• Auction-rate preferred securities are a form of preferred stock issued by the fund.
• Like any other preferred stock, they are senior to a fund’s common shares when dividends are paid, and if the fund liquidates. This means preferred shareholders must be paid all declared dividends before a single common share dividend or distribution is paid.
• Dividend rates are set at auction at levels that reflect the lowest rate the matches all bidders (people who want to buy preferred shares at a particular dividend rate) with sellers (those who wish to sell). If there are not enough buyers, the auctions “fail” and the rate is set by a formula to a “maximum rate” described in the preferred shares’ organizational documents (similar to a prospectus).

What happened in 2008?

Many sub-prime mortgages written in 2005 through 2007 begin to default. Firms with exposure to these mortgages or investments based on them required extensive additional capital. These firms, when acting as lead managers in auctions, began to step away from bidding at auction due to capital constraints.

• The firms had no contractual obligation to bid
• Auctions fail because there are more sellers than buyers
• Preferred shareholders cannot sell/market becomes illiquid
• Dividends go to maximum rate, creating higher leverage financing costs for funds' common shareholders

• Fund borrows from bank or other firm. Terms and timeframes may vary.
• Can be auction-rate notes, line of credit, commercial paper, and other forms of debt.
• Regulations require assets raised by borrowing must be backed by total portfolio assets at least 3 to 1 when using debt leverage.

• A new form of preferred share (equity leverage)
• Intended to be eligible for money market funds to purchase
• Expected to maintain high credit ratings from nationally recognized rating agency
• Includes a liquidity feature (a put option)
• Issued in August 2008 for four Nuveen Municipal Bond Closed-End Funds
• No guarantee any future funds can successfully issue VRDP shares

• A new form of preferred share that seeks to lock in leverage costs for a stated term
• Proceeds will refinance all or part of respective Municipal CEF outstanding auction-rate preferred shares (ARPS)
• Targeted for investors seeking intermediate term tax-exempt¹ fixed income exposure
• 5-year term with mandatory redemption, callable after 1 year
• Fixed-rate monthly tax-exempt dividends
• High quality credit ratings (Aaa/ AAA / AAA by Moody’s, S&P, Fitch)upon issuance
• $10 denomination (liquidation preference)
• NYSE exchange listing
• Preferred equity equal to ARPS in the fund’s capital structure (pari passu); senior to common shares

¹Income may be subject to state and local income taxes and the alternative minimum tax. Capital gains, if any, will be subject to capital gains tax.