OREANDA-NEWS. Fitch Ratings assigns 'AAA' Long-term ratings to the $28.3 million of Series 2019 Variable Rate MuniFund Term Preferred Shares (VMTP Shares) issued by Nuveen Municipal 2021 Target Term Fund (NHA). The Term Redemption Date for the Series 2019 Shares is April 1, 2019. NHA is managed by Nuveen Fund Advisors, LLC (NFA) and subadvised by Nuveen Asset Management, LLC (NAM).

KEY RATING DRIVERS

The 'AAA' long-term ratings of the Series 2019 VMTP Shares primarily reflects:
--Sufficient asset coverage provided to the VMTP Shares as calculated per the over-collateralization (OC) tests of NHA;
--The structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the operations of NHA;
--The capabilities of NFA as investment advisor and NAM as subadvisor.

FUND PROFILE

NHA is a recently created closed-end management investment company regulated by the Investment Company Act of 1940. The fund will invest at least 80% of assets in municipal securities, the income from which is exempt from regular federal income tax. When fully invested, Fitch expects the fund to hold about $113 million in total assets.

The fund intends to cease operations, liquidate its portfolio and redeem any leverage and to return the original net asset value (NAV) to common shareholders on or about March 1, 2021. To facilitate this, the fund intends to invest in securities that mature no later than six months after the March 1, 2021 termination date. Such a strategy could make the portfolio less sensitive to interest rate risk.

Over time, NHA intends to reach a level of about 65% of assets in securities rated 'BBB' or below; however, Fitch notes that investment guidelines provide the flexibility to invest up to 100% in securities rated below investment grade. NHA will not invest in any securities in the 'CCC' rating category or below at the time of investment.

Fitch believes the diversification guidelines could serve to mitigate some of the risk inherent in a predominantly below investment-grade portfolio. The fund will not invest more than 25% of the portfolio in any one sector or more than 5% in a single issuer.

FUND LEVERAGE AND ASSET COVERAGE

NHA is issuing $28.3 million of Series 2019 VMTP Shares to target an effective leverage ratio of approximately 25% when fully invested. Although Fitch does not expect leverage to materially surpass the targeted level, the agency notes the maximum effective leverage ratio allowed by the governing documents of the Series 2019 VMTP Shares is 45%. The fund does not expect to use tender option bonds (TOBs) for leverage but has the right under its governing documents to do so.

The total asset coverage ratio, after taking into account the issuance of the Series 2019 VMTP Shares, is in excess of the minimum asset coverage threshold of 225% currently set by the terms of the preferred shares.

STRUCTURAL PROTECTIONS

In the event of asset coverage declines, the governing documents of the Series 2019 VMTP Shares require NHA to reduce leverage in order to restore compliance with the applicable asset coverage test. Compliance with both the minimum asset coverage threshold of 225% and the 45% maximum effective leverage ratio threshold are tested daily.

Failure to cure a breach of the minimum asset coverage threshold by the allotted cure date would result in mandatory redemption of the Series 2019 VMTP Shares. If NHA is in breach, it must redeem sufficient preferred shares to restore compliance. To facilitate redemption, the fund will deposit sufficient funds with a third-party custodian.

Failure to cure a breach of the 45% maximum effective leverage ratio by the allotted cure date requires NHA to restore compliance by depositing enough funds with a third-party custodian to redeem a sufficient number of preferred shares, which may include the Series 2019 VMTP Shares, and / or by reducing the amount of any TOBs the fund may have outstanding in an amount sufficient to restore compliance.

For the Series 2019 VMTP Shares, the total market value exposure period (i.e. the pre-specified time period allotted for valuation, cure and redemption in the event of a breach) for the minimum asset coverage and maximum effective leverage ratio tests is within the 60-business-day guidelines provided in Fitch's criteria.

STRESS TESTS

Fitch performed various stress tests on NHA in order to assess the strength of the structural protections available to the Series 2019 VMTP Shares compared to the stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where the fund's leverage and portfolio composition migrated to the outer limits of their operating and investment guidelines.

At the targeted leverage level, the asset coverage available to the Series 2019 VMTP Shares falls below the 'AAA' threshold, and instead passes at a 'AA' rating level only under remote circumstances, such as increasing NHA's issuer concentration while simultaneously migrating the portfolio to a mix of 100% high yield bonds.

Given the highly unlikely nature of the stress scenarios, and the minimal rating impact at the target leverage level, Fitch views NHA's permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' rating. That said, Fitch notes that stress test results are sensitive to both leverage increases and increases in the portfolio's percentage of high yield securities. An increase in leverage materially above the 25% target or an increase in the level of high yield securities materially above 65% could result in negative rating pressure.

THE ADVISORS

The investment advisor for NHA is NFA, a subsidiary of Nuveen Investments, Inc. NFA is responsible for the fund's overall investment strategies and their implementation. The sub-advisor, NAM, is a subsidiary of NFA that oversees the day-to-day operations of the fund. Nuveen Investments and its affiliates had approximately $225 billion of assets under management as of Dec. 31, 2015.

RATING SENSITIVITIES

The ratings assigned to the Series 2019 VMTP Shares may be sensitive to material changes in leverage, portfolio credit quality or market risk of NHA, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause a ratings downgrade.

NHA has the ability to assume economic leverage through speculative derivative transactions which may not be captured by the minimum asset coverage test or effective leverage ratio; and has the ability to invest up to 20% of its portfolio in a broad range of asset classes including illiquid securities, and preferred debt and convertible securities issued by REITs and MLPs. The fund does not envision engaging in material amounts of such activity in the future, which could run counter to its ability to maintain liquidity and achieve tax-exempt income. However, material levels of such activity in the future could have potential negative rating implications if they adversely affect asset coverage available to rated preferred shares.