Defaulted ratings typically do not
carry an Outlook.
Deciding When to Assign Rating Watch or Outlook
Timing is informative but not critical to the choice of a Watch rather than an Outlook. A discrete event that is largely clear and the
terms of which are defined, but which will not happen for more than six monthssuch as a lengthy regulatory approval processwould nonetheless likely see ratings placed on Watch rather than a revision to the Outlook. An Outlook revision
may, however, be deemed more appropriate where a series of potential event risks has been identified, none of which individually warrants a Watch but which cumulatively indicate heightened probability of a rating change over the following one to two
years.
A revision to the Outlook may also be appropriate where a specific event has been identified, but where the conditions
and implications of that event are largely unclear and subject to high execution risk over an extended periodfor example a proposed, but politically controversial, privatization.
B-10
Standard Rating Actions
Affirmed*
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The rating has been reviewed and no change has been deemed necessary.
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Confirmed
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Action taken in response to an external request or change in terms. Rating has been reviewed in either context, and no rating change has been deemed necessary.
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Downgrade*
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The rating has been lowered in the scale.
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Matured
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This action is used when an issue has reached the end of its repayment term and rating coverage is discontinued. Denoted as M.
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Paid-In-Full
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This action indicates that the issue has been paid in full. As the issue no longer exists, it is therefore no longer rated. Denoted as PIF.
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New Rating*
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Rating has been assigned to a previously unrated issue primarily used in cases of shelf issues such as MTNs or similar programs.
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No Longer
Applicable
(NLA)
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Rating formerly assigned is no longer relevant due to a change in scale or some other non-credit event.
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Prerefunded*
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Assigned to long-term US Public Finance issues after Fitch assesses refunding escrow.
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Publish*
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Initial public announcement of rating on the agencys website, although not necessarily the first rating assigned. This action denotes when a previously private rating is published.
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Upgrade*
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The rating has been raised in the scale.
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Withdrawn*
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The rating has been withdrawn and the issue or issuer is no longer rated by Fitch Ratings. Indicated in rating databases with the symbol WD.
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Rating Watch
Maintained*
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The issue or issuer has been reviewed and remains on active Rating Watch status.
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Rating Watch
On*
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The issue or issuer has been placed on active Rating Watch status.
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Rating Watch
Revision*
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Rating Watch status has changed.
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Support Floor
Rating Revision
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Applicable only to Support ratings related to Financial Institutions, which are amended only with this action.
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B-11
Under
Review*
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Applicable to ratings that may undergo a change in scale not related to changes in fundamental credit quality. Final action will be Revision Rating
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Revision
Outlook*
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The Rating Outlook status has changed independent of a full review of the underlying rating.
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*
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A rating action must be recorded for each rating in a required cycle to be considered compliant with Fitch policy concerning aging of ratings. Not all Ratings or Data
Actions, or changes in rating modifiers, will meet this requirement. Actions that meet this requirement are noted with an * in the above definitions.
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B-12
EVERY SHAREHOLDERS VOTE IS IMPORTANT
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EASY VOTING OPTIONS:
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VOTE ON THE INTERNET
Log on to:
www.proxy-direct.com
or scan the QR code
Follow the on-screen instructions
available 24
hours
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VOTE BY PHONE
Call 1-800-337-3503
Follow the recorded instructions
available 24 hours
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VOTE BY MAIL
Vote, sign and date this Proxy
Card and return
in the
postage-paid envelope
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VOTE IN PERSON
Attend Shareholder Meeting
333 West Wacker Dr.
Chicago, IL 60606
on May 16, 2013
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Please detach at perforation before mailing.
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NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND 2
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 16, 2013
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PROXY
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PREFERRED SHARES