Nuveen's Unusual Municipal Fund Issuance (NFZ, NZW, NVJ)

Nuveen Investments has made an unusual filing that under normal circumstances might not matter.  But we live in a near-zero rate world now where investors are looking for more interesting ways to earn in rates of return outside of buying and selling common stocks.  Three of its closed-end funds have filed registration statements with the SEC to issue MuniFund Term Preferred Shares.  This is a form of preferred stock which will be listed on the NYSE.  The three closed-end funds issuing these shares are Nuveen Arizona Dividend Advantage Municipal Fund (AMEX: NFZ), Nuveen Michigan Dividend Advantage Municipal Fund (AMEX: NZW) and Nuveen Ohio Dividend Advantage Municipal Fund 3 (AMEX: NVJ).

This term MTP is a fixed rate form of preferred stock with a mandatory redemption period. By issuing MuniFund Term Preferred Shares, the funds “are seeking to take advantage of the current historically low-interest rate environment to lock in an attractive tax-exempt cost of leverage for as long as the term of the MTP.”

Issuing MuniFund Term Preferred Shares helps the funds “mitigate the risk of a significant increase in its cost of leverage should short-term interest rates rise.”

I have put a note into Nuveen’s press contact regarding this because this is not a usual issuance.  Will these be tax-free dividends on a federal income tax basis?  Are these meant to be dividend backstops in case Michigan, Arizona, or Ohio municipalities get into worse financial shape than they are now?

Nuveen Arizona Dividend Advantage Municipal Fund (AMEX: NFZ) and Nuveen Michigan Dividend Advantage Municipal Fund (AMEX: NZW) have a 6.3% yield based upon the last dividend and both are very thinly traded with under 10,000 shares per day trading. Nuveen Ohio Dividend Advantage Municipal Fund 3 (AMEX: NVJ) yields 5.8% and is also very low volume.

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JON C. OGG
JANUARY 29, 2010