|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended April 30, 2013 (Unaudited)
|
|
BlackRock
Credit Allocation
Income Trust
(BTZ)
|
|
|
BlackRock
Floating Rate
Income Trust
(BGT)
1
|
|
|
BlackRock
Multi-Sector
Income Trust
(BIT)
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
53,275,173
|
|
|
$
|
14,164,983
|
|
|
$
|
7,209,724
|
|
Dividends unaffiliated
|
|
|
1,118,364
|
|
|
|
|
|
|
|
|
|
Dividends affiliated
|
|
|
5,003
|
|
|
|
1,336
|
|
|
|
23,563
|
|
|
|
|
|
|
Total income
|
|
|
54,398,540
|
|
|
|
14,166,319
|
|
|
|
7,233,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment advisory
|
|
|
6,654,494
|
|
|
|
1,800,368
|
|
|
|
1,047,688
|
|
Professional
|
|
|
137,358
|
|
|
|
105,704
|
|
|
|
35,054
|
|
Officer and Trustees
|
|
|
125,825
|
|
|
|
22,523
|
|
|
|
14,012
|
|
Accounting services
|
|
|
105,627
|
|
|
|
29,503
|
|
|
|
23,932
|
|
Custodian
|
|
|
54,732
|
|
|
|
70,952
|
|
|
|
17,174
|
|
Transfer agent
|
|
|
87,393
|
|
|
|
20,815
|
|
|
|
14,818
|
|
Borrowing costs
3
|
|
|
|
|
|
|
85,794
|
|
|
|
|
|
Reorganization costs
|
|
|
60,581
|
|
|
|
|
|
|
|
|
|
Organization
|
|
|
|
|
|
|
|
|
|
|
33,000
|
|
Printing
|
|
|
16,095
|
|
|
|
9,231
|
|
|
|
6,262
|
|
Registration
|
|
|
8,869
|
|
|
|
4,525
|
|
|
|
3,286
|
|
Miscellaneous
|
|
|
46,784
|
|
|
|
26,126
|
|
|
|
10,044
|
|
|
|
|
|
|
Total expenses excluding interest expense
|
|
|
7,297,758
|
|
|
|
2,175,541
|
|
|
|
1,205,270
|
|
Interest expense
|
|
|
1,046,315
|
|
|
|
652,890
|
|
|
|
67,199
|
|
|
|
|
|
|
Total expenses
|
|
|
8,344,073
|
|
|
|
2,828,431
|
|
|
|
1,272,469
|
|
Less fees waived by Manager
|
|
|
(3,083
|
)
|
|
|
(743
|
)
|
|
|
(18,691
|
)
|
|
|
|
|
|
Total expenses after fees waived
|
|
|
8,340,990
|
|
|
|
2,827,688
|
|
|
|
1,253,778
|
|
|
|
|
|
|
Net investment income
|
|
|
46,057,550
|
|
|
|
11,338,631
|
|
|
|
5,979,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and Unrealized Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss) from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
19,295,306
|
|
|
|
4,404,811
|
|
|
|
(42,606
|
)
|
Financial futures contracts
|
|
|
2,067,701
|
|
|
|
|
|
|
|
99,413
|
|
Foreign currency transactions
|
|
|
(62,757
|
)
|
|
|
1,402,601
|
|
|
|
(592,744
|
)
|
Options written
|
|
|
(1,324,013
|
)
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
2,420,717
|
|
|
|
153,856
|
|
|
|
294,823
|
|
|
|
|
|
|
|
|
|
22,396,954
|
|
|
|
5,961,268
|
|
|
|
(241,114
|
)
|
|
|
|
|
|
Net change in unrealized appreciation/depreciation on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
22,895,376
|
|
|
|
6,272,957
|
|
|
|
18,175,300
|
|
Financial futures contracts
|
|
|
(5,433,632
|
)
|
|
|
|
|
|
|
(914,674
|
)
|
Foreign currency translations
|
|
|
(11,066
|
)
|
|
|
(1,476,890
|
)
|
|
|
(833,828
|
)
|
Options written
|
|
|
2,124,109
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
(2,376,871
|
)
|
|
|
19,341
|
|
|
|
558,406
|
|
Unfunded loan commitments
|
|
|
|
|
|
|
10,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,197,916
|
|
|
|
4,825,757
|
|
|
|
16,985,204
|
|
|
|
|
|
|
Total realized and unrealized gain
|
|
|
39,594,870
|
|
|
|
10,787,025
|
|
|
|
16,744,090
|
|
|
|
|
|
|
Net Increase in Net Assets Resulting from Operations
|
|
$
|
85,652,420
|
|
|
$
|
22,125,656
|
|
|
$
|
22,723,599
|
|
|
|
|
|
|
|
|
|
1
Consolidated Statement of
Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
2
For the period February 27, 2013
(commencement of operations) to April 30, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
3
See Note 6 of the Notes to Financial
Statements for details of short-term borrowings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
|
|
|
|
Statements of Changes in Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BlackRock Credit Allocation
Income Trust (BTZ)
|
|
|
|
|
BlackRock Floating Rate
Income Trust (BGT)
1
|
|
Increase (Decrease) in Net Assets:
|
|
Six Months Ended
April 30,
2013
(Unaudited)
|
|
|
Year Ended
October 31,
2012
|
|
|
|
|
Six Months Ended
April 30,
2013
(Unaudited)
|
|
|
Year Ended
October 31,
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
46,057,550
|
|
|
$
|
48,604,985
|
|
|
|
|
$
|
11,338,631
|
|
|
$
|
22,900,163
|
|
Net realized gain
|
|
|
22,396,954
|
|
|
|
2,008,796
|
|
|
|
|
|
5,961,268
|
|
|
|
505,502
|
|
Net change in unrealized appreciation/depreciation
|
|
|
17,197,916
|
|
|
|
72,603,230
|
|
|
|
|
|
4,825,757
|
|
|
|
15,613,331
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
|
85,652,420
|
|
|
|
123,217,011
|
|
|
|
|
|
22,125,656
|
|
|
|
39,018,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to Shareholders From
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(48,410,759
|
)
|
|
|
(48,718,467
|
)
2
|
|
|
|
|
(14,187,260
|
)
|
|
|
(25,867,315
|
)
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Share Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinvestment of dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
277,776
|
|
|
|
300,131
|
|
Net proceeds from the issuance of shares due to reorganization
|
|
|
862,691,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets derived from capital share transactions
|
|
|
862,691,514
|
|
|
|
|
|
|
|
|
|
277,776
|
|
|
|
300,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in net assets
|
|
|
899,933,175
|
|
|
|
74,498,544
|
|
|
|
|
|
8,216,172
|
|
|
|
13,451,812
|
|
Beginning of period
|
|
|
796,835,719
|
|
|
|
722,337,175
|
|
|
|
|
|
343,282,417
|
|
|
|
329,830,605
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
1,696,768,894
|
|
|
$
|
796,835,719
|
|
|
|
|
$
|
351,498,589
|
|
|
$
|
343,282,417
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed (distributions in excess of) net investment income
|
|
$
|
(2,267,698
|
)
|
|
$
|
757,568
|
|
|
|
|
$
|
427,764
|
|
|
$
|
3,276,393
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Consolidated Statements of Changes in Net Assets.
|
2
|
|
Dividends are determined in accordance with federal income tax regulations.
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
45
|
|
|
|
Statement of Changes in Net Assets
|
|
BlackRock Multi-Sector Income Trust (BIT)
|
|
|
|
|
|
|
|
Increase (Decrease) in Net Assets:
|
|
Period
February 27, 2013
1
to April 30,
2013
(Unudited)
|
|
|
|
|
|
|
|
|
Operations
|
|
|
|
|
|
|
Net investment income
|
|
|
|
$
|
5,979,509
|
|
Net realized loss
|
|
|
|
|
(241,114
|
)
|
Net change in unrealized appreciation/depreciation
|
|
|
|
|
16,985,204
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
|
|
|
22,723,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to Shareholders From
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
(4,483,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Share Transactions
|
|
|
|
|
|
|
Net proceeds from the issuance of shares
|
|
|
|
|
686,229,426
|
|
Net proceeds from the underwriters over allotment option exercised
|
|
|
|
|
46,120,006
|
|
|
|
|
|
|
|
|
Net increase in net assets derived from capital share transactions
|
|
|
|
|
732,349,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
Total increase in net assets
|
|
|
|
|
750,589,227
|
|
Beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
|
$
|
750,589,227
|
|
|
|
|
|
|
|
|
Undistributed net investment income
|
|
|
|
$
|
1,495,705
|
|
|
|
|
|
|
|
|
1
|
|
Commencement of operations.
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended April 30, 2013 (Unaudited)
|
|
BlackRock
Credit Allocation
Income Trust
(BTZ)
|
|
|
BlackRock
Floating Rate
Income Trust
(BGT)
1
|
|
|
BlackRock
Multi- Sector
Income Trust
(BIT)
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used for) Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
85,652,420
|
|
|
$
|
22,125,656
|
|
|
$
|
22,723,599
|
|
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used for) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in interest receivable
|
|
|
(140,808
|
)
3
|
|
|
144,333
|
|
|
|
(10,350,199
|
)
|
(Increase) decrease in swaps receivable
|
|
|
37,198
|
|
|
|
(14,061
|
)
|
|
|
(73,750
|
)
|
Increase in prepaid expenses
|
|
|
(24,708
|
)
3
|
|
|
(665
|
)
|
|
|
|
|
Increase in variation margin receivable
|
|
|
(467,303
|
)
|
|
|
|
|
|
|
(33,750
|
)
|
Decrease in dividends receivable
|
|
|
66,400
|
|
|
|
|
|
|
|
|
|
Increase in cash pledged as collateral for financial futures contracts
|
|
|
(5,197,879
|
)
3
|
|
|
|
|
|
|
(472,000
|
)
|
(Increase) decrease in cash pledged as collateral for swaps
|
|
|
1,790,000
|
|
|
|
|
|
|
|
(600,000
|
)
|
Increase in investment advisory fees payable
|
|
|
605,114
|
|
|
|
3,549
|
|
|
|
564,963
|
|
Increase (decrease) in interest expense payable
|
|
|
(64,103
|
)
|
|
|
10,342
|
|
|
|
66,230
|
|
Decrease in cash received as collateral for reverse repurchase agreements
|
|
|
(2,502,900
|
)
|
|
|
|
|
|
|
|
|
Decrease in cash received as collateral for swaps
|
|
|
(500,000
|
)
|
|
|
|
|
|
|
|
|
Decrease in reorganization costs payable
|
|
|
(294,700
|
)
|
|
|
|
|
|
|
|
|
Increase (decrease) in other accrued expenses payable
|
|
|
(1,461,999
|
)
3
|
|
|
18,095
|
|
|
|
105,435
|
|
Decrease in variation margin payable
|
|
|
(334,500
|
)
|
|
|
|
|
|
|
|
|
Increase in swaps payable
|
|
|
223,941
|
|
|
|
|
|
|
|
|
|
Increase in Officers and Trustees fees payable
|
|
|
265,897
|
|
|
|
12,915
|
|
|
|
|
|
Net periodic and termination payments of swaps
|
|
|
3,893,638
|
|
|
|
852,548
|
|
|
|
1,319,163
|
|
Net realized and unrealized gain on investments and swaps
|
|
|
(42,912,293
|
)
|
|
|
(8,463,010
|
)
|
|
|
(18,141,976
|
)
|
Amortization of premium and accretion of discount on investments and swaps
|
|
|
2,566,605
|
|
|
|
(802,931
|
)
|
|
|
(1,472,586
|
)
|
Premiums received from options written
|
|
|
356,773
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of long-term investments
|
|
|
471,314,152
|
|
|
|
207,759,080
|
|
|
|
173,367,751
|
|
Purchases of long-term investments
|
|
|
(424,840,091
|
)
|
|
|
(201,999,040
|
)
|
|
|
(1,105,515,385
|
)
|
Net proceeds from sales (purchases) of short-term securities
|
|
|
1,410,604
|
|
|
|
(3,043,778
|
)
|
|
|
(12,116,795
|
)
|
Premiums paid on closing options written
|
|
|
(4,233,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used for) operating activities
|
|
|
85,207,820
|
|
|
|
16,603,033
|
|
|
|
(950,629,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used for) Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash receipts from issuance of common shares
|
|
|
|
|
|
|
|
|
|
|
732,349,432
|
|
Cash receipts from borrowings
|
|
|
|
|
|
|
154,000,000
|
|
|
|
|
|
Cash payments on borrowings
|
|
|
|
|
|
|
(156,000,000
|
)
|
|
|
|
|
Net borrowings of reverse repurchase agreements
|
|
|
(36,198,258
|
)
|
|
|
|
|
|
|
220,742,061
|
|
Cash dividends paid to shareholders
|
|
|
(48,240,752
|
)
|
|
|
(13,909,484
|
)
|
|
|
(4,382,203
|
)
|
Increase (decrease) in bank overdraft
|
|
|
(826,690
|
)
3
|
|
|
(166,749
|
)
|
|
|
2,010,809
|
|
|
|
|
|
|
Cash provided by (used for) financing activities
|
|
|
(85,265,700
|
)
|
|
|
(16,076,233
|
)
|
|
|
950,720,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Impact from Foreign Exchange Fluctuations
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash impact from foreign exchange fluctuations
|
|
|
|
|
|
|
484
|
|
|
|
930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Foreign Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and foreign currency
|
|
|
(57,880
|
)
|
|
|
527,284
|
|
|
|
91,729
|
|
Cash and foreign currency at beginning of period
|
|
|
57,880
|
|
|
|
168,646
|
|
|
|
|
|
|
|
|
|
|
Cash and foreign currency at end of period
|
|
|
|
|
|
$
|
695,930
|
|
|
$
|
91,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
1,110,418
|
|
|
$
|
642,548
|
|
|
$
|
969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of investments acquired through reorganization
|
|
$
|
1,252,477,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital shares issued in reorganization
|
|
$
|
762,017,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital shares issued in reinvestment of dividends
|
|
|
|
|
|
$
|
277,776
|
|
|
|
|
|
|
|
|
|
|
1
Consolidated Statement of Cash Flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
2
For the period February 27, 2013 (commencement of
operations) to April 30, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
3
Includes assets and liabilities acquired in
reorganization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
47
|
|
|
|
Financial Highlights
|
|
BlackRock Credit Allocation Income Trust (BTZ)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ended
April 30,
2013
(Unaudited)
|
|
|
Year Ended October 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
15.37
|
|
|
$
|
13.94
|
|
|
$
|
14.46
|
|
|
$
|
12.64
|
|
|
$
|
10.59
|
|
|
$
|
21.39
|
|
|
|
|
|
|
Net investment income
1
|
|
|
0.48
|
|
|
|
0.94
|
|
|
|
0.88
|
|
|
|
0.85
|
|
|
|
0.99
|
|
|
|
1.33
|
|
Net realized and unrealized gain (loss)
|
|
|
0.36
|
|
|
|
1.43
|
|
|
|
(0.54
|
)
|
|
|
2.14
|
|
|
|
2.54
|
|
|
|
(10.06
|
)
|
Dividends to Preferred Shareholders from net investment income
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
(0.07
|
)
|
|
|
(0.07
|
)
|
|
|
(0.33
|
)
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
0.84
|
|
|
|
2.37
|
|
|
|
0.33
|
|
|
|
2.92
|
|
|
|
3.46
|
|
|
|
(9.06
|
)
|
|
|
|
|
|
Dividends and distributions to Common Shareholders from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.51
|
)
2
|
|
|
(0.94
|
)
3
|
|
|
(0.85
|
)
3
|
|
|
(0.81
|
)
3
|
|
|
(0.93
|
)
3
|
|
|
(0.90
|
)
3
|
Tax return of capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.29
|
)
3
|
|
|
(0.48
|
)
3
|
|
|
(0.84
|
)
3
|
|
|
|
|
|
Total dividends and distributions
|
|
|
(0.51
|
)
|
|
|
(0.94
|
)
|
|
|
(0.85
|
)
|
|
|
(1.10
|
)
|
|
|
(1.41
|
)
|
|
|
(1.74
|
)
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
15.70
|
|
|
$
|
15.37
|
|
|
$
|
13.94
|
|
|
$
|
14.46
|
|
|
$
|
12.64
|
|
|
$
|
10.59
|
|
|
|
|
|
|
Market price, end of period
|
|
$
|
14.42
|
|
|
$
|
14.23
|
|
|
$
|
12.08
|
|
|
$
|
13.02
|
|
|
$
|
10.96
|
|
|
$
|
9.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Return Applicable to Common Shareholders
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
5.88%
|
5
|
|
|
18.35%
|
|
|
|
3.28%
|
|
|
|
25.16%
|
|
|
|
41.06%
|
|
|
|
(44.27)%
|
|
|
|
|
|
|
Based on market price
|
|
|
5.04%
|
5
|
|
|
26.44%
|
|
|
|
(0.60)%
|
|
|
|
29.98%
|
|
|
|
38.38%
|
|
|
|
(43.51)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
6
|
|
|
1.15%
|
7,8
|
|
|
1.20%
|
9
|
|
|
1.09%
|
|
|
|
1.12%
|
|
|
|
1.60%
|
|
|
|
1.65%
|
|
|
|
|
|
|
Total expenses after fees waived and paid
indirectly
6
|
|
|
1.14%
|
7,8
|
|
|
1.20%
|
9
|
|
|
1.09%
|
|
|
|
1.11%
|
|
|
|
1.58%
|
|
|
|
1.65%
|
|
|
|
|
|
|
Total expenses after fees waived and paid indirectly and excluding interest expense
6
|
|
|
1.00%
|
7,8
|
|
|
1.07%
|
9
|
|
|
0.99%
|
|
|
|
1.07%
|
|
|
|
1.24%
|
|
|
|
1.21%
|
|
|
|
|
|
|
Net investment income
6
|
|
|
6.32%
|
7
|
|
|
6.53%
|
|
|
|
6.25%
|
|
|
|
6.33%
|
|
|
|
9.93%
|
|
|
|
7.63%
|
|
|
|
|
|
|
Dividends to Preferred Shareholders
|
|
|
|
|
|
|
|
|
|
|
0.09%
|
|
|
|
0.50%
|
|
|
|
0.74%
|
|
|
|
1.89%
|
|
|
|
|
|
|
Net investment income to Common Shareholders
|
|
|
6.32%
|
7
|
|
|
6.53%
|
|
|
|
6.16%
|
|
|
|
5.83%
|
|
|
|
9.19%
|
|
|
|
5.74%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of period (000)
|
|
$
|
1,696,769
|
|
|
$
|
796,836
|
|
|
$
|
722,337
|
|
|
$
|
749,360
|
|
|
$
|
654,999
|
|
|
$
|
548,612
|
|
|
|
|
|
|
Preferred Shares outstanding at $25,000 liquidation preference, end of period (000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
231,000
|
|
|
$
|
231,000
|
|
|
$
|
231,000
|
|
|
|
|
|
|
Borrowings outstanding, end of period (000)
|
|
$
|
750,036
|
|
|
$
|
373,716
|
|
|
$
|
339,303
|
|
|
|
|
|
|
$
|
61,576
|
|
|
$
|
223,512
|
|
|
|
|
|
|
Average borrowings outstanding during the period (000)
|
|
$
|
682,715
|
|
|
$
|
312,634
|
|
|
$
|
182,843
|
|
|
$
|
63,660
|
|
|
$
|
76,521
|
|
|
$
|
107,377
|
|
|
|
|
|
|
Portfolio turnover
|
|
|
22%
|
|
|
|
37%
|
|
|
|
54%
|
|
|
|
64%
|
|
|
|
30%
|
|
|
|
126%
|
|
|
|
|
|
|
Asset coverage per Preferred Share at $25,000 liquidation preference, end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
106,104
|
|
|
$
|
95,892
|
|
|
$
|
84,384
|
|
|
|
|
|
|
Asset coverage, end of period per $1,000
|
|
$
|
3,262
|
|
|
$
|
3,132
|
|
|
$
|
3,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Based on average shares outstanding.
|
2
|
|
A portion of the dividends from net investment income may be deemed a tax return of capital or net realized gain at fiscal year end.
|
3
|
|
Dividends and distributions are determined in accordance with federal income tax regulations.
|
4
|
|
Total investment returns based on market price, which can be significantly greater or lesser than the net asset value, may result in substantially
different returns. Where applicable, total investment returns exclude the effects of any sales charges and include the reinvestment of dividends and distributions.
|
5
|
|
Aggregate total investment return.
|
6
|
|
Do not reflect the effect of dividends to Preferred Shareholders.
|
8
|
|
Includes reorganization costs associated with the Trusts merger. Without these costs, total expenses, total expenses after fees waived and paid
indirectly, and total expenses after fees waived and paid indirectly and excluding interest expense would have been 1.14%, 1.13% and 0.99%, respectively.
|
9
|
|
Includes reorganization costs associated with the Trusts merger. Without these costs, total expenses, total expenses after fees waived and paid
indirectly, and total expenses after fees waived and paid indirectly and excluding interest expense would have been 1.16%, 1.16% and 1.02%, respectively.
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
|
|
|
|
Financial Highlights
|
|
BlackRock Floating Rate Income Trust (BGT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ended
April
30,
2013
1
(Unaudited)
|
|
|
Year Ended October 31,
|
|
|
Period
January 1, 2008
to October 31,
2008
|
|
|
Year Ended
December 31,
2007
|
|
|
|
|
2012
1
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
14.52
|
|
|
$
|
13.97
|
|
|
$
|
14.48
|
|
|
$
|
13.29
|
|
|
$
|
11.24
|
|
|
$
|
17.71
|
|
|
$
|
19.11
|
|
|
|
|
|
|
Net investment income
|
|
|
0.48
|
2
|
|
|
0.97
|
2
|
|
|
1.00
|
2
|
|
|
0.97
|
2
|
|
|
0.98
|
2
|
|
|
1.42
|
2
|
|
|
2.03
|
|
Net realized and unrealized gain (loss)
|
|
|
0.46
|
|
|
|
0.68
|
|
|
|
(0.42
|
)
|
|
|
1.09
|
|
|
|
2.72
|
|
|
|
(6.62
|
)
|
|
|
(1.39
|
)
|
Dividends to Preferred Shareholders from net investment income
|
|
|
|
|
|
|
|
|
|
|
(0.00
|
)
3
|
|
|
(0.04
|
)
|
|
|
(0.04
|
)
|
|
|
(0.24
|
)
|
|
|
(0.54
|
)
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
0.94
|
|
|
|
1.65
|
|
|
|
0.58
|
|
|
|
2.02
|
|
|
|
3.66
|
|
|
|
(5.44
|
)
|
|
|
0.10
|
|
|
|
|
|
|
Dividends and distributions to Common Shareholders from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.60
|
)
4
|
|
|
(1.10
|
)
5
|
|
|
(1.09
|
)
5
|
|
|
(0.83
|
)
5
|
|
|
(1.19
|
)
5
|
|
|
(1.03
|
)
5
|
|
|
(1.14)
5
|
|
Tax return of capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.42
|
)
5
|
|
|
|
|
|
|
(0.36)
5
|
|
|
|
|
|
|
Total dividends and distributions
|
|
|
(0.60
|
)
|
|
|
(1.10
|
)
|
|
|
(1.09
|
)
|
|
|
(0.83
|
)
|
|
|
(1.61
|
)
|
|
|
(1.03
|
)
|
|
|
(1.50
|
)
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
14.86
|
|
|
$
|
14.52
|
|
|
$
|
13.97
|
|
|
$
|
14.48
|
|
|
$
|
13.29
|
|
|
$
|
11.24
|
|
|
$
|
17.71
|
|
|
|
|
|
|
Market price, end of period
|
|
$
|
16.00
|
|
|
$
|
15.07
|
|
|
$
|
13.00
|
|
|
$
|
14.52
|
|
|
$
|
12.58
|
|
|
$
|
9.63
|
|
|
$
|
15.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Return Applicable to Common Shareholders
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
6.56%
|
7
|
|
|
12.37%
|
|
|
|
4.03%
|
|
|
|
15.55%
|
|
|
|
39.51%
|
|
|
|
(31.62
|
)%
7
|
|
|
0.98%
|
|
|
|
|
|
|
Based on market price
|
|
|
10.55%
|
7
|
|
|
25.33%
|
|
|
|
(3.46
|
)%
|
|
|
22.41%
|
|
|
|
54.14%
|
|
|
|
(34.24
|
)%
7
|
|
|
(10.92)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
8
|
|
|
1.65%
|
9
|
|
|
1.66%
|
|
|
|
1.73%
|
|
|
|
1.43%
|
|
|
|
1.96%
|
|
|
|
2.22%
|
9
|
|
|
1.67%
|
|
|
|
|
|
|
Total expenses after fees waived and paid
indirectly
8
|
|
|
1.64%
|
9
|
|
|
1.61%
|
|
|
|
1.60%
|
|
|
|
1.25%
|
|
|
|
1.68%
|
|
|
|
1.89%
|
9
|
|
|
1.33%
|
|
|
|
|
|
|
Total expenses after fees waived and paid indirectly and excluding interest expense
8
|
|
|
1.27%
|
9,10
|
|
|
1.25%
|
11
|
|
|
1.24%
|
|
|
|
1.15%
|
|
|
|
1.24%
|
|
|
|
1.21%
|
9
|
|
|
1.16%
|
|
|
|
|
|
|
Net investment income
8
|
|
|
6.60%
|
9
|
|
|
6.87%
|
|
|
|
6.95%
|
|
|
|
7.01%
|
|
|
|
8.92%
|
|
|
|
10.56%
|
9
|
|
|
10.83%
|
|
|
|
|
|
|
Dividends to Preferred Shareholders
|
|
|
|
|
|
|
|
|
|
|
0.03%
|
|
|
|
0.27%
|
|
|
|
0.38%
|
|
|
|
1.75%
|
9
|
|
|
2.88%
|
|
|
|
|
|
|
Net investment income to Common Shareholders
|
|
|
6.60%
|
9
|
|
|
6.87%
|
|
|
|
6.92%
|
|
|
|
6.74%
|
|
|
|
8.54%
|
|
|
|
8.81%
|
9
|
|
|
7.95%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of period (000)
|
|
$
|
351,499
|
|
|
$
|
343,282
|
|
|
$
|
329,831
|
|
|
$
|
341,436
|
|
|
$
|
312,872
|
|
|
$
|
264,590
|
|
|
$
|
417,086
|
|
|
|
|
|
|
Preferred Shares outstanding at $25,000 liquidation preference, end of period (000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,800
|
|
|
$
|
58,800
|
|
|
$
|
58,800
|
|
|
$
|
243,450
|
|
|
|
|
|
|
Borrowings outstanding, end of period (000)
|
|
$
|
143,000
|
|
|
$
|
145,000
|
|
|
$
|
122,000
|
|
|
$
|
38,000
|
|
|
$
|
14,000
|
|
|
$
|
123,150
|
|
|
|
|
|
|
|
|
|
|
Average borrowings outstanding during the period (000)
|
|
$
|
137,304
|
|
|
$
|
126,186
|
|
|
$
|
120,334
|
|
|
$
|
24,321
|
|
|
$
|
53,156
|
|
|
$
|
71,780
|
|
|
$
|
10,524
|
|
|
|
|
|
|
Portfolio turnover
|
|
|
38%
|
|
|
|
65%
|
|
|
|
89%
|
|
|
|
87%
|
|
|
|
42%
|
|
|
|
25%
|
|
|
|
41%
|
|
|
|
|
|
|
Asset coverage per Preferred Share at $25,000 liquidation preference, end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
170,174
|
|
|
$
|
158,029
|
|
|
$
|
137,505
|
|
|
$
|
67,849
|
|
|
|
|
|
|
Asset coverage, end of period per $1,000
|
|
$
|
3,458
|
|
|
$
|
3,367
|
|
|
$
|
3,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Consolidated Financial Highlights.
|
2
|
|
Based on average shares outstanding.
|
3
|
|
Amount is greater than $(0.01) per share.
|
4
|
|
A portion of the dividends from net investment income may be deemed a tax return of capital or net realized gain at fiscal year end.
|
5
|
|
Dividends and distributions are determined in accordance with federal income tax regulations.
|
6
|
|
Total investment returns based on market price, which can be significantly greater or lesser than the net asset value, may result in substantially
different returns. Where applicable, total investment returns exclude the effects of any sales charges and include the reinvestment of dividends and distributions.
|
7
|
|
Aggregate total investment return.
|
8
|
|
Do not reflect the effect of dividends to Preferred Shareholders.
|
10
|
|
For the six months ended April 30, 2013, the total expense ratio after fees waived and paid indirectly and excluding interest expense and borrowing
costs was 1.22%.
|
11
|
|
For the year ended October 31, 2012, the total expense ratio after fees waived and paid indirectly and excluding interest expense and borrowing costs
was 1.14%.
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
49
|
|
|
|
Financial Highlights
|
|
BlackRock Multi-Sector Income Trust (BIT)
|
|
|
|
|
|
|
|
Period
February 27,
2013
1
to April
30,
2013
(Unaudited)
|
|
|
|
|
|
|
|
|
Per Share Operating Performance
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
19.10
|
2
|
|
|
|
|
|
Net investment income
3
|
|
|
0.16
|
|
Net realized and unrealized gain
|
|
|
0.40
|
|
|
|
|
|
|
Net increase from investment operations
|
|
|
0.56
|
|
|
|
|
|
|
Dividends from net investment income
4
|
|
|
(0.12
|
)
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
19.54
|
|
|
|
|
|
|
Market price, end of period
|
|
$
|
19.16
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Return
5
|
|
|
|
|
Based on net asset value
|
|
|
2.93%
|
6
|
|
|
|
|
|
Based on market price
|
|
|
(3.62
|
)%
6
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets
|
|
|
|
|
Total expenses
7
|
|
|
1.05%
|
8
|
|
|
|
|
|
Total expenses after fees waived
7
|
|
|
1.03%
|
8
|
|
|
|
|
|
Total expenses after fees waived and excluding interest
expense
7
|
|
|
0.97%
|
8
|
|
|
|
|
|
Net investment income
6
|
|
|
5.04%
|
8
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
Net assets, end of period (000)
|
|
$
|
750,589
|
|
|
|
|
|
|
Borrowings outstanding, end of period (000)
|
|
$
|
220,742
|
|
|
|
|
|
|
Average borrowings outstanding, during the period (000)
|
|
$
|
76,441
|
|
|
|
|
|
|
Portfolio turnover
|
|
|
26%
|
9
|
|
|
|
|
|
Asset coverage, end of period per $1,000
|
|
$
|
4,400
|
|
|
|
|
|
|
1
|
|
Commencement of operations.
|
2
|
|
Net asset value, beginning of period, reflects a reduction of $0.90 per share sales charge from the initial offering price of $20.00 per share.
|
3
|
|
Based on average shares outstanding.
|
4
|
|
A portion of the dividends from net investment income may be deemed a tax return of capital or net realized gain at fiscal year end.
|
5
|
|
Total investment returns based on market price, which can be significantly greater or lesser than the net asset value, may result in substantially
different returns. Where applicable, total investment returns exclude the effects of any sales charges and include the reinvestment of dividends and distributions.
|
6
|
|
Aggregate total investment return.
|
8
|
|
Certain expenses incurred during the period February 27, 2013 to April 30, 2013 have been included in the ratio, but not annualized. If these
expenses were annualized, the annualized ratio of total expenses, total expenses after fees waived, total expenses after fees waived and excluding interest expense and net investment income would have been 1.07%, 1.05%, 0.99% and 5.02%,
respectively.
|
9
|
|
Includes mortgage dollar roll transactions. Excluding these transactions, the portfolio turnover rate would have been 16%.
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
|
|
|
|
Notes to Financial Statements
(Unaudited)
|
|
|
1. Organization and Significant Accounting Policies:
BlackRock Credit Allocation Income Trust
(BTZ) (formerly known as BlackRock Credit Allocation Income Trust IV), BlackRock Floating Rate Income Trust (BGT) and BlackRock Multi-Sector Income Trust (BIT) (collectively, the Trusts or individually
as a Trust) are registered under the 1940 Act as non-diversified, closed-end management investment companies. The Trusts are organized as Delaware statutory trusts. Prior to commencement of operations on February 27, 2013, BIT had
no operations other than those relating to organizational matters and the sale of 6,964 Common Shares on December 31, 2012 to BlackRock Holdco 2, Inc., an affiliate of BIT, for $133,012. Investment operations for BIT commenced on
February 27, 2013. The Trusts financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP), which may require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those
estimates. The Boards of Trustees of the Trusts are collectively referred to throughout this report as the Board of Trustees or the Board, and the trustees thereof are collectively referred to throughout this report as
Trustees. The Trusts determine and make available for publication the NAVs of their Common Shares on a daily basis.
Reorganization:
The Board and shareholders of BTZ and the respective Boards of Directors and Board of Trustees and shareholders of each of BlackRock Credit Allocation Income Trust I, Inc. (PSW), BlackRock Credit Allocation Income Trust II, Inc.
(PSY) and BlackRock Credit Allocation Income Trust IIII (BPP) (individually, a Target Fund and collectively the Target Funds) approved the reorganization of its respective Target Fund into BTZ pursuant
to which BTZ acquired substantially all of the assets and substantially all of the liabilities of each Target Fund in exchange for an equal aggregate value of newlyissued shares of BTZ in a merger transaction.
Each shareholder of a Target Fund received shares of BTZ in an amount equal to the aggregate net asset value of such shareholders Target Fund shares,
as determined at the close of business on December 7, 2012, less the cost of the Target Funds reorganization. Cash was distributed for any fractional shares.
The reorganizations were accomplished by a tax-free exchange of shares of BTZ in the following amounts and at the following conversion ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Fund
|
|
Shares Prior to
Reorganization
|
|
|
Conversion
Ratio
|
|
|
Shares
of
BTZ
|
|
PSW
|
|
|
10,311,941
|
|
|
|
0.74476327
|
|
|
|
7,679,944
|
|
PSY
|
|
|
40,807,418
|
|
|
|
0.80162384
|
|
|
|
32,712,181
|
|
BPP
|
|
|
18,467,785
|
|
|
|
0.85922134
|
|
|
|
15,867,888
|
|
Each Target Funds net assets and composition of net assets on December 7, 2012, the date of the reorganization,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Funds
|
|
|
|
PSW
|
|
|
PSY
|
|
|
BPP
|
|
Net assets
|
|
$
|
117,764,870
|
|
|
$
|
501,609,101
|
|
|
$
|
243,318,554
|
|
Paid-in capital
|
|
$
|
220,759,069
|
|
|
$
|
855,557,957
|
|
|
$
|
421,683,737
|
|
Undistributed (distributions in excess of) net investment income
|
|
$
|
(271,460
|
)
|
|
$
|
(379,634
|
)
|
|
$
|
(20,963
|
)
|
Accumulated net realized loss
|
|
$
|
(117,819,600
|
)
|
|
$
|
(415,840,977
|
)
|
|
$
|
(201,649,795
|
)
|
Net unrealized appreciation (depreciation)
|
|
$
|
15,096,861
|
|
|
$
|
62,271,755
|
|
|
$
|
23,305,575
|
|
For financial reporting purposes, assets received and shares issued by BTZ were recorded at fair value. However, the cost
basis of the investments being received from the Target Funds were carried forward to align ongoing reporting of BTZs realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
The net assets of BTZ before the acquisition were $794,732,940. The aggregate net assets of BTZ immediately after the acquisition amounted to $1,657,424,622.
Each Target Funds fair value and cost of investments prior to the reorganization were as follows:
|
|
|
|
|
|
|
|
|
Target Fund
|
|
Fair Value of
Investments
|
|
|
Cost
of
Investments
|
|
PSW
|
|
$
|
173,824,678
|
|
|
$
|
158,779,261
|
|
PSY
|
|
$
|
728,147,930
|
|
|
$
|
666,028,086
|
|
BPP
|
|
$
|
354,504,965
|
|
|
$
|
331,424,010
|
|
The purpose of these transactions was to combine four funds managed by the Manager with the same or substantially similar
(but not identical) investment objectives, investment policies, strategies, risks and restrictions. Each reorganization was a tax-free event and was effective on December 10, 2012.
Assuming the acquisition had been completed on November 1, 2012 the beginning of the fiscal reporting period of BTZ, the pro forma results of operations for the six months ended April 30, 2013, are
as follows:
|
|
Net investment income: $41,071,752
|
|
|
Net realized and change in unrealized gain/loss on investments: $60,501,185
|
|
|
Net increase/decrease in net assets resulting from operations: $101,572,937
|
Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of the
Target Funds that have been included in BTZs Statement of Operations since December 10, 2012.
Reorganization costs incurred in
connection with the reorganization were expensed by BTZ.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
51
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
The Board of Trustees approved a change in the name of BTZ from BlackRock Credit Allocation Income Trust IV to BlackRock Credit Allocation Income Trust. This change was effective
February 11, 2013.
The following is a summary of significant accounting policies followed by the Trusts:
Basis of Consolidation: BGTs accompanying consolidated financial statements include the account of BGT Subsidiary, LLC (the Taxable
Subsidiary), which is a wholly owned taxable subsidiary of BGT. The Taxable Subsidiary enables BGT to hold an investment in J.G. Wentworth LLC Preferred Equity Interests, an operating company and to satisfy Regulated Investment Company
(RIC) tax requirements. Income earned and gains realized on the investments held by the Taxable Subsidiary are taxable to such subsidiary. A tax provision for income, if any, is shown as income tax in the Consolidated Statement of
Operations for BGT. A tax provision for realized and unrealized gains, if any, is included as a reduction of realized and/or unrealized gain (loss) in the Consolidated Statement of Operations for BGT. BGT may invest up to 25% of its total assets in
the Taxable Subsidiary. Intercompany accounts and transactions, if any, have been eliminated.
The Taxable Subsidiary is subject to the same
investment policies and restrictions that apply to BGT.
Valuation: US GAAP defines fair value as the price the Trusts would receive to sell
an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The Trusts determine the fair values of their financial instruments at market value using independent dealers or pricing services
under policies approved by the Board. The Global Valuation Methodologies Committee is the committee formed by management to develop global pricing policies and procedures and to provide oversight of the pricing function for the Trusts for all
financial instruments.
The Trusts value their bond investments on the basis of last available bid prices or current market quotations provided by
dealers or pricing services. Floating rate loan interests are valued at the mean of the bid prices from one or more brokers or dealers as obtained from a pricing service. In determining the value of a particular investment, pricing services may use
certain information with respect to transactions in such investments, quotations from dealers, pricing matrixes, market transactions in comparable investments, various relationships observed in the market between investments and calculated yield
measures. Asset-backed and mortgage-backed securities are valued by independent pricing services using models that consider estimated cash flows of each tranche of the security, establish a benchmark yield and develop an estimated tranche specific
spread to the benchmark yield based on the unique attributes of the tranche. Financial futures contracts traded on exchanges are valued at their last sale price. Swap agreements are valued utilizing quotes received daily by the Trusts pricing
service or through brokers, which are derived using daily swap curves and models that incorporate a number of market data factors, such as discounted cash flows, trades and values of the underlying reference instruments. Investments in open-end
registered investment companies are valued at NAV each business day. Short-term securities with remaining maturities of 60 days or less may be valued at amortized cost, which approximates fair value.
Municipal investments (including commitments to purchase such investments on a when-issued basis) are valued on the basis of prices provided by
dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrixes, market transactions in
comparable investments and information with respect to various relationships between investments.
Equity investments traded on a recognized
securities exchange or the NASDAQ Global Market System (NASDAQ) are valued at the last reported sale price that day or the NASDAQ official closing price, if applicable. For equity investments traded on more than one exchange, the last
reported sale price on the exchange where the stock is primarily traded is used. Equity investments traded on a recognized exchange for which there were no sales on that day are valued at the last available bid price. If no bid price is available,
the prior days price will be used, unless it is determined that such prior days price no longer reflects the fair value of the security.
Securities and other assets and liabilities denominated in foreign currencies are translated into US dollars using exchange rates determined as of the close of business on the New York Stock Exchange
(NYSE). Foreign currency exchange contracts are valued at the mean between the bid and ask prices and are determined as of the close of business on the NYSE. Interpolated values are derived when the settlement date of the contract is an
interim date for which quotations are not available.
Exchange-traded options are valued at the mean between the last bid and ask prices at the
close of the options market in which the options trade. An exchange-traded option for which there is no mean price is valued at the last bid (long positions) or ask (short positions) price. If no bid or ask price is available, the prior days
price will be used, unless it is determined that the prior days price no longer reflects the fair value of the option. Over-the-counter (OTC) options and swaptions are valued by an independent pricing service using a mathematical
model, which incorporates a number of market data factors, such as the trades and prices of the underlying instruments.
In the event that
application of these methods of valuation results in a price for an investment that is deemed not to be representative of the market value of such investment, or if a price is not available, the investment will be valued by the Global Valuation
Committee, or its delegate, in accordance with a policy approved by the Board as reflecting fair value (Fair Value Assets). When determining the price for Fair Value Assets, the Global Valuation Committee, or its delegate, seeks to
determine the price that each Trust might reasonably expect to receive from the current sale of that asset in an arms-length transaction. Fair value determinations shall be based upon all available factors that the Global Valuation Committee,
or its delegate, deem relevant consistent with the principles of fair value measurement, which include the market approach, income approach and/or in the case of recent investments, the cost approach, as appropriate. A market approach generally
consists of using comparable market transactions. The income approach generally is used to discount future cash flows to present value and adjusted for liquidity as appropriate. These factors include but are not limited to: (i) attributes
specific to the investment or asset; (ii) the principal market for the investment or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
asset; (iii) the customary participants in the principal market for the investment or asset; (iv) data assumptions by market participants for the investment or asset, if reasonably
available; (v) quoted prices for similar investments or assets in active markets; and (vi) other factors, such as future cash flows, interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, recovery
rates, liquidation amounts and/or default rates. Due to the inherent uncertainty of valuations of such investments, the fair values may differ from the values that would have been used had an active market existed. The Global Valuation Committee, or
its delegate, employs various methods for calibrating valuation approaches for investments where an active market does not exist, including regular due diligence of the Trusts pricing vendors, a regular review of key inputs and assumptions,
transactional back-testing or disposition analysis to compare unrealized gains and losses to realized gains and losses, reviews of missing or stale prices and large movements in market values and reviews of any market related activity. The pricing
of all Fair Value Assets is subsequently reported to the Board or a committee thereof on a quarterly basis.
Generally, trading in foreign
instruments is substantially completed each day at various times prior to the close of business on the NYSE. Occasionally, events affecting the values of such instruments may occur between the foreign market close and the close of business on the
NYSE that may not be reflected in the computation of the Trusts net assets. If events (for example, a company announcement, market volatility or a natural disaster) occur during such periods that are expected to affect the value of such
instruments materially, those instruments may be Fair Value Assets and be valued at their fair value, as determined in good faith by the Global Valuation Committee using a pricing service and/or policies approved by the Board.
Foreign Currency: The Trusts books and records are maintained in US dollars. Purchases and sales of investment securities are recorded at the rates of
exchange prevailing on the respective date of such transactions. Generally, when the US dollar rises in value against a foreign currency, the Trusts investments denominated in that currency will lose value because that currency is worth fewer
US dollars; the opposite effect occurs if the US dollar falls in relative value.
The Trusts do not isolate the portion of the results of
operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of investments held or sold for financial reporting purposes. Accordingly, the effects of changes in foreign currency exchange rates on
investments are not segregated in the Statements of Operations from the effects of changes in market prices of those investments but are included as a component of net realized and unrealized gain (loss) from investments. The Trusts report realized
currency gains (losses) on foreign currency related transactions as components of net realized gain (loss) for financial reporting purposes, whereas such components are treated as ordinary income for federal income tax purposes.
Asset-Backed and Mortgage-Backed Securities: The Trusts may invest in asset-backed securities. Asset-backed securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in an underlying pool of assets, or as debt instruments, which are also known as collateralized obligations, and are generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and issuing such debt. Asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. The yield characteristics of certain
asset-backed securities may differ from traditional debt securities. One such major difference is that all or a principal part of the obligations may be prepaid at any time because the underlying assets (i.e., loans) may be prepaid at any time. As a
result, a decrease in interest rates in the market may result in increases in the level of prepayments as borrowers, particularly mortgagors, refinance and repay their loans. An increased prepayment rate with respect to an asset-backed security
subject to such a prepayment feature will have the effect of shortening the maturity of the security. In addition, the Trusts may have to subsequently reinvest the proceeds at lower interest rates. If the Trusts have purchased such an asset-backed
security at a premium, a faster than anticipated prepayment rate could result in a loss of principal to the extent of the premium paid.
The
Trusts may purchase certain mortgage pass-through securities. There are a number of important differences among the agencies and instrumentalities of the US government that issue mortgage-related securities and among the securities that they issue.
For example, mortgage-related securities guaranteed by Ginnie Mae are guaranteed as to the timely payment of principal and interest by Ginnie Mae and such guarantee is backed by the full faith and credit of the United States. However,
mortgage-related securities issued by Freddie Mac and Fannie Mae, including Freddie Mac and Fannie Mae guaranteed mortgage pass-through certificates, which are solely the obligations of Freddie Mac and Fannie Mae, are not backed by or entitled to
the full faith and credit of the United States but are supported by the right of the issuer to borrow from the Treasury.
Collateralized Debt
Obligations: The Trusts may invest in collateralized debt obligations (CDOs), which include collateralized bond obligations (CBOs) and collateralized loan obligations (CLOs). CBOs and CLOs are types of
asset-backed securities. A CDO is an entity which is backed by a diversified pool of debt securities (CBOs) or syndicated bank loans (CLOs). The cash flows of the CDO can be split into multiple segments, called tranches, which will vary
in risk profile and yield. The riskiest segment is the subordinated or equity tranche. This tranche bears the greatest risk of defaults from the underlying assets in the CDO and serves to protect the other, more senior, tranches from
default in all but the most severe circumstances. Since it is shielded from defaults by the more junior tranches, a senior tranche will typically have higher credit ratings and lower yields than their underlying securities, and often
receive investment grade ratings from one or more of the nationally recognized rating agencies. Despite the protection from the more junior tranches, senior tranches can experience substantial losses due to actual defaults, increased sensitivity to
future defaults and the disappearance of one or more protecting tranches as a result of changes in the credit profile of the underlying pool of assets.
Multiple Class Pass-Through Securities: The Trusts may invest in multiple class pass-through securities, including collateralized mortgage obligations (CMOs) and commercial mortgage-backed
securities. These multiple class securities may be issued by Ginnie Mae, US government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
53
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
agencies or instrumentalities or by trusts formed by private originators of, or investors in, mortgage loans. In general, CMOs are debt obligations of a legal entity that are collateralized by,
and multiple class pass-through securities represent direct ownership interests in, a pool of residential or commercial mortgage loans or mortgage pass-through securities (the Mortgage Assets), the payments on which are used to make
payments on the CMOs or multiple pass-through securities. Classes of CMOs include interest only (IOs), principal only (POs), planned amortization classes and targeted amortization classes. IOs and POs are stripped
mortgage-backed securities representing interests in a pool of mortgages, the cash flow from which has been separated into interest and principal components. IOs receive the interest portion of the cash flow while POs receive the principal portion.
IOs and POs can be extremely volatile in response to changes in interest rates. As interest rates rise and fall, the value of IOs tends to move in the same direction as interest rates. POs perform best when prepayments on the underlying mortgages
rise since this increases the rate at which the principal is returned and the yield to maturity on the PO. When payments on mortgages underlying a PO are slower than anticipated, the life of the PO is lengthened and the yield to maturity is reduced.
If the underlying Mortgage Assets experience greater than anticipated pre-payments of principal, the Trusts may not fully recoup their initial investment in IOs.
Zero-Coupon Bonds: The Trusts may invest in zero-coupon bonds, which are normally issued at a significant discount from face value and do not provide for periodic interest payments. Zero-coupon bonds may
experience greater volatility in market value than similar maturity debt obligations which provide for regular interest payments.
Capital Trusts:
The Trusts may invest in capital trusts. These securities are typically issued by corporations, generally in the form of interest-bearing notes with preferred securities characteristics, or by an affiliated business trust of a corporation, generally
in the form of beneficial interests in subordinated debentures or similarly structured securities. The securities can be structured as either fixed or adjustable coupon securities that can have either a perpetual or stated maturity date. Dividends
can be deferred without creating an event of default or acceleration, although maturity cannot take place unless all cumulative payment obligations have been met. The deferral of payments does not affect the purchase or sale of these securities in
the open market. Payments on these securities are treated as interest rather than dividends for federal income tax purposes. These securities generally are rated below that of the issuing companys senior debt securities.
Preferred Stock: The Trusts may invest in preferred stock. Preferred stock has a preference over common stock in liquidation (and generally in receiving
dividends as well) but is subordinated to the liabilities of the issuer in all respects. As a general rule, the market value of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived
credit risk, while the market price of convertible preferred stock generally also reflects some element of conversion value. Because preferred stock is junior to debt securities and other obligations of the issuer, deterioration in the credit
quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics. Unlike interest payments on debt securities, preferred stock dividends are payable only
if declared by the issuers board of directors. Preferred stock also may be subject to optional or mandatory redemption provisions.
Floating
Rate Loan Interests: The Trusts may invest in floating rate loan interests. The floating rate loan interests the Trusts holds are typically issued to companies (the borrower) by banks, other financial institutions, and privately and
publicly offered corporations (the lender). Floating rate loan interests are generally non-investment grade, often involve borrowers whose financial condition is troubled or uncertain and companies that are highly leveraged. The Trusts
may invest in obligations of borrowers who are in bankruptcy proceedings. Floating rate loan interests may include fully funded term loans or revolving lines of credit. Floating rate loan interests are typically senior in the corporate capital
structure of the borrower. Floating rate loan interests generally pay interest at rates that are periodically determined by reference to a base lending rate plus a premium. The base lending rates are generally the lending rate offered by one or more
European banks, such as the London Interbank Offered Rate (LIBOR), the prime rate offered by one or more US banks or the certificate of deposit rate. Floating rate loan interests may involve foreign borrowers, and investments may be
denominated in foreign currencies. The Trusts consider these investments to be investments in debt securities for purposes of its investment policies.
When the Trusts purchase a floating rate loan interest they may receive a facility fee and when they sell a floating rate loan interest they may pay a facility fee. On an ongoing basis, the Trusts may
receive a commitment fee based on the undrawn portion of the underlying line of credit amount of a floating rate loan interest. Facility and commitment fees are typically amortized to income over the term of the loan or term of the commitment,
respectively. Consent and amendment fees are recorded to income as earned. Prepayment penalty fees, which may be received by the Trusts upon the prepayment of a floating rate loan interest by a borrower, are recorded as realized gains. The Trusts
may invest in multiple series or tranches of a loan. A different series or tranche may have varying terms and carry different associated risks.
Floating rate loan interests are usually freely callable at the borrowers option. The Trusts may invest in such loans in the form of participations in
loans (Participations) or assignments (Assignments) of all or a portion of loans from third parties. Participations typically will result in the Trusts having a contractual relationship only with the lender, not with the
borrower. The Trusts will have the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the Participation and only upon receipt by the lender of the payments from the borrower. In
connection with purchasing Participations, the Trusts generally will have no right to enforce compliance by the borrower with the terms of the loan agreement, nor any rights of offset against the borrower, and the Trusts may not benefit directly
from any collateral supporting the loan in which it has purchased the Participation. As a result, the Trusts will assume the credit risk of both the borrower and the lender that is selling the Participation. The Trusts investment in loan
participation interests involves the risk of insolvency of the financial intermediaries who are parties to the transactions. In the event of the insolvency of the lender
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
selling the Participation, the Trusts may be treated as a general creditor of the lender and may not benefit from any offset between the lender and the borrower. Assignments typically result in
the Trusts having a direct contractual relationship with the borrower, and the Trusts may enforce compliance by the borrower with the terms of the loan agreement.
Forward Commitments and When-Issued Delayed Delivery Securities: The Trusts may purchase securities on a when-issued basis and may purchase or sell securities on a forward commitment basis. Settlement of
such transactions normally occurs within a month or more after the purchase or sale commitment is made. The Trusts may purchase securities under such conditions with the intention of actually acquiring them, but may enter into a separate agreement
to sell the securities before the settlement date. Since the value of securities purchased may fluctuate prior to settlement, the Trusts may be required to pay more at settlement than the security is worth. In addition, the Trusts are not entitled
to any of the interest earned prior to settlement. When purchasing a security on a delayed delivery basis, the Trusts assume the rights and risks of ownership of the security, including the risk of price and yield fluctuations. In the event of
default by the counterparty, the Trusts maximum amount of loss is the unrealized appreciation of unsettled when-issued transactions, which is shown in the Schedules of Investments.
Reverse Repurchase Agreements: The Trusts may enter into reverse repurchase agreements with qualified third party broker-dealers. In a reverse repurchase agreement, the Trusts sell a security to the
counterparty, a bank or broker-dealer, and agree to repurchase the same security at a mutually agreed upon date and price. Certain agreements have no stated maturity and can be terminated by either party at any time. During the term of the reverse
repurchase agreement, the Trusts continue to receive the principal and interest payments on the security delivered to the counterparty. Interest on the value of the reverse repurchase agreements issued and outstanding is based upon competitive
market rates determined at the time of issuance. The Trusts may utilize reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest
expense of the transaction. Reverse repurchase agreements involve leverage risk and also the risk that the market value of the security that the Trusts are obligated to repurchase under the agreement may decline below the repurchase price.
For financial reporting purposes, cash received in exchange for securities delivered plus accrued interest payments to be made to the
counterparty is recorded as a liability in the Statements of Assets and Liabilities at face value including accrued interest. Due to the short term nature of the reverse repurchase agreements, face value approximates fair value. Interest payments
made by the Trusts to the counterparties are recorded as a component of interest expense in the Statements of Operations. In periods of increased demand for the security, a Trust may receive a fee for use of the security by the counterparty, which
may result in interest income to the Trust.
Reverse repurchase transactions are entered into by the Trusts under Master Repurchase Agreements
(MRA) which permit the Trusts, under certain circumstances including an event of default (such as bankruptcy or insolvency), to offset payables and/or receivables under the MRA with collateral held and/or posted to the counterparty and create one
single net payment due to or from the Trust. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against such a right of offset in the event of an MRA counterpartys bankruptcy or
insolvency. Pursuant to the terms of the MRA, each Trust is posting securities as collateral with a market value in excess of the repurchase price to be paid by such Trust upon the maturity of the reverse repurchase transaction. Upon a
bankruptcy or insolvency of the MRA counterparty, the Trust is considered an unsecured creditor with respect to such excess collateral and as such the return of such excess collateral may be delayed.
BIT has adopted the new disclosure requirements on offsetting in the following table. As such, the following table is a summary of BITs open reverse
repurchase agreements by counterparty which are subject to a MRA on a net payment basis as of April 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
Reverse
Repurchase
Agreements
|
|
|
Fair Value of
Non-cash
Collateral
Pledged
|
|
|
Cash
Collateral
Pledged
|
|
|
Net
Amount
1
|
|
Barclays Capital, Inc.
|
|
$
|
35,199,368
|
|
|
$
|
(35,199,368)
|
|
|
|
|
|
|
|
|
|
UBS Securities LLC
|
|
|
80,834,549
|
|
|
|
(80,834,549)
|
|
|
|
|
|
|
|
|
|
Deutsche Bank Securities, Inc.
|
|
|
98,913,658
|
|
|
|
(98,913,658)
|
|
|
|
|
|
|
|
|
|
Credit Suisse Securities (USA) LLC
|
|
|
5,860,716
|
|
|
|
(5,860,716)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
220,808,291
|
|
|
$
|
(220,808,291)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Net amount represents the net amount payable due to the counterparty in the
event of default.
|
In the event the buyer of the security under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the Trusts use of the proceeds of the agreement may be restricted while the other party, or its trustee or receiver, determines whether or not to enforce the Trusts obligation to repurchase the security.
Segregation and Collateralization: In cases in which the 1940 Act and the interpretive positions of the Securities and Exchange Commission (SEC)
require that each Trust either deliver collateral or segregate assets in connection with certain investments (e.g., financial futures contracts, foreign currency exchange contracts, swaps and options written), or certain borrowings (e.g., reverse
repurchase agreements and loan payable), each Trust will, consistent with SEC rules and/or certain interpretive letters issued by the SEC, segregate collateral or designate on its books and records cash or liquid securities having a market value at
least equal to the amount that would otherwise be required to be physically segregated. Furthermore, based on requirements and agreements with certain exchanges and third party broker-dealers, a Trust engaging in such transactions may have
requirements to deliver/deposit securities to/with an exchange or broker-dealer as collateral for certain investments. Typically, the Trusts are permitted to sell, re-pledge or use collateral received from the counterparty, but counterparties
typically are not permitted to sell, re-pledge or use the collateral they receive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
55
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
Investment Transactions and Investment Income: For financial reporting purposes, investment transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and
losses on investment transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the
Trusts are informed of the ex-dividend date. Under the applicable foreign tax laws, a withholding tax at various rates may be imposed on capital gains, dividends and interest. Upon notification from issuers, some of the dividend income received from
a real estate investment trust may be redesignated as a reduction of cost of the related investment and/or realized gain. Interest income, including amortization and accretion of premiums and discounts on debt securities, is recognized on the
accrual basis.
Dividends and Distributions: Dividends from net investment income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates. The portion of distributions that exceeds a Trusts current and accumulated earnings and profits, which are measured on a tax basis, will constitute a nontaxable return of capital. Distributions in
excess of a Trusts taxable income and net capital gains, but not in excess of a Trusts earnings and profits
,
will be taxable to shareholders as ordinary income and will not constitute a nontaxable return of capital. Capital
losses carried forward from years beginning before 2011 do not reduce earnings and profits, even if such carried forward losses offset current year realized gains. The character and timing of dividends and distributions are determined in accordance
with federal income tax regulations, which may differ from US GAAP.
Income Taxes: It is the Trusts policy to comply with the requirements
of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all of their taxable income to their shareholders. Therefore, no federal income tax provision is required.
Each Trust files US federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on the
Trusts US federal tax returns, except BITs, remains open for each of the four years ended October 31, 2012. The statutes of limitations on the Trusts state and local tax returns, except BITs, may remain open for an
additional year depending upon the jurisdiction. Management does not believe there are any uncertain tax positions that require recognition of a tax liability.
Recent Accounting Standards: In December 2011, the Financial Accounting Standards Board (the FASB) issued guidance that will expand current disclosure requirements on the offsetting of certain
assets and liabilities. The new disclosures will be required for investments and derivative financial instruments subject to master netting or similar agreements which are eligible for offset in the Statements of Assets and Liabilities and will
require an entity to disclose both gross and net information about such investments and transactions in the financial statements. In January 2013, the FASB issued guidance that clarifies which investments and transactions are subject to the
offsetting disclosure requirements. The scope of the disclosure requirements for offsetting will be limited to derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending
transactions. The guidance is effective for financial statements with fiscal years beginning on or after January 1, 2013, and interim periods within those fiscal years. BIT adopted the disclosure provisions on offsetting during the current
reporting period. The disclosures required have been included for BITs reverse repurchase agreements and derivative financial instruments in Note 1 and Note 2, respectively. Management is evaluating the impact of this guidance on BTZs
and BGTs financial statement disclosures.
Deferred Compensation Plan: Under the Deferred Compensation Plan (the Plan) approved
by each Trusts Board, the independent Trustees (Independent Trustees) may defer a portion of their annual complex-wide compensation. Deferred amounts earn an approximate return as though equivalent dollar amounts had been invested
in common shares of certain other BlackRock Closed-End Funds selected by the Independent Trustees. This has the same economic effect for the Independent Trustees as if the Independent Trustees had invested the deferred amounts directly in certain
other BlackRock Closed-End Funds.
The Plan is not funded and obligations thereunder represent general unsecured claims against the general assets
of each Trust. Deferred compensation liabilities are included in Officers and Trustees fees payable in the Statements of Assets and Liabilities and will remain as a liability of the Trusts until such amounts are distributed in accordance
with the Plan.
Other: Expenses directly related to a Trust are charged to that Trust. Other operating expenses shared by several funds are pro
rated among those funds on the basis of relative net assets or other appropriate methods.
The Trusts have an arrangement with the custodian
whereby fees may be reduced by credits earned on uninvested cash balances, which, if applicable, are shown as fees paid indirectly in the Statements of Operations. The custodian imposes fees on overdrawn cash balances, which can be offset by
accumulated credits earned or may result in additional custody charges.
2. Derivative Financial Instruments:
The Trusts engage in various portfolio investment strategies using derivative contracts both to increase the returns of the Trusts and/or to economically
hedge their exposure to certain risks such as credit risk, interest rate risk or foreign currency exchange rate risk. These contracts may be transacted on an exchange or OTC.
Financial Futures Contracts: The Trusts purchase and/or sell financial futures contracts and options on financial futures contracts to gain exposure to, or economically hedge against, changes in interest
rates (interest rate risk). Financial futures contracts are agreements between a Trust and a counterparty to buy or sell a specific quantity of an underlying instrument at a specified price and at a specified date. Depending on the terms of the
particular contract, financial futures contracts are settled either through physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. Upon entering into a financial
futures contract, the Trusts are required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on a contracts size and risk profile. The initial margin deposit must then be maintained
at an established level over the life of the contract. Securities deposited as
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
initial margin are designated on the Schedules of Investments and cash deposited is recorded on the Statements of Assets and Liabilities as cash pledged for financial futures contracts. Pursuant
to the contract, the Trusts agree to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Trusts as unrealized
appreciation or depreciation. When the contract is closed, the Trusts record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The use of financial
futures contracts involves the risk of an imperfect correlation in the movements in the price of financial futures contracts, interest or foreign currency exchange rates and the underlying assets.
Foreign Currency Exchange Contracts: The Trusts enter into foreign currency exchange contracts as an economic hedge against either specific transactions or
portfolio instruments or to obtain exposure to foreign currencies (foreign currency exchange rate risk). A foreign currency exchange contract is an agreement between two parties to buy and sell a currency at a set exchange rate on a future date.
Foreign currency exchange contracts, when used by the Trusts, help to manage the overall exposure to the currencies in which some of the investments held by the Trusts are denominated. The contract is marked-to-market daily and the change in market
value is recorded by the Trusts as an unrealized gain or loss. When the contract is closed, the Trusts record a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The
use of foreign currency exchange contracts involves the risk that the value of a foreign currency exchange contract changes unfavorably due to movements in the value of the referenced foreign currencies and the risk that the counterparty to the
contract does not perform its obligations under the agreement.
Options: The Trusts purchase and write call and put options to increase or
decrease their exposure to underlying instruments (including interest rate risk) and/or, in the case of options written, to generate gains from options premiums. A call option gives the purchaser (holder) of the option the right (but not the
obligation) to buy, and obligates the seller (writer) to sell (when the option is exercised), the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. A put option gives the holder the
right to sell and obligates the writer to buy the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. When the Trusts purchase (write) an option, an amount equal to the premium paid
(received) by the Trusts is reflected as an asset (liability). The amount of the asset (liability) is subsequently marked-to-market to reflect the current market value of the option purchased (written).When an instrument is purchased or sold through
an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the instrument acquired or deducted from (or added to) the proceeds of the instrument sold. When an option expires (or the Trusts enter into
a closing transaction), the Trusts realize a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premiums received or paid). When the Trusts write a
call option, such option is covered, meaning that the Trusts hold the underlying instrument subject to being called by the option counterparty. When the Trusts write a put option, such option is covered by cash in an amount sufficient to
cover the obligation.
Options on swaps (swaptions) are similar to options on securities except that instead of selling or purchasing the right to
buy or sell a security, the writer or purchaser of the swap option is granting or buying the right to enter into a previously agreed upon interest rate swap agreement (interest rate risk) at any time before the expiration of the option.
In purchasing and writing options, the Trusts bear the risk of an unfavorable change in the value of the underlying instrument or the risk that the Trusts
may not be able to enter into a closing transaction due to an illiquid market. Exercise of an option written could result in the Trusts purchasing or selling a security at a price different from the current market value.
Swaps: The Trusts enter into swap agreements, in which a Trust and a counterparty agree either to make periodic net payments on a specified notional amount
or a net payment upon termination. These payments received or made by the Trusts are recorded in the Statements of Operations as realized gains or losses, respectively. Any upfront fees paid are recorded as assets and any upfront fees received are
recorded as liabilities and are shown as swap premiums paid and swap premiums received, respectively in the Statements of Assets and Liabilities and amortized over the term of the swap. Swap agreements are privately negotiated in the OTC market and
may be entered into as a bilateral contract or centrally cleared (centrally cleared swaps). In a centrally cleared swap, immediately following execution of the swap agreement, the swap agreement is novated to a central counterparty (the
CCP) and the Trusts face the CCP through a broker. Upon entering into a centrally cleared swap, the Trusts are required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on the
size and risk profile of the particular swap. Securities deposited as initial margin are designated on the Schedules of Investments and cash deposited is recorded on the Statements of Assets and Liabilities as cash pledged for centrally cleared
swaps. Swaps are marked-to-market daily and changes in value are recorded as unrealized appreciation (depreciation). The daily change in valuation of centrally cleared swaps, if any, is recorded as a receivable or payable for variation margin in the
Statements of Assets and Liabilities. When the swap is terminated, the Trusts will record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Trusts basis in the contract, if
any. Generally, the basis of the contracts is the premium received or paid. Swap transactions involve, to varying degrees, elements of interest rate, credit and market risk in excess of the amounts recognized in the Statements of Assets and
Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of the contractual terms in the
agreements, and that there may be unfavorable changes in interest rates and/or market values associated with these transactions.
|
|
Credit default swaps The Trusts enter into credit default swaps to manage their exposure to the market or certain sectors of the market,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
57
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
|
to reduce their risk exposure to defaults of corporate and/or sovereign issuers or to create exposure to corporate and/or sovereign issuers to which they are not otherwise exposed (credit risk).
The Trusts may either buy or sell (write) credit default swaps on single-name issuers (corporate or sovereign), a combination or basket of single-name issuers or traded indexes. Credit default swaps on single-name issuers are agreements in which the
protection buyer pays fixed periodic payments to the seller in consideration for a guarantee from the protection seller to make a specific payment should a negative credit event take place with respect to the referenced entity (e.g., bankruptcy,
failure to pay, obligation accelerators, repudiation, moratorium or restructuring). Credit default swaps on traded indexes are agreements in which the buyer pays fixed periodic payments to the seller in consideration for a guarantee from the seller
to make a specific payment should a write-down, principal or interest shortfall or default of all or individual underlying securities included in the index occurs. As a buyer, if an underlying credit event occurs, the Trusts will either receive from
the seller an amount equal to the notional amount of the swap and deliver the referenced security or underlying securities comprising the index or receive a net settlement of cash equal to the notional amount of the swap less the recovery value of
the security or underlying securities comprising the index. As a seller (writer), if an underlying credit event occurs, the Trusts will either pay the buyer an amount equal to the notional amount of the swap and take delivery of the referenced
security or underlying securities comprising the index or pay a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying securities comprising the index.
|
|
|
Interest rate swaps The Trusts enter into interest rate swaps to gain or reduce exposure to interest rates or to manage duration, the yield curve
or interest rate risk by economically hedging the value of the fixed rate bonds which may decrease when interest rates rise (interest rate risk). Interest rate swaps are agreements in which one party pays a stream of interest payments, either fixed
or floating, for another partys stream of interest payments, either fixed or floating, on the same notional amount for a specified period of time. Interest rate floors, which are a type of interest rate swap, are agreements in which one party
agrees to make payments to the other party to the extent that interest rates fall below a specified rate or floor in return for a premium. In more complex swaps, the notional principal amount may decline (or amortize) over time.
|
A derivative contract may suffer a mark to market loss if the value of the contract decreases due to an unfavorable change in
the market rates or values of the underlying instrument. Losses can also occur if the counterparty does not perform under the contract. A Trusts risk of loss from counterparty credit risk on OTC derivatives is generally limited to the
aggregate unrealized gain netted against any collateral held by such Trust. For OTC options purchased, each Trust bears the risk of loss of the amount of the premiums paid plus the positive change in market values net of any collateral held by such
Trust should the counterparty fail to perform under the contracts. Options written by the Trusts do not typically give rise to counterparty credit risk, as options written generally obligate the Trusts, and not, the counterparty to perform. With
exchange traded purchased options and futures and centrally cleared swaps, there is minimal counterparty credit risk to the Trusts since the exchanges clearinghouse, as counterparty to such instruments, guarantees against a possible default.
The clearinghouse stands between the buyer and the seller of the contract; therefore, the credit risk is limited to failure of the clearinghouse. However, credit risk still exists in exchange traded futures and centrally cleared swaps with respect
to initial and variation margin that is held in a brokers customer accounts. While brokers are required to segregate customer margin from their own assets, in the event that a broker becomes insolvent or goes into bankruptcy and at that time
there is a shortfall in the aggregate amount of margin held by the broker for all its clients, US bankruptcy laws will typically allocate that shortfall on a pro rata basis across all the brokers customers, potentially resulting in losses to
the Trusts.
In order to better define its contractual rights and to secure rights that will help the Trusts mitigate their counterparty risk, the
Trusts may enter into an International Swaps and Derivatives Association, Inc. Master Agreement (ISDA Master Agreement) or similar agreement with their derivative contract counterparties. An ISDA Master Agreement is a bilateral agreement
between each Tust and a counterparty that governs OTC derivatives and foreign exchange contracts and typically contains, among other things, collateral posting terms and netting provisions in the event of a default and/or termination event. Under an
ISDA Master Agreement, each Trust may, under certain circumstances, offset with the counterparty certain derivative financial instruments payables and/or receivables with collateral held and/or posted and create one single net payment. The
provisions of the ISDA Master Agreement typically permit a single net payment in the event of default (close-out netting) including the bankruptcy or insolvency of the counterparty. However, bankruptcy or insolvency laws of a particular jurisdiction
may impose restrictions on or prohibitions against the right of offset in bankruptcy, insolvency or other events.
Collateral and margin
requirements differ by type of derivative. Margin requirements are established by the broker or clearinghouse for exchange traded and centrally cleared derivatives (financial futures contracts, options and centrally cleared swaps). Brokers can ask
for margining in excess of the minimum in certain circumstances. Collateral terms are contract specific for OTC derivatives (foreign currency exchange contracts and swaps). For derivatives traded under an ISDA Master Agreement, the collateral
requirements are typically calculated by netting the mark to market amount for each transaction under such agreement and comparing that amount to the value of any collateral currently pledged by the Trusts and the counterparty. For financial
reporting purposes, cash collateral that has been pledged to cover obligations of the Trusts and cash collateral received from the counterparty, if any, is reported separately on the Statements of Assets and Liabilities as cash pledged as collateral
and cash received as collateral, respectively. Non-cash collateral pledged by the Trusts, if any, is noted in the Schedules of Investments. Generally, the amount of collateral due from or to a party has to exceed a minimum transfer amount threshold
(e.g. $500,000) before a transfer has to be made, which is determined at the close of business of the Trusts and additional required collateral is delivered to/pledged by the Trusts on the next business day. To the extent amounts due to the Trusts
from their counterparties are not fully collateralized,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
contractually or otherwise, the Trusts bear the risk of loss from counterparty non-performance. See Note 1 Segregation and Collateralization for information with respect to collateral
practices. Each Trust attempts to mitigate counterparty risk by only entering into agreements with counterparties that it believes have the financial resources to honor their obligations and by monitoring the financial stability of those
counterparties.
Certain ISDA Master Agreements allow counterparties to OTC derivatives to terminate derivative contracts prior to maturity in the
event the Trusts
net assets decline by a stated percentage or the Trusts fail to meet the terms of their ISDA Master Agreements, which
would cause the Trusts to accelerate payment of any net liability owed to the counterparty.
For financial reporting purposes, the Trusts do not
offset derivative assets and derivative liabilities that are subject to netting arrangements in the Statements of Assets and Liabilities.
BIT has
adopted the new disclosure requirements on offsetting in the following tables.
At April 30, 2013, BITs derivative assets and liabilities
(by type) are as follows:
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
Derivative Financial Instruments:
|
|
|
|
|
|
|
|
|
Financial futures contracts
|
|
$
|
33,750
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
|
|
|
|
$
|
845,160
|
|
Swaps
|
|
|
558,406
|
|
|
|
1,024,340
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets and liabilities in the Statements of Assets and Liabilities
|
|
|
592,156
|
|
|
|
1,869,500
|
|
|
|
|
|
|
|
|
|
|
Derivatives not subject to a master netting agreement or similar agreement (MNA)
|
|
|
33,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets and liabilities subject to MNA
|
|
$
|
558,406
|
|
|
$
|
1,869,500
|
|
|
|
|
|
|
|
|
|
|
The following table presents BITs derivative assets by counterparty net of amounts available for offset under a MNA and
net of the related collateral received by the Trust as of April 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
Derivative Assets
Subject to a MNA
by
Counterparty
|
|
Derivatives
Available for Offset
|
|
|
Non-cash
Collateral
Received
|
|
|
Cash
Collateral
Received
|
|
|
Net Amount of
Derivative
Assets
1
|
|
Bank of America NA
|
|
$558,406
|
|
$
|
(558,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents BITs derivative liabilities by counterparty net of amounts available for offset under a
MNA and net of the related collateral pledged by the Trust as of April 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
Derivative Liabilities
Subject to a MNA by
Counterparty
|
|
Derivatives
Available for Offset
|
|
|
Non-cash
Collateral
Pledged
|
|
|
Cash
Collateral
Pledged
|
|
|
Net Amount of
Derivative
Liabilities
2
|
|
Bank of America NA
|
|
$1,869,500
|
|
$
|
(558,406
|
)
|
|
|
|
|
|
$
|
(600,000
|
)
|
|
$
|
711,094
|
|
|
1
|
|
Net amount represents the net amount receivable from the counterparty in the event of default.
|
|
2
|
|
Net amount represents the net amount payable due to the counterparty in the event of default.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments Categorized by Risk
Exposure:
|
|
|
|
Fair Values of Derivative Financial Instruments as of April 30, 2013
|
|
|
|
Asset Derivatives
|
|
|
|
|
|
BTZ
|
|
|
BGT
|
|
|
BIT
|
|
|
|
Statements of Assets and Liabilities Location
|
|
Value
|
|
Interest rate contracts
|
|
Net unrealized appreciation/depreciation
3
; Unrealized appreciation on swaps; Investments at value
unaffiliated
4
|
|
$
|
348,880
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
|
Unrealized appreciation on foreign currency exchange contracts
|
|
|
|
|
|
$
|
13,830
|
|
|
|
|
|
Credit contracts
|
|
Unrealized appreciation on swaps; swap premiums paid
|
|
|
1,781,149
|
|
|
|
59,378
|
|
|
$
|
558,406
|
|
|
|
|
|
Total
|
|
|
|
$
|
2,130,029
|
|
|
$
|
73,208
|
|
|
$
|
558,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
59
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments Categorized by Risk
Exposure:
|
|
|
|
Fair Values of Derivative Financial Instruments as of April 30, 2013
|
|
|
|
Liability
Derivatives
|
|
|
|
|
|
BTZ
|
|
|
BGT
|
|
|
BIT
|
|
|
|
Statements of Assets and Liabilities Location
|
|
Value
|
|
Interest rate contracts
|
|
Net unrealized appreciation/depreciation
3
; Unrealized depreciation on swaps
2
; Options written at value
|
|
$
|
(6,617,366
|
)
|
|
|
|
|
|
$
|
(914,674
|
)
|
Foreign currency exchange contracts
|
|
Unrealized depreciation on foreign currency exchange contracts
|
|
|
(19,324
|
)
|
|
$
|
(889,935
|
)
|
|
|
(845,160
|
)
|
Credit contracts
|
|
Unrealized depreciation on swaps; swap premiums received
|
|
|
(3,587,815
|
)
|
|
|
(738,729
|
)
|
|
|
(1,024,340
|
)
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(10,224,505
|
)
|
|
$
|
(1,628,664
|
)
|
|
$
|
(2,784,174
|
)
|
|
|
|
|
|
|
|
3
Includes cumulative appreciation/depreciation on financial futures contracts and centrally cleared swaps as reported in the Schedules of Investments. Only the
current days variation margin is reported within the Statements of Assets and Liabilities.
4
Includes options purchased at value as reported in the Schedules of Investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Financial Instruments in the
Statements of
Operations
Six Months Ended April 30, 2013
|
|
|
|
|
|
Net Realized Gain (Loss) From
|
|
|
|
|
|
BTZ
|
|
|
BGT
|
|
|
BIT
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial futures contracts
|
|
$
|
2,067,701
|
|
|
|
|
|
|
$
|
99,413
|
|
Swaps
|
|
|
2,798,586
|
|
|
|
|
|
|
|
|
|
Options
1
|
|
|
(2,799,979
|
)
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency transactions
|
|
|
(59,010
|
)
|
|
$
|
1,595,520
|
|
|
|
(391,512
|
)
|
Options
1
|
|
|
(422,450
|
)
|
|
|
|
|
|
|
|
|
Credit contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
(377,869
|
)
|
|
|
153,856
|
|
|
|
294,823
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,206,979
|
|
|
$
|
1,749,376
|
|
|
$
|
2,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Unrealized
Appreciation/Depreciation on
|
|
|
|
BTZ
|
|
|
BGT
|
|
|
BIT
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial futures contracts
|
|
$
|
(5,433,632
|
)
|
|
|
|
|
|
$
|
(914,674
|
)
|
Swaps
|
|
|
(1,967,121
|
)
|
|
|
|
|
|
|
|
|
Options
1
|
|
|
2,128,422
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translations
|
|
|
(19,324
|
)
|
|
$
|
(1,530,681
|
)
|
|
|
(845,160
|
)
|
Credit contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
(409,750
|
)
|
|
|
19,341
|
|
|
|
558,406
|
|
|
|
|
|
|
Total
|
|
$
|
(5,701,405
|
)
|
|
$
|
(1,511,340
|
)
|
|
$
|
(1,201,428
|
)
|
|
|
|
|
|
1
Options purchased are included in the net realized gain (loss) from investments and net change in unrealized appreciation/depreciation on
investments.
For the six months ended April 30, 2013, the average
quarterly balances of outstanding derivative financial instruments were as follows:
|
|
|
|
BTZ
|
|
|
BGT
|
|
|
BIT
|
|
Financial futures contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of contracts purchased
|
|
|
705
|
|
|
|
|
|
|
|
|
|
Average number of contracts sold
|
|
|
2,334
|
|
|
|
|
|
|
|
300
|
|
Average notional value of contracts purchased
|
|
$
|
155,740,336
|
|
|
|
|
|
|
|
|
|
Average notional value of contracts sold
|
|
$
|
311,942,414
|
|
|
|
|
|
|
$
|
40,683,516
|
|
Foreign currency exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of contracts US dollars purchased
|
|
|
1
|
|
|
|
6
|
|
|
|
3
|
|
Average number of contracts US dollars sold
|
|
|
3
|
2
|
|
|
1
|
|
|
|
12
|
2
|
Average US dollar amounts purchased
|
|
$
|
3,343,004
|
|
|
$
|
80,773,186
|
|
|
$
|
64,375,369
|
|
Average US dollar amounts sold
|
|
$
|
5,099,933
|
2
|
|
$
|
2,904,943
|
|
|
$
|
118,835,233
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BTZ
|
|
|
BGT
|
|
|
BIT
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of option contracts purchased
|
|
|
35,000,210
|
|
|
|
26
|
|
|
|
|
|
Average number of option contracts written
|
|
|
|
|
|
|
|
|
|
|
|
|
Average notional value of option contracts purchased
|
|
$
|
35,210,000
|
|
|
$
|
24,514
|
|
|
|
|
|
Average notional value of option contracts written
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of swaption contracts purchased
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Average number of swaption contracts written
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Average notional value of swaption contracts purchased
|
|
$
|
267,775,000
|
|
|
|
|
|
|
|
|
|
Average notional value of swaption contracts written
|
|
$
|
202,500,000
|
|
|
|
|
|
|
|
|
|
Credit default swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of contracts buy protection
|
|
|
22
|
|
|
|
|
|
|
|
|
|
Average number of contracts sell protection
|
|
|
9
|
|
|
|
10
|
|
|
|
2
|
|
Average notional value buy protection
|
|
$
|
89,131,064
|
|
|
|
|
|
|
|
|
|
Average notional value sell protection
|
|
$
|
33,254,000
|
|
|
$
|
2,394,388
|
|
|
$
|
15,000,000
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of contracts pays fixed rate
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Average number of contracts receives fixed rate
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Average notional value pays fixed rate
|
|
$
|
89,800,000
|
|
|
|
|
|
|
|
|
|
Average notional value receives fixed rate
|
|
$
|
14,800,000
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Actual contract amount shown due to limited activity.
|
3. Investment Advisory Agreement and Other Transactions with Affiliates:
The PNC Financial Services Group, Inc. (PNC) is the largest stockholder and an affiliate, for 1940 Act purposes, of BlackRock, Inc. (BlackRock).
Each Trust entered into an Investment Advisory Agreement with BlackRock Advisors, LLC (the Manager), the Trusts investment advisor, an
indirect, wholly owned subsidiary of BlackRock, to provide investment advisory and administration services. The Manager is responsible for the management of each Trusts portfolio and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of each Trust. For such services, each Trust pays the Manager a monthly fee based on a percentage of BTZs and BGTs average weekly (average daily for BIT) net assets (including any assets
attributable to borrowings) at the following annual rates:
|
|
|
|
|
BTZ
|
|
|
0.62%
|
|
BGT
|
|
|
0.75%
|
|
BIT
|
|
|
0.80%
|
|
Prior to December 10, 2012, BTZ paid the Manager an investment advisory fee computed and paid monthly based on an annual
rate of 0.65%.
The Manager voluntarily agreed to waive its investment advisory fees by the amount of investment advisory fees each Trust pays to
the Manager indirectly through its investment in affiliated money market funds. However, the Manager does not waive its investment advisory fees by the amount of investment advisory fees paid in connection with each Trusts investment in other
affiliated investment companies, if any. These amounts are shown as fees waived by Manager in the Statements of Operations.
The Manager provides
investment management and other services to the Taxable Subsidiary. The Manager does not receive separate compensation from the Taxable Subsidiary for providing investment management or administrative services. However, BGT pays the Manager based on
the BGTs net assets (including any assets attributable to borrowings), which includes the assets of the Taxable Subsidiary.
The Manager
entered into a sub-advisory agreement with BlackRock Financial Management, Inc. (BFM), an affiliate of the Manager with respect to each Trust. The Manager also entered into a sub-advisory agreement with BlackRock Investment Management,
LLC (BIM), an affiliate of the Manager, with respect to BTZ and BIT. On June 5, 2013, the Board approved the Manager entering into a sub-advisory agreement with BlackRock (Singapore) Limited (BRS), an affiliate of the
Manager, with respect to BIT. The Manager pays BFM, BIM and BRS, for services they provide, a monthly fee that is a percentage of the investment advisory fees paid by each Trust to the Manager.
Certain officers and/or Trustees of the Trusts are officers and/or directors of BlackRock or its affiliates. The Trusts reimburse the Manager for a portion
of the compensation paid to the Trusts Chief Compliance Officer, which is included in Officer and Trustees in the Statements of Operations.
4. Investments:
Purchases and sales of
investments including paydowns, excluding short-term securities and US government securities for the six months ended April 30, 2013, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
Sales
|
|
BTZ
|
|
$
|
403,228,276
|
|
|
$
|
416,662,347
|
|
BGT
|
|
$
|
212,121,921
|
|
|
$
|
197,428,349
|
|
BIT
|
|
$
|
1,152,048,871
|
|
|
$
|
146,874,646
|
|
Purchases and sales of US government securities for the six months ended April 30, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
Sales
|
|
BTZ
|
|
$
|
37,170,455
|
|
|
$
|
47,090,224
|
|
BIT
|
|
$
|
30,282,542
|
|
|
$
|
30,251,833
|
|
For the period ended April 30, 2013, purchases and sales of mortgage dollar rolls for BIT were $70,234,250 and
$70,407,758, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
61
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
Transactions in options written for the six months ended April 30, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calls
|
|
|
|
|
Puts
|
|
BTZ
|
|
|
Contracts
|
|
|
|
Notional
(000)
1
|
|
|
|
Premiums
Received
|
|
|
|
|
|
Contracts
|
|
|
|
Notional
(000)
1
|
|
|
|
Premiums
Received
|
|
Outstanding options, beginning of period
|
|
|
|
|
|
$
|
23,500
|
|
|
$
|
1,274,813
|
|
|
|
|
|
|
|
|
$
|
39,500
|
|
|
$
|
1,586,812
|
|
Options written
|
|
|
|
|
|
|
180,000
|
|
|
|
162,000
|
|
|
|
|
|
|
|
|
|
180,000
|
|
|
|
198,000
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(180,000
|
)
|
|
|
(198,000
|
)
|
Options closed
|
|
|
|
|
|
|
(203,500
|
)
|
|
|
(1,436,813
|
)
|
|
|
|
|
|
|
|
|
(23,500
|
)
|
|
|
(1,274,812
|
)
|
Outstanding options, end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,000
|
|
|
$
|
312,000
|
|
|
1
|
|
Amount shown is in the currency in which the transaction was denominated.
|
5. Income Tax Information:
As of October 31, 2012, the Trusts had capital loss carryforwards
available to offset future realized capital gains through the indicated expiration dates as follows:
|
|
|
|
|
|
|
|
|
Expires October 31,
|
|
BTZ
|
|
|
BGT
|
|
2015
|
|
$
|
47,850,027
|
|
|
$
|
3,268,804
|
|
2016
|
|
|
113,355,213
|
|
|
|
24,616,531
|
|
2017
|
|
|
223,939,227
|
|
|
|
45,385,443
|
|
2018
|
|
|
15,223,841
|
|
|
|
16,526,601
|
|
2019
|
|
|
10,353,275
|
|
|
|
409,424
|
|
No expiration date
1
|
|
|
|
|
|
|
94,239
|
|
Total
|
|
$
|
410,721,583
|
|
|
$
|
90,301,042
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Must be utilized prior to losses subject to expiration
|
As of April 30, 2013, gross unrealized appreciation and gross unrealized depreciation based on cost for federal income tax purposes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BTZ
|
|
|
BGT
|
|
|
BIT
|
|
Tax cost
|
|
$
|
2,231,034,019
|
|
|
$
|
525,514,448
|
|
|
$
|
1,018,751,992
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
$
|
222,138,949
|
|
|
$
|
14,239,069
|
|
|
$
|
19,352,210
|
|
Gross unrealized depreciation
|
|
|
(14,016,319
|
)
|
|
|
(5,160,654
|
)
|
|
|
(1,176,910
|
)
|
|
|
|
|
|
Net unrealized appreciation
|
|
$
|
208,122,630
|
|
|
$
|
9,078,415
|
|
|
$
|
18,175,300
|
|
|
|
|
|
|
6. Borrowings:
Effective March 1, 2013, BGT was party to a senior committed secured, 360-day rolling line of credit facility and a separate security agreement (the
SSB Agreement) with State Street Bank and Trust Company (SSB). SSB may elect to terminate its commitment upon 360-days written notice to BGT at any time after February 24, 2014. BGT has granted a security interest in
substantially all of its assets to SSB. The SSB Agreement allows for a maximum commitment amount of $172,000,000.
Advances were made by SSB to
BGT, at BGTs option of (a) the higher of (i) 0.80% above the Fed Funds rate and (ii) 0.80% above the Overnight LIBOR or (b) 0.80% above 7-day, 30-day, 60-day or 90-day LIBOR.
In addition, BGT pays a facility fee and utilization fee (based on the daily unused portion of the commitments). The commitment fees are waived if BGT meets
certain conditions. The fees associated with each of the agreements are included in the Statements of Operations as borrowing costs. Advances to BGT as of April 30, 2013 are shown in the Statements of Assets and Liabilities as loan payable.
Based on the short-term nature of the borrowings under the line of credit and the variable interest rate, the carrying amount of the borrowings approximates fair value.
BGT may not declare dividends or make other distributions on shares or purchase any such shares if, at the time of the declaration, distribution or purchase, asset coverage with respect to the outstanding
short-term borrowings is less than 300%.
For the six months ended April 30, 2013, the daily weighted average interest rates for BGT with
loans under the revolving credit agreement was 0.96%.
For the six months ended April 30, 2013, the daily weighted average interest rates
from reverse repurchase agreements were as follows:
7. Commitments:
The Trusts may invest in floating rate loan interests. In connection with these investments, the Trusts may also enter into unfunded floating rate loan
interests. In connection with these commitments, the Trusts earn a commitment fee, typically set as a percentage of the commitment amount. Such fee income, which is included in interest income in the Statements of Operations, is recognized ratably
over the commitment period. Commitment fees received in advance and unrecognized are recorded in the Statements of Assets and Liabilities as deferred income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
|
|
|
|
Notes to Financial Statements (concluded)
|
|
|
Unfunded floating rate loan interests are marked-to-market daily, and any unrealized appreciation or depreciation is included in the Statements of Assets and Liabilities and Statements of
Operations. As of April 30, 2013, the BGT had the following unfunded floating rate loan interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrower
|
|
Unfunded
Floating
Rate Loan
Interest
|
|
|
Value of
Underlying
Floating
Rate Loan
Interest
|
|
|
Unrealized
Appreciation
|
|
Leslies Poolmart, Inc.
|
|
$
|
32,000
|
|
|
$
|
32,424
|
|
|
$
|
545
|
|
Syniverse Holdings, Inc.
|
|
$
|
1,220,000
|
|
|
$
|
1,223,819
|
|
|
$
|
9,804
|
|
8. Concentration, Market and Credit Risk:
In the normal course of business, the Trusts invest in securities and enter into transactions where risks exist due to fluctuations in the market (market risk) or failure of the issuer of a security to meet
all its obligations (issuer credit risk). The value of securities held by the Trusts may decline in response to certain events, including those directly involving the issuers whose securities are owned by the Trusts; conditions affecting the general
economy; overall market changes; local, regional or global political, social or economic instability; and currency and interest rate and price fluctuations. Similar to issuer credit risk, the Trusts may be exposed to counterparty credit risk, or the
risk that an entity with which the Trusts have unsettled or open transactions may fail to or be unable to perform on its commitments. The Trusts manage counterparty credit risk by entering into transactions only with counterparties that they believe
have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Trusts to market, issuer and counterparty credit risks, consist principally of
financial instruments and receivables due from counterparties. The extent of the Trusts exposure to market, issuer and counterparty credit risks with respect to these financial assets is generally approximated by their value recorded in the
Statements of Assets and Liabilities, less any collateral held by the Trust.
As of April 30, 2013, BTZ invested a significant portion of its
assets in securities in the financials sector, BGT invested a significant portion of its assets in the consumer discretionary sector, and BIT invested a significant portion of its assets in the financials and consumer discretionary sectors. Changes
in economic conditions affecting the financials and consumer discretionary sectors would have a greater impact on the Trusts and could affect the value, income and/or liquidity of positions in such securities.
9. Capital Share Transactions:
The Trusts are
each authorized to issue and unlimited number of $0.001 par value shares, which may be issued as either Common Shares or Preferred Shares.
Common
Shares
For the periods shown, shares issued and outstanding increased by the following amounts as a result of dividend reinvestment:
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ended
April 30,
2013
|
|
|
Year
Ended
October 31,
2012
|
|
BGT
|
|
|
18,776
|
|
|
|
21,103
|
|
Shares issued and outstanding increased 56,260,013 from the reorganization for the six months ended April 30, 2013 and
remained constant for the year ended October 31, 2012 for BTZ.
Shares issued and outstanding for the period February 27, 2013 to
April 30, 2013, increased by 36,000,000 from the initial public offering and 2,414,660 from the underwriters exercising the over-allotment option for BIT.
Upon commencement of operations, organization costs associated with the establishment of BIT were expensed by BIT. Offering costs incurred in connection with BITs offering of Common Shares have been
charged against the proceeds from the initial Common Share offering in the amount of $1,503,586.
For BIT, as February 27, 2013, 6,964 shares
were owned by affiliates.
10. Subsequent Events:
Managements evaluation of the impact of all subsequent events on the Trusts financial statements was completed through the date the financial statements were issued and the following items were
noted:
Each Trust paid a net investment income dividend in the following amounts per share on May 30, 2013 to Common Shareholders of record
on May 15, 2013:
|
|
|
|
|
|
|
Common
Dividend
Per Share
|
|
BTZ
|
|
$
|
0.0785
|
|
BGT
|
|
$
|
0.0775
|
|
BIT
|
|
$
|
0.1167
|
|
Additionally, the Trusts declared a net investment income dividend on June 3, 2013 payable to Common Shareholders of
record on June 14, 2013 for the same amounts as noted above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
63
|
|
|
|
|
|
Disclosure of Investment Advisory Agreement and Sub-Advisory
Agreements
|
The Board of Trustees (the
Board, the members of which are referred to as Board Members) of BlackRock Multi-Sector Income Trust (the Trust) met on December 17, 2012 and February 7, 2013 to consider the approval of the Trusts
investment advisory agreement (the Advisory Agreement) with BlackRock Advisors, LLC (the Manager), the Trusts investment advisor. The Board also considered the approval of the sub-advisory agreement among the Manager,
BlackRock Financial Management, Inc. (BFM), and the Trust (the BFM Sub-Advisory Agreement) and the sub-advisory agreement among the Manager, BlackRock Investment Management, LLC (BIM and together with BFM, the
Sub-Advisors), and the Trust (the BIM Sub-Advisory Agreement and together with the BFM Sub-Advisory Agreement, the Sub-Advisory Agreements). The Manager and the Sub-Advisors are referred to herein as
BlackRock. The Advisory Agreement and the Sub-Advisory Agreements are referred to herein as the Agreements.
Activities
and Composition of the Board
At the time the Board considered the Agreements on December 17, 2012, the Board consisted of three individuals,
two of whom were not interested persons of the Trust as defined in the Investment Company Act of 1940 (the 1940 Act) (the Independent Board Members). At the time the Board considered the Agreements on February 7,
2013, the Board consisted of eleven individuals, seven of whom were Independent Board Members, and an additional two of whom would be Independent Board Members after the completion of the Trusts initial public offering. The Board Members are
responsible for the oversight of the operations of the Trust and perform the various duties imposed on the directors of investment companies by the 1940 Act. The Independent Board Members have retained independent legal counsel to assist them in
connection with their duties. The Chairman of the Board is an Independent Board Member. The Board has established six standing committees: an Audit Committee, a Governance and Nominating Committee, a Compliance Committee,
a Performance
Oversight Committee, an Executive Committee and a Leverage Committee, each of which is chaired by an Independent Board Member and composed of Independent Board Members (except for the Executive Committee and the Leverage Committee, each of which
also has one interested Board Member).
The Agreements
Pursuant to the 1940 Act, the Board is required to consider the initial approval of the Agreements. In connection with this process, the Board assessed, among other things, the nature, scope and quality of
the services to be provided to the Trust by BlackRock, its personnel and its affiliates, including investment management, administrative and shareholder services, oversight of fund accounting and custody, marketing services, risk oversight,
compliance and assistance in meeting applicable legal and regulatory requirements.
Board Considerations in Approving the Agreements
The Approval Process: Prior to the December 17, 2012 and February 7, 2013 meetings, the Board received materials specifically relating
to the Agreements. The materials provided in connection with the December 17, 2012 meeting, and referred to in connection with the February 7, 2013 meeting, included information regarding (i) the investment objectives and policies of the Trust; (ii)
the team of investment advisory personnel assigned to the Trust; (iii) the Trusts management fee and estimated total operating expenses as compared with a peer group of funds as determined by Lipper, Inc. (Lipper); and (iv) certain
anticipated direct and indirect fallout benefits to BlackRock from its relationship with the Trust. Periodically, the Board Members, in connection with their duties as trustees or directors of other funds in the BlackRock family of
closed-end funds, have received other information including general information regarding BlackRocks management of such funds, BlackRocks management of relationships with service providers to such funds, resources devoted to compliance
with such funds investment objectives and policies, the structure and expertise of BlackRock and BlackRocks parent companies, BlackRocks policies and procedures in respect of execution of portfolio transactions and other matters.
At in person meetings held on December 17, 2012 and February 7, 2013, the Board, including the Independent Board Members, reviewed materials
relating to its consideration of the Agreements and unanimously approved the Advisory Agreement and the Sub-Advisory Agreements. In approving the Agreements, the Board considered, among other factors: (a) the nature, extent and quality of the
services to be provided by BlackRock; (b) the investment performance of BlackRock portfolio management in general; (c) the advisory fee and the cost of the services and profits to be realized by BlackRock and its affiliates from their relationship
with the Trust; (d) economies of scale; (e) fall-out benefits to BlackRock as a result of its relationship with the Trust; (f) the policies and practices of BlackRock with respect to portfolio transactions for the Trust; and (g) other factors deemed
relevant by the Board Members.
The Board also considered other matters it deemed important to the approval process, such as payments made to
BlackRock or its affiliates relating to securities lending, services related to the valuation and pricing of Trust portfolio holdings, direct and indirect benefits to BlackRock and its affiliates from their relationship with the Trust and advice
from independent legal counsel with respect to the review process and materials submitted for the Boards review. The Board noted the willingness of BlackRock personnel to engage in open, candid discussions with the Board. The Board did not
identify any particular information as controlling, and each Board Member may have attributed different weights to the various items considered.
A. Nature, Extent and Quality of the Services Provided by BlackRock:
The Board, including the Independent Board Members, reviewed the nature, extent and quality of services to be provided by BlackRock to the Trust. The Board met with BlackRocks senior management
personnel responsible for investment operations, including the senior investment officers. The Board also reviewed the materials provided by the Trusts portfolio management team discussing the Trusts investment objective, strategies and
outlook.
The Board considered, among other factors, with respect to BlackRock: its compliance record, including whether other funds advised by
BlackRock have operated within their investment objectives, policies and restrictions; the Trusts investment objective, policies and restrictions; the number, education and experience of investment personnel generally and the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
|
|
|
|
|
|
Disclosure of Investment Advisory Agreement and Sub-Advisory Agreements
(continued)
|
Trusts portfolio management team; investments by portfolio managers in the funds they manage; portfolio trading capabilities; use of technology; commitment to compliance; credit analysis
capabilities; risk analysis and oversight capabilities; and the approach to training and retaining portfolio managers and other research, advisory and management personnel. The Board engaged in a review of BlackRocks compensation structure
with respect to the Trusts portfolio management team and BlackRocks ability to attract and retain high-quality talent and create performance incentives.
In addition to advisory services, the Board considered the quality of the administrative and non-investment advisory services to be provided to the Trust. BlackRock and its affiliates will provide the Trust
with certain services (in addition to any such services provided to the Trust by third parties) and officers and other personnel as are necessary for the operations of the Trust. In particular, BlackRock and its affiliates will provide the Trust
with the following administrative services including, among others: (i) preparing disclosure documents, such as the prospectus and the statement of additional information in connection with the initial public offering and periodic shareholder
reports; (ii) preparing communications with analysts to support secondary market trading of the Trust; (iii) assisting with daily accounting and pricing; (iv) preparing periodic filings with regulators and stock exchanges; (v) overseeing and
coordinating the activities of other service providers; (vi) organizing Board meetings and preparing the materials for such Board meetings; (vii) providing legal and compliance support; and (viii) performing other administrative functions necessary
for the operation of the Trust, such as tax reporting, fulfilling regulatory filing requirements and call center services. The Board reviewed the structure and duties of BlackRocks fund administration, accounting, legal and compliance
departments and considered BlackRocks policies and procedures for assuring compliance with applicable laws and regulations.
B. The
Investment Performance of the Trust and BlackRock: In their capacity as members of the boards of directors or trustees of certain other BlackRock-advised funds, the Board Members, including the Independent Board Members, previously received and
considered information about BlackRocks investment performance for other BlackRock-advised funds. The Board, however, could not consider the performance history of the Trust because the Trust was newly organized and had not yet commenced
operations as of the December 17, 2012 or February 7, 2013 meetings.
C. Consideration of the Advisory/Management Fees and the Cost of the
Services and Profits to be Realized by BlackRock and its Affiliates from their Relationship with the Trust: The Board, including the Independent Board Members, reviewed the Trusts contractual management fee rate compared with the other funds
in its Lipper category. It also compared the Trusts total expenses to those of other comparable funds. The funds within the peer group were selected by Lipper, which is not affiliated with BlackRock.
The Board, including the Independent Board Members, reviewed six sub-categories of fees and expenses for the Trust compared with the other funds in its
Lipper peer group: (i) contractual management fees; (ii) total expenses, including investment-related expenses and taxes; (iii) total expenses, excluding investment-related expenses and taxes; (iv) management fees (common and leveraged); (v)
management fees (common) and (vi) non-management expenses.
The Board noted that, relative to the other funds in its Lipper peer group, the Trust
was in the fourth quartile in each of the sub-categories, with the exception of non-management expenses, where the Trust was in the second quartile. The Board recognized the Trusts relatively less favorable comparisons. While the funds
selected for the Trusts Lipper peer group were selected under Lippers selection methodology, the Board believed they may not represent the best comparables for the Trust. The Board noted that the underlying asset classes of the funds
selected for the Lipper peer group vary substantially from each other and the Trust. In addition, the other funds were generally raised during substantially different vintage periods from the Trust, and may represent legacy pricing and management
fee structures as opposed to current market rates. Further, certain of the sub-categories include investment related expenses or are affected by the degree to which a fund uses leverage. The Board noted that because the Trust assumed that it would
use approximately 45% leverage, at the high-end of the indicated leverage range, which is higher than the funds in the Lipper peer group, its management fee (as a percentage of net assets) will appear higher than that for a fund that uses less
leverage and its total annual operating expenses may be higher than that of a fund that has lower financing cost. The Board believed a subset of recently-issued taxable fixed income closed-end funds constituted a better representative comparison for
the Trust. The Board compared the Trusts expenses to such other funds and noted that the Trusts total expenses compare favorably to the expenses of such funds.
The Board also considered whether BlackRock has the financial resources necessary to attract and retain high quality investment management personnel to perform its obligations under the Agreements and to
continue to provide the high quality of services that is expected by the Board.
As the Trust had not yet commenced operations, BlackRock was not
able to provide the Board with specific information concerning the expected profits to be realized by BlackRock and its affiliates from their relationships with the Trust. BlackRock, however, noted that it will provide the Board with such
information at future meetings.
Following consideration of this information, the Board, including the Independent Board Members, concluded that
the fees to be paid pursuant to the Agreements were fair and reasonable in light of the services to be provided.
D. Economies of Scale: The
Board, including the Independent Board Members, considered the extent to which economies of scale might be realized as the assets of the Trust increase. The Board also considered the extent to which the Trust may benefit from such economies and
whether there should be changes in the advisory fee rate or structure in order to enable the Trust to participate in these economies of scale, for example through the use of breakpoints in the advisory fee based upon the asset level of the Trust.
Based on the Boards review and consideration of the issue, the Board concluded that most closed-end funds do not have fund level
breakpoints because closed-end funds generally do not experience substantial growth after the initial public offering. They are typically priced at scale at a funds inception. The Board noted that only one closed-end fund in the Fund Complex
has breakpoints in its advisory fee structure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
65
|
|
|
|
|
|
Disclosure of Investment Advisory Agreement and Sub-Advisory Agreements (concluded)
|
E. Other Factors Deemed Relevant by the Board Members: The Board, including the
Independent Board Members, also took into account other ancillary or fall-out benefits that BlackRock or its affiliates may derive from their respective relationships with the Trust, both tangible and intangible, such as BlackRocks
ability to leverage its investment professionals who manage other portfolios and risk management personnel, an increase in BlackRocks profile in the investment advisory community, and the engagement of BlackRocks affiliates as service
providers to the Trust, including securities lending and cash management services. The Board also considered BlackRocks overall operations and its efforts to expand the scale of, and improve the quality of, its operations. The Board also noted
that BlackRock may use and benefit from third party research obtained by soft dollars generated by certain registered fund transactions to assist in managing all or a number of its other client accounts. The Board further noted that BlackRock funds
may invest in affiliated exchange-traded funds without any offset against the management fees payable by the funds to BlackRock.
In connection
with its consideration of the Agreements, the Board also received information regarding BlackRocks brokerage and soft dollar practices. The Board received reports from BlackRock which included information on brokerage commissions and trade
execution practices for BlackRock closed-end funds throughout the year.
The Board noted the competitive nature of the closed-end fund
marketplace, and that shareholders are able to sell their Trust shares in the secondary market if they believe that the Trusts fees and expenses are too high or if they are dissatisfied with the performance of the Trust.
The Board, including all of the Independent Board Members, concluded that these ancillary benefits that BlackRock and its affiliates could receive with
regard to providing investment advisory and other services to the Trust were consistent with those generally available to other fund sponsors.
Conclusion
The Board, including a majority of
the Independent Board Members, approved each of the Advisory Agreement between the Manager and the Trust, the BFM Sub-Advisory Agreement among the Manager, BFM, and the Trust and the BIM Sub-Advisory Agreement among the Manager, BIM, and the Trust.
Based upon its evaluation of all of the aforementioned factors in their totality, the Board, including the Independent Board Members, was satisfied that the terms of the Agreements were fair and reasonable and in the best interest of the Trust and
its shareholders. In arriving at its decision to approve the Agreements, the Board, including the Independent Board Members, did not identify any single factor or group of factors as all-important or controlling, but considered all factors together,
and different Board Members may have attributed different weights to the various factors considered. The Independent Board Members were also assisted by the advice of independent legal counsel in making this determination.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
SEMI-ANNUAL REPORT
|
|
APRIL 30, 2013
|
|
|