Notes to Financial Statements
1. Organization and Significant Accounting Policies:
BlackRock Defined Opportunity Credit Trust (BHL), BlackRock Diversified Income Strategies Fund, Inc. (DVF), BlackRock Floating Rate Income Strategies Fund, Inc. (FRA) and BlackRock Limited Duration Income Trust
(BLW) (collectively, the Funds or individually as a Fund) are registered under the 1940 Act, as diversified, closed-end management investment companies. BHL and BLW are organized as Delaware Statutory trusts. DVF and
FRA are organized as Maryland corporations. The Funds 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 Directors and the Boards of Trustees of the Funds are collectively referred to throughout this report as the Board of Directors or the Board, and the directors/trustees thereof are collectively
referred to throughout this report as Directors. The Funds determine and make available for publication the NAV of their Common Shares on a daily basis.
Reorganizations:
On May 23, 2012, the Board approved separate plans of reorganization whereby
FRA will acquire all of the assets and all of the liabilities of DVF and BlackRock Floating Rate Income Strategies Fund II, Inc.
(FRB and with DVF, each a Target Fund) in exchange for newly issued shares of FRA in a merger transaction.
The following is a summary of significant accounting policies followed by the Funds:
Basis of Consolidation:
The accompanying consolidated financial statements include the accounts
of DVF JGW SPV, LLC, DVF (S-MARTIN) SPV, LLC, FRA JGW SPV, LLC and BLW JGW SPV, LLC (the Taxable Subsidiaries), all
of which are wholly owned taxable subsidiaries of each Fund. The Taxable Subsidiaries enable the Funds to hold investments that
are organized as an operating partnership and still satisfy Regulated Investment Company (RIC) tax requirements. Income
earned and gains realized on the investments held by the Taxable Subsidiaries are taxable to such subsidiaries. An income tax
provision for all income, including realized and unrealized gains, if any, is reflected as either a reduction in investment income
or as component of realized and unrealized gain (loss) on the Consolidated Statements of Operations. The Funds may invest up to
25% of their total assets in the Taxable Subsidiary. Intercompany accounts and transactions have been eliminated. The Taxable
Subsidiary is subject to the same investment policies and restrictions that apply to the Funds.
Valuation:
US GAAP defines fair value as the price the Funds would receive to sell an asset
or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The Funds fair value
their financial instruments at market value using independent dealers or pricing services under policies approved by the Board.
The Global Valuation Committee is the committee formed by management to develop global pricing policies and procedures and to
provide oversight of the pricing function for the Funds for all financial instruments.
The Funds 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 Funds 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 (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 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
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Notes to Financial Statements (continued)
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 Fund 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 investment advisor and/or
sub-advisor deems relevant consistent with the principles of fair value measurement which include the market approach, income approach and/or 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 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds 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 on the Statement 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 Funds 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 Funds 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. If a Fund has 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 Funds 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.
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Collateralized Debt Obligations:
Certain Funds 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 a bankruptcy remote 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:
Certain 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 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.
Stripped Mortgage-Backed Securities:
Certain Trusts may invest in stripped mortgage-backed
securities issued by the US government, its agencies and instrumentalities. Stripped mortgage-backed securities are usually structured
with two classes that receive different proportions of the interest (IOs) and principal (POs) distributions on a pool of Mortgage
Assets. The Trusts also may invest in stripped mortgage-backed securities that are privately issued.
Zero-Coupon Bonds:
The Funds 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:
Certain 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:
Certain Funds may invest in preferred stocks. 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 Funds may invest in floating rate loan interests. The floating
rate loan interests the Funds hold 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
Funds 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 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 Funds consider these investments
to be investments in debt securities for purposes of its investment policies.
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When a Fund purchases a floating rate loan interest it may receive a facility fee and when it sells
a floating rate loan interest it may pay a facility fee. On an ongoing basis, the Funds 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 Funds upon the prepayment of a floating rate
loan interest by a borrower, are recorded as realized gains. The Funds 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 Funds 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 Funds having a contractual relationship only with the lender, not with the borrower. The Funds 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 Funds 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 Funds may not benefit directly from any collateral supporting the loan in which it has purchased the Participation. As a result, the Funds will assume the credit
risk of both the borrower and the lender that is selling the Participation. The Funds 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 selling the Participation, the Funds 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 Funds having a direct
contractual relationship with the borrower, and the Funds may enforce compliance by the borrower with the terms of the loan agreement.
Forward Commitments and When-Issued Delayed Delivery Securities:
The Funds 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 Funds 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 Funds may be required to pay more at settlement
than the security is worth. In addition, the Funds are not entitled to any of the interest earned prior to settlement. When purchasing
a security on a delayed delivery basis, the Funds 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 Funds maximum amount of loss is the unrealized
appreciation of unsettled when-issued transactions, which is shown in the Schedules of Investments.
Reverse Repurchase Agreements:
Certain Funds may enter into reverse repurchase agreements
with qualified third party broker-dealers. In a reverse repurchase agreement, the Funds sell securities to a bank or broker-dealer
and agrees to repurchase the same securities at a mutually agreed upon date and price. Securities sold under reverse repurchase
agreements are recorded as a liability in the Statement 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. During the term of the reverse
repurchase agreement, the Funds continue to receive the principal and interest payments on these securities. Certain agreements
have no stated maturity and can be terminated by either party at any time. 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 Funds 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 securities that the Funds are obligated to repurchase under the agreement may decline below
the repurchase price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the Funds 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 Funds obligation to repurchase the securities.
Segregation and Collateralization:
In cases in which the 1940 Act and the interpretive positions
of the Securities and Exchange Commission (SEC) require that the Funds either deliver collateral or segregate assets
in connection with certain investments (e.g., financial futures contracts, foreign currency exchange contracts and swaps), or
certain borrowings (e.g., reverse repurchase agreements and loan payable), the Funds 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, each party to such transactions has requirements
to deliver/deposit securities as collateral for certain investments.
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 Funds 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,
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is recognized on the accrual basis. Consent fees are compensation for agreeing to changes in the terms of debt instruments and are included in interest income in the Statements of Operations.
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 dividends and distributions that exceeds
a Funds current and accumulated earnings and profits, which are measured on a tax basis, may be treated as a tax return
of capital. Distributions in excess of a Funds taxable income and net capital gains, but not in excess of a Funds
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 each Funds 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 its taxable
income to its shareholders. Therefore, no federal income tax provision is required.
Each Fund files US federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on the Funds US federal tax returns remains open for each of the four years ended August 31, 2012.
The statutes of limitations on the Funds state and local tax returns 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 Standard:
In December 2011, the Financial Accounting Standard Board 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. The guidance is effective for financial statements with fiscal
years beginning on or after January 1, 2013, and interim periods within those fiscal years. Management is evaluating the impact
of this guidance on the Funds financial statement disclosures.
Deferred Compensation and BlackRock Closed-End Share Equivalent Investment Plan:
Under the
deferred compensation plan approved by each Funds Board, independent Directors (Independent Directors) 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 Directors. This has
approximately the same economic effect for the Independent Directors as if the Independent Directors had invested the deferred
amounts directly in certain other BlackRock Closed-End Funds.
The deferred compensation plan is not funded and obligations thereunder represent general unsecured claims against the general assets of each Fund. Prior to March 31, 2012, each Fund elected to invest in common shares of certain other BlackRock
Closed-End Funds selected by the Independent Directors in order to match its deferred compensation obligations, and dividends and distributions received from the BlackRock Closed-End Fund investments through March 31, 2012 are included in income
affiliated in the Statements of Operations.
Other:
Expenses directly related to a Fund are charged to that Fund. 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 Funds 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 Funds engage in various portfolio investment strategies using derivative contracts both to increase the returns of the Funds and/or to economically hedge, or protect, their exposure to certain risks such as credit risk, equity risk, interest rate
risk, foreign currency exchange rate risk. These contracts may be transacted on an exchange or OTC.
Losses may arise if the value of the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument or if the counterparty does not perform under the contract. The Funds maximum risk of loss from
counterparty credit risk on OTC derivatives is generally the aggregate unrealized gain netted against any collateral pledged by/posted to the counterparty. For OTC options purchased, the Funds bear the risk of loss in the amount of the premiums paid plus
the positive change in market values net of any collateral received on the options should the counterparty fail to perform under the contracts. Options written by the Funds do not give rise to counterparty credit risk, as options written obligate the
Funds to perform and not the counterparty. Counterparty risk related to exchange-traded financial futures contracts and options and centrally cleared swaps is deemed to be minimal due to the protection against defaults provided by the exchange on which
these contracts trade.
The Funds may mitigate counterparty risk by procuring collateral and through netting provisions included within an International Swaps and Derivatives Association, Inc. master agreement (ISDA Master Agreement) implemented between a Fund and
each of its respective counterparties. An ISDA Master Agreement allows each Fund to offset with each separate counterparty certain derivative financial instruments payables and/or receivables with collateral held. The amount of collateral moved
to/from applicable counterparties is generally based upon minimum transfer amounts of up to $500,000. To the extent amounts due to the Funds from their counterparties are not fully collateralized, contractually or otherwise, the Funds bear the risk
of loss from counterparty non-performance. See Note 1 Segregation and
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Collateralization for information with respect to collateral practices. In addition, the Funds manage counterparty risk by entering into agreements only 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 Funds net assets decline by a stated percentage or the Funds fail to meet the terms of its ISDA Master
Agreements, which would cause the Funds to accelerate payment of any net liability owed to the counterparty.
Financial Futures Contracts:
The Funds purchase 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 the Funds and 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. Pursuant to the contract, the Funds 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 Funds as unrealized appreciation or depreciation. When the contract is closed, the Funds 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 Funds 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 Funds, help to manage
the overall exposure to the currencies in which some of the investments held by the Funds are denominated. The contract is marked-to-market
daily and the change in market value is recorded by the Funds as an unrealized gain or loss. When the contract is closed, the
Funds 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 Funds purchase and write call and put options to increase or decrease their exposure
to underlying instruments (equity and/or 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
Funds purchase (write) an option, an amount equal to the premium paid (received) by the Funds 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 Funds enter into a closing transaction), the Funds 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 Funds write a call option, such option is covered, meaning that the Funds holds the underlying
instrument subject to being called by the option counterparty. When the Funds 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 or credit default swap agreement (interest rate risk and/or credit risk) at any time before the expiration of the option.
In purchasing and writing options, the Funds bear the risk of an unfavorable change in the value of the underlying instrument or the risk that the Funds may not be able to enter into a closing transaction due to an illiquid market. Exercise of a written
option could result in the Funds purchasing or selling a security at a price different from the current market value.
Swaps:
The Funds enter into swap agreements, in which the Funds and a counterparty agree to
either make periodic net payments on a specified notional amount or a net payment upon termination. Swap agreements are privately
negotiated in the OTC market and may be executed on a registered financial and commodities exchange (centrally cleared swaps).
In a centrally cleared swap, the Funds typically enter into an agreement with a counterparty; however, performance is guaranteed
by the central clearinghouse reducing or eliminating the Funds exposure to the credit risk of the counterparty. These payments
received or made by the Funds are recorded in the Statement 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 amortized over the term of the
swap. 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 Statement
of Assets and Liabilities. When the swap is terminated, the Funds will record a realized gain or loss equal to the difference
between the proceeds from (or cost of) the closing transaction and the Funds basis in the contract, if any. Generally, the
basis of the contracts is the premium received or paid. Swap transactions
AUGUST 31, 2012
|
ANNUAL REPORT
|
73
|
Notes to Financial Statements (continued)
involve, to varying degrees, elements of interest rate, credit and market risk in excess of the amounts recognized in the Statement 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 Funds enter into credit default
swaps to manage their exposure to the market or certain sectors of the market, 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 Funds enter into credit default swap agreements to provide a measure of protection against the default of an issuer
(as buyer of protection) and/or gain credit exposure to an issuer to which it is not otherwise exposed (as seller of protection).
The Funds 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 buyer
pays fixed periodic payments to the seller in consideration for a guarantee from the 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 Funds 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 Funds 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.
|
Derivative Financial Instruments Categorized by Risk Exposure:
Fair Values of Derivative
Financial Instruments as of August 31, 2012
Asset Derivatives
|
|
BHL
|
DVF
|
|
|
FRA
|
BLW
|
|
Statements of Assets
|
|
|
|
|
|
|
|
|
|
|
and Liabilities Location
|
Value
|
Equity contracts
|
Investments at value unaffiliated
|
|
|
|
|
|
|
|
$
|
316,881
|
Interest rate contracts
|
Net unrealized appreciation
1
;
|
|
|
|
|
|
|
|
|
232,064
|
Foreign currency exchange contracts
|
Unrealized appreciation on foreign
|
$
|
145
|
|
|
|
$
|
3
|
|
148,795
|
|
currency exchange contracts
|
|
|
|
|
|
|
|
|
|
Credit contracts
|
Unrealized appreciation on swaps
1
;
|
|
|
|
|
|
|
|
|
125,337
|
Total
|
|
$
|
145
|
|
|
|
$
|
3
|
$
|
823,077
|
|
|
Liability Derivatives
|
|
|
|
BHL
|
DVF
|
|
|
FRA
|
BLW
|
|
Statements of Assets
|
|
|
|
|
|
|
|
|
|
|
and Liabilities Location
|
Value
|
Equity contracts
|
Net unrealized depreciation
1
;
|
|
|
|
|
|
|
|
$
|
361,266
|
|
Options written at value
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
Net unrealized depreciation
1
;
|
|
|
|
|
|
|
|
|
283,383
|
|
Unrealized depreciation on swaps
1
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
Unrealized depreciation on foreign
|
$
|
132,044
|
$
|
99,745
|
|
$
|
221,993
|
|
1,283,988
|
|
currency exchange contracts
|
|
|
|
|
|
|
|
|
|
Credit contracts
|
Unrealized depreciation on swaps
1
;
|
|
66,320
|
|
70,339
|
|
|
146,707
|
|
345,353
|
Total
|
|
$
|
198,364
|
$
|
170,084
|
|
$
|
368,700
|
$
|
2,273,990
|
1
|
|
Includes cumulative appreciation/depreciation on financial futures contracts and centrally
cleared swaps as reported in the Schedules of Investments. Only current days variation margin is reported within the Statements
of Assets and Liabilities.
|
74
|
ANNUAL REPORT
|
AUGUST 31, 2012
|
Notes to Financial Statements (continued)
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 Fund entered into an Investment Advisory Agreement with BlackRock Advisors, LLC (the Manager), the Funds 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 Funds portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of each Fund. For such services, each Fund pays the
Manager a monthly fee based on a percentage of each Funds average daily net assets, plus the proceeds of any outstanding borrowings used for leverage as follows:
BHL
|
1.00
|
%
|
DVF
|
0.75
|
%
|
FRA
|
0.75
|
%
|
BLW
|
0.55
|
%
|
The Manager voluntarily agreed to waive its investment advisory fees by the amount of investment advisory fees each Fund 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 Funds investment in other affiliated investment companies, if any. These amounts are included in, fees waived by Manager in the Statements of
Operations.
The Manager provides investment management and other services to the Taxable Subsidiaries. The Manager does not receive separate compensation from the Taxable Subsidiaries for providing investment management or administrative services. However, each Fund
pays the Manager based on the Funds net assets which includes the assets of the Taxable Subsidiaries.
The Manager entered into a sub-advisory agreement with BlackRock Financial Management, Inc. (BFM), an affiliate of the Manager. The Manager pays BFM, for services it provides, a monthly fee that is a percentage of the investment advisory fees
paid by each Fund to the Manager.
Certain officers and/or Directors of the Funds are officers and/or Directors of BlackRock or its affiliates. The Funds reimburse the Manager for a portion of the compensation paid to the Funds Chief Compliance Officer.
4. Investments:
Purchases and sales of investments including paydowns and excluding short-term securities and US government securities for the year ended August 31, 2012 were as follows:
|
Purchases
|
|
Sales
|
BHL
|
$
|
99,658,538
|
|
$
|
89,086,222
|
DVF
|
$
|
107,893,306
|
|
$
|
96,003,424
|
FRA
|
$
|
220,299,496
|
|
$
|
195,618,713
|
BLW
|
$
|
513,272,430
|
|
$
|
452,222,610
|
Purchases and sales of US government securities for BLW for the year ended August 31, 2012 were $13,534,081 and $13,549,018, respectively.
Transactions in options written for the year ended August 31, 2012, were as follows:
|
|
Calls
|
|
Puts
|
|
|
|
|
Notional
|
|
Premiums
|
|
|
|
Notional
|
|
Premiums
|
BLW
|
|
Contracts
|
|
(000)
|
|
Received
|
|
Contracts
|
|
(000)
|
|
Received
|
Outstanding options, beginning of year
|
|
|
—
|
|
|
$
|
7,400
|
|
|
$
|
76,220
|
|
|
|
—
|
|
|
$
|
15,100
|
|
|
$
|
229,830
|
|
Options written
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,000
|
|
|
|
—
|
|
|
|
75,600
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,700
|
)
|
|
|
(30,030
|
)
|
Options expired
|
|
|
—
|
|
|
|
(7,400
|
)
|
|
|
(76,220
|
)
|
|
|
—
|
|
|
|
(7,400
|
)
|
|
|
(199,800
|
)
|
Outstanding options, end of year
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,000
|
|
|
|
—
|
|
|
$
|
75,600
|
|
5. Income Tax Information:
US GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. The following permanent
differences as of August 31, 2012 attributable to the accounting for swap agreements, amortization methods on fixed income securities, foreign currency transactions, income recognized from pass-through entities and a liquidating distribution of a
wholly-owned subsidiary were reclassified to the following accounts:
|
|
BHL
|
|
DVF
|
|
FRA
|
|
BLW
|
Paid-in capital
|
|
$
|
(6
|
)
|
|
$
|
(419,008
|
)
|
|
$
|
(15
|
)
|
|
|
—
|
|
Undistributed (distribution in excess of) net investment income
|
|
$
|
724,273
|
|
|
$
|
1,027,785
|
|
|
$
|
914,664
|
|
|
$
|
2,928,592
|
|
Accumulated net realized loss
|
|
$
|
(724,267
|
)
|
|
$
|
(608,777
|
)
|
|
$
|
(914,649
|
)
|
|
$
|
(2,928,592
|
)
|
The tax character of distributions paid during the fiscal years ended August 31, 2012 and August 31, 2011 was as follows:
|
|
|
|
BHL
|
|
DVF
|
|
FRA
|
|
BLW
|
Ordinary income
|
|
|
8/31/12
|
|
|
$
|
7,217,171
|
|
|
$
|
8,705,562
|
|
|
$
|
17,066,400
|
|
|
$
|
48,930,681
|
|
|
|
|
8/31/11
|
|
|
|
7,140,522
|
|
|
|
8,509,258
|
|
|
|
15,965,641
|
|
|
|
45,830,635
|
|
Tax return of capital
|
|
|
8/31/11
|
|
|
|
—
|
|
|
|
739,496
|
|
|
|
1,072,049
|
|
|
|
—
|
|
Total
|
|
|
8/31/12
|
|
|
$
|
7,217,171
|
|
|
$
|
8,705,562
|
|
|
$
|
17,066,400
|
|
|
$
|
48,930,681
|
|
|
|
|
8/31/11
|
|
|
$
|
7,140,522
|
|
|
$
|
9,248,754
|
|
|
$
|
17,037,690
|
|
|
$
|
45,830,635
|
|
Notes to Financial Statements (continued)
As of August 31, 2012, the tax components of accumulated net losses were as follows:
|
|
BHL
|
|
DVF
|
|
FRA
|
|
BLW
|
Undistributed ordinary income
|
|
$
|
1,660,136
|
|
|
$
|
600,465
|
|
|
$
|
2,138,183
|
|
|
$
|
7,775,401
|
|
Capital loss carryforwards
|
|
|
(3,695,649
|
)
|
|
|
(88,878,920
|
)
|
|
|
(73,249,870
|
)
|
|
|
(73,744,438
|
)
|
Net unrealized gains (losses)
1
|
|
|
1,943,600
|
|
|
|
(5,463,837
|
)
|
|
|
(1,171,025
|
)
|
|
|
6,325,173
|
|
Qualified late-year losses
2
|
|
|
(526,566
|
)
|
|
|
(719,890
|
)
|
|
|
(970,838
|
)
|
|
|
(457,423
|
)
|
Total
|
|
$
|
(618,479
|
)
|
|
$
|
(94,462,182
|
)
|
|
$
|
(73,253,550
|
)
|
|
$
|
(60,101,287
|
)
|
|
1
|
The differences between book-basis and tax-basis net unrealized
gains (losses) were attributable primarily to the tax deferral of losses on wash sales, amortization methods for premiums and
discounts on fixed income securities, the accrual of income on securities in default, the realization for tax purposes of unrealized
gains/losses on certain futures and foreign currency contracts, the timing and recognition of partnership income, the accounting
for swap agreements, the deferral of compensation to directors and investments in wholly owned subsidiaries.
|
|
2
|
The Funds have elected to defer certain qualified late-year
losses and recognize such losses in the year ending August 31, 2013.
|
As of August 31, 2012, the Funds had capital loss carryforwards available to offset future realized capital gains through the indicated expiration dates as follows:
Expires August 31,
|
|
BHL
|
|
DVF
|
|
FRA
|
|
BLW
|
2013
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
691,829
|
|
|
|
—
|
|
2014
|
|
|
|
—
|
|
|
$
|
1,755,694
|
|
|
|
—
|
|
|
|
—
|
|
2015
|
|
|
|
—
|
|
|
|
2,237,399
|
|
|
|
—
|
|
|
|
—
|
|
2016
|
|
|
|
—
|
|
|
|
1,444,704
|
|
|
|
475,453
|
|
|
$
|
21,882,229
|
|
2017
|
|
|
|
—
|
|
|
|
20,249,830
|
|
|
|
20,954,032
|
|
|
|
9,996,868
|
|
2018
|
|
|
$
|
3,695,649
|
|
|
|
52,502,532
|
|
|
|
43,990,722
|
|
|
|
37,509,275
|
|
2019
|
|
|
|
—
|
|
|
|
7,153,981
|
|
|
|
2,206,081
|
|
|
|
—
|
|
No expiration date
3
|
|
|
|
—
|
|
|
|
3,534,780
|
|
|
|
4,931,753
|
|
|
|
4,356,066
|
|
Total
|
|
|
$
|
3,695,649
|
|
|
$
|
88,878,920
|
|
|
$
|
73,249,870
|
|
|
$
|
73,744,438
|
|
3
Must be utilized prior to losses subject to expiration.
During the year ended August 31, 2012, BHL utilized $147,902 of its capital loss carryforward.
As of August 31, 2012, gross unrealized appreciation and gross unrealized depreciation based on cost for federal income tax purposes were as follows:
|
BHL
|
DVF
|
FRA
|
BLW
|
Tax cost
|
$
|
184,374,583
|
|
$
|
201,769,787
|
|
$
|
401,579,518
|
|
$
|
932,565,934
|
|
Gross unrealized appreciation
|
$
|
3,427,418
|
|
$
|
4,319,730
|
|
$
|
7,905,398
|
|
$
|
32,380,982
|
|
Gross unrealized depreciation
|
|
(1,417,575
|
)
|
|
(7,685,537
|
)
|
|
(7,328,646
|
)
|
|
(23,010,831
|
)
|
Net unrealized appreciation (depreciation)
|
$
|
2,009,843
|
|
$
|
(3,365,807
|
)
|
$
|
576,752
|
|
$
|
9,370,151
|
|
6. Borrowings:
BHL, DVF and FRA entered into a senior committed secured, 364-day revolving line of credit and a separate security agreement (the SSB Agreement) with State Street Bank and Trust Company (SSB). The Funds have granted a security
interest in substantially all of their assets to SSB. The SSB Agreement allowed for the following maximum commitment amounts:
|
|
Commitment
|
|
|
Amounts
|
BHL
|
|
|
$
|
63,300,000
|
|
DVF
|
|
|
$
|
66,800,000
|
|
FRA
|
|
|
|
$
|
137,200,000
|
|
Prior to March 2, 2012, advances were made by SSB to the Funds, at the Funds 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.
Effective March 2, 2012, Advances will be made by SSB to the Funds, at the Funds option of (a) the higher of (i) 0.75% above the Fed Funds rate and (ii) 0.75% above the LIBOR or (b) 0.75% above 7-day, 30-day, 60-day or 90-day LIBOR.
In addition, the Funds pay a facility fee and a commitment fee based upon SSBs total commitment to the Funds. The fees associated with each of the agreements are included in the Statements of Operations as borrowing costs. Advances to the Funds as
of August 31, 2012 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.
The Funds 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%.
Notes to Financial Statements (continued)
For the year ended August 31, 2012, the daily weighted average interest rates for Funds with loans under the revolving credit agreements were as follows:
|
|
Daily Weighted
|
|
|
Average
|
|
|
Interest Rate
|
BHL
|
|
|
|
|
0.95
|
%
|
DVF
|
|
|
|
|
0.95
|
%
|
FRA
|
|
|
|
|
0.95
|
%
|
For the year ended August 31, 2012, the daily weighted average interest rate for BLW with borrowings from reverse repurchase agreements was as follows:
|
Daily Weighted
|
|
Average
|
|
Interest Rate
|
BLW
|
0.42
|
%
|
7. Commitments:
The Funds may invest in floating rate loan interests. In connection with these investments, the Funds may also enter into unfunded floating rate loan interests and bridge loan commitments (commitments). Bridge loan commitments may obligate
the Funds to furnish temporary financing to a borrower until permanent financing can be arranged. At August 31, 2012, the Funds had outstanding bridge loan commitments as follows:
|
|
Commitment
|
|
|
|
Amounts
|
BLW
|
|
|
|
$
|
1,200,000
|
|
In connection with either of these commitments, the Funds 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 on the Statement of Assets and Liabilities as deferred income. Unfunded floating rate loan interests are marked-to-market daily, and any unrealized appreciation or depreciation is included
in the Statement of Assets and Liabilities and Statement of Operations. As of August 31, 2012, the Funds had no outstanding unfunded floating rate loan interests.
8. Concentration, Market and Credit Risk:
In the normal course of business, the Funds 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 Funds may decline in response to certain events, including those directly
involving the issuers whose securities are owned by the Funds; 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 Funds may be exposed to counterparty credit risk, or the risk that an entity with which the Funds have
unsettled or open transactions may fail to or be unable to perform on its commitments. The Fund manages counterparty credit risk
by entering into transactions only with counterparties that it believes have the financial resources to honor their obligations
and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Funds to market,
issuer and counterparty credit risks, consist principally of financial instruments and receivables due from counterparties. The
extent of the Funds exposure to market, issuer and counterparty credit risks with respect to these financial assets is generally
approximated by their value recorded in Statements of Assets and Liabilities, less any collateral held by the Funds.
The Funds invests a significant portion of its assets in securities backed by commercial or residential mortgage loans or in issuers that hold mortgage and other asset-backed securities. Please see the Schedule of Investments for these securities.
Changes in economic conditions, including delinquencies and/or defaults on assets underlying these securities, can affect the value, income and/or liquidity of such positions.
9. Capital Share Transactions:
BHL and BLW are authorized to issue an unlimited number of shares, par value $0.001, all of which were initially classified as Common Shares. DVF and FRA are authorized to issue 200 million shares, par value $0.10, all of which were initially
classified as Common Shares. The Board is authorized, however, to reclassify any unissued Common Shares without approval of Common Shareholders.
For the years shown, shares issued and outstanding increased by the following amounts as a result of dividend reinvestment:
|
|
Year Ended August 31,
|
|
|
2012
|
|
2011
|
BHL
|
|
|
|
—
|
|
|
|
18,402
|
|
DVF
|
|
|
|
—
|
|
|
|
42,239
|
|
FRA
|
|
|
|
17,388
|
|
|
|
58,212
|
|
BLW
|
|
|
|
34,642
|
|
|
|
30,417
|
|
10. Subsequent Events:
Managements evaluation of the impact of all subsequent events on the Funds financial statements was completed through the date the financial statements were issued and the following item was noted:
Each Fund paid a net investment income dividend on September 28, 2012 to Common Shareholders of record on September 14, 2012 as follows:
|
Common
|
|
Dividend
|
|
Per Share
|
BHL
|
$
|
0.0685
|
DVF
|
$
|
0.0585
|
FRA
|
$
|
0.0770
|
BLW
|
$
|
0.1075
|
Notes to Financial Statements (concluded)
Additionally, the Funds declared a net investment income dividend on October 1, 2012 payable to Common Shareholders of record on October 15, 2012 as follows:
|
Common
|
|
Dividend
|
|
Per Share
|
BHL
|
$
|
0.0685
|
FRA
|
$
|
0.0770
|
BLW
|
$
|
0.1075
|
The Board and shareholders of FRA and the Board and shareholders of each of the Target Funds, approved the reorganizations of each Target Fund into FRA pursuant to which FRA acquired all of the assets and all of the liabilities of each Target Fund in
exchange for an equal aggregate value of newly issued shares of FRA in a merger transaction.
Each shareholder of a Target Fund received shares of FRA in an amount equal to the aggregate NAV of such shareholders Target Fund shares, as determined at the close of business on October 5, 2012. Cash was distributed for any fractional shares.
The reorganizations were accomplished by a tax-free exchange of shares of FRA in the following amounts and at the following conversion ratios:
|
Shares Prior to
|
Conversion
|
Shares of
|
Target Funds
|
Reorganizations
|
Ratio
|
FRA
|
FRB
|
10,585,281
|
0.91462449
|
9,681,549
|
DVF
|
12,405,453
|
0.72423797
|
8,984,499
|
Each Target Funds net assets and composition of net assets on October 5, 2012, the date of the reorganization, were as follows:
|
Target Funds
|
|
FRB
|
DVF
|
Net assets
|
$
|
145,503,247
|
|
$
|
135,026,897
|
|
Paid-in capital
|
$
|
199,039,469
|
|
$
|
228,390,538
|
|
Undistributed (distributions in excess of)
|
|
|
|
|
|
|
net investment income
|
$
|
(142,364
|
)
|
$
|
(97,246
|
)
|
Accumulated net realized loss.
|
$
|
(54,909,880
|
)
|
$
|
(89,378,206
|
)
|
Net unrealized appreciation (depreciation)
|
$
|
1,516,022
|
|
$
|
(3,888,189
|
)
|
For financial reporting purposes, assets received and shares issued by FRA 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 FRAs realized
and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
The net assets of FRA before the acquisition were $278,016,037.
The aggregate net assets of FRA immediately after the acquisition amounted to $558,546,181. Each Target Funds fair value and cost of investments prior to the reorganization were as follows:
|
|
Fair Value of
|
|
Cost of
|
Target Funds
|
|
Investments
|
|
Investments
|
FRB
|
|
$
|
220,588,307
|
|
|
$
|
219,010,017
|
|
DVF
|
|
$
|
206,051,284
|
|
|
$
|
209,710,937
|
|
The purpose of these transactions was to combine three 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 October 5, 2012.
In connection with the reorganizations, DVF and FRA paid a special income distribution on September 26, 2012 to shareholders of record as of September 24, as follows:
|
Distribution
|
|
Per Share
|
DVF
|
$
|
0.0810
|
FRA
|
$
|
0.1080
|
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of BlackRock Diversified Income Strategies Fund, Inc.
and BlackRock Floating Rate Income Strategies Fund, Inc. and to the Shareholders and Board of Trustees of BlackRock Defined Opportunity
Credit Trust and BlackRock Limited Duration Income Trust:
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of BlackRock Defined Opportunity Credit Trust (the Fund) as of August 31, 2012, and its related statements of operations and cash
flows for the year then ended, its statements of changes in net assets for each of the two years in the period then ended and its financial highlights for each of the periods presented. We have also audited the consolidated statements of assets and
liabilities, including the consolidated schedules of investments, of BlackRock Diversified Income Strategies Fund, Inc., BlackRock Floating Rate Income Strategies Fund, Inc., and BlackRock Limited Duration Income Trust, (collectively the
Funds), as of August 31, 2012, and their related consolidated statements of operations and consolidated cash flows for the year then ended, their consolidated statements of changes in net assets for each of the two years in the period then
ended, and their consolidated financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Funds management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements and financial highlights are free of material misstatement. The Funds are not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Funds internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of August
31,2012, by correspondence with the custodian, brokers and agent banks; where replies were not received from brokers or agent
banks, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of BlackRock Defined Opportunity Credit Trust as of August 31, 2012, the results of its operations and
its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for each of the periods presented, and the consolidated financial positions of BlackRock Diversified
Income Strategies Fund, Inc., BlackRock Floating Rate Income Strategies Fund, Inc., and BlackRock Limited Duration Income Trust, as of August 31, 2012, the consolidated results of their operations and their consolidated cash flows for the year then
ended, the consolidated changes in their net assets for each of the two years in the period then ended, and their consolidated financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 10 to the consolidated financial statements, on September 13, 2012, the Board of Floating Rate Income Strategies Fund II, Inc. and BlackRock Diversified Income Strategies Fund, Inc. (individually, a Target Fund) approved
the reorganizations of each Target Fund into BlackRock Floating Rate Income Strategies Fund, Inc. pursuant to which BlackRock Floating Rate Income Strategies Fund, Inc. acquired substantially all of the assets and substantially all of the liabilities of
each Target Fund in exchange for newly issued shares of BlackRock Floating Rate Income Strategies Fund, Inc.
Deloitte & Touche LLP
Boston, Massachusetts
October 26, 2012
Important Tax
Information
(Unaudited)
The following information is provided with respect to the ordinary income distributions paid by the Funds for the taxable year ended August 31, 2012.
|
Payable
Dates
|
BHL
|
DVF
|
FRA
|
BLW
|
Interest-Related Dividends for Non-US Residents
1
|
September 2011 January 2012
|
93.30
|
%
|
72.26
|
%
|
83.09
|
%
|
92.79
|
%
|
|
February 2012 August
2012
|
57.35
|
%
|
66.22
|
%
|
65.55
|
%
|
61.84
|
%
|
|
1
|
Represents the portion of the taxable ordinary income
dividends eligible for exemption from US withholding tax for nonresident aliens and foreign corporations.
|
80
|
ANNUAL REPORT
|
AUGUST 31, 2012
|
Disclosure of Investment Advisory Agreements and Sub-Advisory Agreements
The Board of Directors or Trustees, as applicable (each, a Board, collectively, the Boards, and the members of which are referred to as Board Members) of BlackRock Defined Opportunity Credit Trust (BHL),
BlackRock Diversified Income Strategies Fund, Inc. (DVF), BlackRock Floating Rate Income Strategies Fund, Inc. (FRA) and BlackRock Limited Duration Income Trust (BLW and together with BHL, DVF and FRA, each a
Fund, and, collectively, the Funds) met on April 26, 2012 and May 22-23, 2012 to consider the approval of each Funds investment advisory agreement (each, an Advisory Agreement) with BlackRock Advisors, LLC (the
Manager), each Funds investment advisor. The Board of each Fund also considered the approval of the sub-advisory agreement (each, a Sub-Advisory Agreement) among the Manager, BlackRock Financial Management, Inc. (the
Sub-Advisor), and its Fund. The Manager and the Sub-Advisor are referred to herein as BlackRock. The Advisory Agreements and the Sub-Advisory Agreements are referred to herein as the Agreements.
Activities and Composition of the Board
Each Board consists of eleven individuals, nine of whom are not interested persons of such Fund as defined in the Investment Company Act of 1940 (the 1940 Act) (the Independent Board Members). The Board Members are
responsible for the oversight of the operations of the Funds 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. Each 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 Boards are required to consider the continuation of the Agreements on an annual basis. The Boards have four quarterly meetings per year, each extending over two days, and a fifth meeting to consider specific information
surrounding the consideration of renewing the Agreements. In connection with this process, the Boards assessed, among other things, the nature, scope and quality of the services provided to the Funds 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.
The Boards, acting directly and through their respective committees, considered at each of their
meetings, and from time to time as appropriate, factors that are relevant to their annual consideration of the renewal of the
Agreements, including the services and support provided by BlackRock to the Funds and their shareholders. Among the matters the
Boards considered were: (a) investment performance for one-, three- and five-year periods, as applicable, against peer funds,
and applicable benchmarks, if any, as well as senior managements and portfolio managers analysis of the reasons for
any over performance or underperformance against their peers and/or benchmark, as applicable; (b) fees, including advisory, administration,
if applicable, and other amounts paid to BlackRock and its affiliates by the Funds for services such as call center and fund accounting;
(c) Fund operating expenses and how BlackRock allocates expenses to the Funds; (d) the resources devoted to, risk oversight of,
and compliance reports relating to, implementation of the Funds investment objectives, policies and restrictions; (e) the
Funds compliance with their Code of Ethics and other compliance policies and procedures; (f) the nature, cost and character
of non-investment management services provided by BlackRock and its affiliates; (g) BlackRocks and other service providers
internal controls and risk and compliance oversight mechanisms; (h) BlackRocks implementation of the proxy voting policies
approved by the Boards; (i) execution quality of portfolio transactions; (j) BlackRocks implementation of the Funds
valuation and liquidity procedures; (k) an analysis of management fees ratios for products with similar investment objectives
across the open-end fund, closed-end fund and institutional account product channels, as applicable; (l) BlackRocks compensation
methodology for its investment professionals and the incentives it creates; and (m) periodic updates on BlackRocks business.
The Boards have engaged in an ongoing strategic review with BlackRock of opportunities to consolidate funds and of BlackRocks commitment to investment performance. In addition, the Boards requested, to the extent reasonably possible, an analysis of
the risk and return relative to selected funds in peer groups. BlackRock provides information to the Boards in response to specific questions. These questions covered issues such as profitability, including the impact of BlackRocks upfront costs in
sponsoring closed-end funds and the relative profitability of closed-end and open end funds, investment performance and management fee levels. The Boards considered the importance of: (i) managing fixed income assets with a view toward preservation of
capital; (ii) portfolio managers investments in the funds they manage; (iii) BlackRocks controls surrounding the coding of quantitative investment models; and (iv) BlackRocks oversight of relationships with third party service
providers.
Board Considerations in Approving the Agreements
The Approval Process:
Prior to the April 26, 2012 meeting, the Boards requested and received
materials specifically relating to the Agreements. The Boards are engaged in a process with its independent legal counsel and
BlackRock to review periodically the nature and scope of the information provided to better assist their deliberations. The materials
provided in connection with the April meeting included (a) information independently compiled and prepared by Lipper, Inc. (Lipper)
on Fund fees and expenses and the investment performance of the Funds as compared with a peer group of funds as determined by
Lipper and, with respect to BHL, DVF and FRA, a customized peer group selected by BlackRock (collectively, Peers),
as well as the gross investment performance of BLW as compared with its custom benchmark; (b) information on the profitability
of the Agreements to BlackRock and a discussion of fall-out benefits to BlackRock and its affiliates; (c) a general analysis provided
by BlackRock concerning investment management fees (a combination of the advisory fee and the
AUGUST 31, 2012
|
ANNUAL REPORT
|
81
|
Disclosure of Investment Advisory Agreements and Sub-Advisory Agreements (continued)
administration fee, if any) charged to other clients, such as institutional clients and open-end funds, under similar investment mandates, as applicable; (d) the existence, impact and sharing of potential economies of scale; (e) a summary of aggregate
amounts paid by each Fund to BlackRock and (f) if applicable, a comparison of management fees to similar BlackRock closed-end funds, as classified by Lipper.
At an in-person meeting held on April 26, 2012, the Boards reviewed materials relating to their consideration of the Agreements. As a result of the discussions that occurred during the April 26, 2012 meeting, and as a culmination of the Boards
year-long deliberative process, the Boards presented BlackRock with questions and requests for additional information. BlackRock responded to these requests with additional written information in advance of the May 22-23, 2012 Board meeting.
At an in-person meeting held on May 22-23, 2012, each Board, including all the Independent Board Members, unanimously approved the continuation of the Advisory Agreement between the Manager and its Fund, and the Sub-Advisory Agreement among the Manager,
the Sub-Advisor, and its Fund, each for a one-year term ending June 30, 2013. In approving the continuation of the Agreements, the Boards considered: (a) the nature, extent and quality of the services provided by BlackRock; (b) the investment performance
of the Funds and BlackRock; (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 Funds; (d) economies of scale; (e) fall-out benefits to BlackRock as a result of its
relationship with the Funds; and (f) other factors deemed relevant by the Board Members.
The Boards also considered other matters they 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 Fund portfolio holdings, direct
and indirect benefits to BlackRock and its affiliates from their relationship with the Funds and advice from independent legal counsel with respect to the review process and materials submitted for the Boards review. The Boards noted the
willingness of BlackRock personnel to engage in open, candid discussions with the Boards. The Boards 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 Boards, including
the Independent Board Members, reviewed the nature, extent and quality of services provided by BlackRock, including the investment
advisory services and the resulting performance of the Funds. Throughout the year, the Boards compared Fund performance to the
performance of a comparable group of closed-end funds and/or the performance of a relevant benchmark, if any. The Boards met with
BlackRocks senior management personnel responsible for investment operations, including the senior investment officers.
Each Board also reviewed the materials provided by its Funds portfolio management team discussing Fund performance and the
Funds investment objective, strategies and outlook.
The Boards considered, among other factors, the number, education and experience of BlackRocks
investment personnel generally and their Funds portfolio management teams, investments by portfolio managers in the funds
they manage, BlackRocks portfolio trading capabilities, BlackRocks use of technology, BlackRocks commitment
to compliance, BlackRocks credit analysis capabilities, BlackRocks risk analysis and oversight capabilities and BlackRocks
approach to training and retaining portfolio managers and other research, advisory and management personnel. The Boards engaged
in a review of BlackRocks compensation structure with respect to their Funds portfolio management teams and BlackRocks
ability to attract and retain high-quality talent and create performance incentives.
In addition to advisory services, the Boards considered the quality of the administrative and non-investment advisory services provided to the Funds. BlackRock and its affiliates provide the Funds with certain services (in addition to any such services
provided to the Funds by third parties) and officers and other personnel as are necessary for the operations of the Funds. In particular, BlackRock and its affiliates provide the Funds 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 Funds; (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 Funds, such as tax reporting, fulfilling regulatory filing
requirements and call center services. The Boards 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 Funds and BlackRock:
The Boards, including the Independent
Board Members, also reviewed and considered the performance history of their Funds. In preparation for the April 26, 2012 meeting,
the Boards worked with its independent legal counsel, BlackRock and Lipper to develop a template for, and was provided with reports
independently prepared by Lipper, which included a comprehensive analysis of each Funds performance. The Boards also reviewed
a narrative and statistical analysis of the Lipper data that was prepared by BlackRock, which analyzed various factors that affect
Lippers rankings. In connection with their review, each Board received and reviewed information regarding the investment
performance, based on net asset value (NAV), of its Fund as compared to funds in that Funds applicable Lipper category,
and with respect to BHL, DVF and FRA, a customized peer group selected by BlackRock, and with respect to BLW, the gross investment
performance of BLW as compared with its custom benchmark. The Boards were provided with a description of the methodology used
by Lipper to select peer funds and periodically meets with Lipper representatives to review their methodology. Each Board and
its Performance Oversight Committee regularly review, and meet with Fund management to discuss, the performance of its Fund throughout
the year.
82
|
ANNUAL REPORT
|
AUGUST 31, 2012
|
Disclosure of Investment Advisory Agreements and Sub-Advisory Agreements (continued)
The Board of DVF noted that, in general, DVF performed better than its Peers in that DVFs performance was at or above the median of its Customized Lipper Peer Group in two of the one-, three- and five-year periods reported. Based on its discussions
with BlackRock and the Boards review of DVFs investment performance compared to its Lipper Peer Group, the methodology used by Lipper to select peer funds, and other relevant information provided by BlackRock, DVFs Board noted that
DVFs investment performance as compared to its Customized Lipper Peer Group provided a more meaningful comparison of DVFs relative performance.
The Board of BHL noted that BHL performed below the median of its Customized Lipper Peer Group in the one- and three-year periods reported, but that BHL performed at or above the median of its Customized Lipper Peer Group in the since-inception period
reported. Based on its discussions with BlackRock and the Boards review of BHLs investment performance compared to its Lipper Peer Group, the methodology used by Lipper to select peer funds, and other relevant information provided by
BlackRock, the Board of BHL noted that BHLs investment performance as compared to its Customized Lipper Peer Group provided a more meaningful comparison of BHLs relative performance. The Board of BHL and BlackRock reviewed and discussed the
reasons for BHLs underperformance during the one- and three-year periods compared with its Peers. BHLs Board was informed that, among other things, the two major factors impacting performance during the one- and three-year periods were
leverage and general investment style. On average, BHL has tended to run lower leverage than BHLs competitors and the investment style leads to overweight positions to higher-quality assets. The two years following the financial crisis in 2008
witnessed a significant rally in lower credit quality assets. The overweight to higher quality assets and below average leverage were the primary drivers to the underperformance for the three-year period.
The Board of FRA noted that FRA performed below the median of its Customized Lipper Peer Group in each of the one-, three- and five-year periods reported. Based on its discussions with BlackRock and the Boards review of FRAs investment
performance compared to its Lipper Peer Group, the methodology used by Lipper to select peer funds, and other relevant information provided by BlackRock, the Board of FRA noted that FRAs investment performance as compared to its Customized Lipper
Peer Group provided a more meaningful comparison of FRAs relative performance. The Board of FRA and BlackRock reviewed and discussed the reasons for FRAs underperformance during these periods compared with its Peers. FRAs Board was
informed that, among other things, the two major factors impacting performance during the one- and three-year periods were leverage and general investment style. On average, FRA has tended to run lower leverage than FRAs competitors and the
investment style leads to overweight positions to higher-quality assets. The two years following the financial crisis in 2008 witnessed a significant rally in lower credit quality assets. The overweight to higher quality assets and below average leverage
were the primary drivers to the underperformance for the three-year period.
The Board of BLW noted that BLWs gross performance underperformed its customized benchmark in the one- and five-year periods reported, but that BLWs gross performance exceeded its customized benchmark in the three-year period reported. Based
on its discussions with BlackRock and
the Boards review of BLWs investment performance compared to its Lipper Peer Group, the methodology used by Lipper to select peer funds, and other relevant information provided by BlackRock, BLWs Board noted that BLWs gross
investment performance as compared to its customized benchmark provided a more meaningful comparison of BLWs relative performance. The Board of BLW and BlackRock reviewed and discussed the reasons for BLWs underperformance during the one- and
five-year periods compared with its customized benchmark. BLWs Board was informed that, among other things, BLWs underperformance for the one-and five-year periods was mainly attributable to the high yield and leverage loan portions of the
portfolio (2008 in particular). In 2011, BLWs high yield strategies in general lagged behind the benchmark, mostly a result of conservative and partially hedged positions held in the second half of the year, including the markets rebound in
October through December. In 2008 both the loan and high yield strategies underperformed their benchmarks.
The Boards of BHL, FRA and BLW and BlackRock discussed BlackRocks strategy for improving the performance of BHL, FRA and BLW and BlackRocks commitment to providing the resources necessary to assist the Funds portfolio managers and to
improve the Funds performance.
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 Funds:
Each Board, including the Independent Board
Members, reviewed its Funds contractual management fee rate compared with the other funds in its Lipper category. It also
compared the Funds total expense ratio, as well as actual management fee rate, to those of other funds in its Lipper category.
The Boards considered the services provided and the fees charged by BlackRock to other types of clients with similar investment
mandates, including separately managed institutional accounts.
The Boards received and reviewed statements relating to BlackRocks financial condition and profitability with respect to the services it provided the Funds. The Boards were also provided with a profitability analysis that detailed the revenues
earned and the expenses incurred by BlackRock for services provided to the Funds. The Boards reviewed BlackRocks profitability with respect to the Funds and other funds the Boards currently oversee for the year ended December 31, 2011 compared to
available aggregate profitability data provided for the years ended December 31, 2010, and December 31, 2009. The Boards reviewed BlackRocks profitability with respect to other fund complexes managed by the Manager and/or its affiliates. The Boards
reviewed BlackRocks assumptions and methodology of allocating expenses in the profitability analysis, noting the inherent limitations in allocating costs among various advisory products. The Boards recognized that profitability may be affected by
numerous factors including, among other things, fee waivers and expense reimbursements by the Manager, the types of funds managed, expense allocations and business mix, and the difficulty of comparing profitability as a result of those factors.
The Boards noted that, in general, individual fund or product line profitability of other advisors is not publicly available. The Boards considered BlackRocks overall operating margin, in general, compared
AUGUST 31, 2012
|
ANNUAL REPORT
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83
|
Disclosure of Investment Advisory Agreements and Sub-Advisory Agreements (concluded)
to the operating margin for leading investment management firms whose operations include advising closed-end funds, among other product types. In addition, the Boards considered, among other things, certain third party data comparing BlackRocks
operating margin with that of other publicly-traded asset management firms. The Boards considered the differences between BlackRock and these other firms, including the contribution of technology at BlackRock, BlackRocks expense management, and the
relative product mix.
In addition, the Boards considered the cost of the services provided to the Funds by BlackRock, and BlackRocks and its affiliates profits relating to the management of the Funds and the other funds advised by BlackRock and its affiliates. As
part of its analysis, the Boards reviewed BlackRocks methodology in allocating its costs to the management of the Funds. The Boards 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 Boards.
The Board of BHL noted that BHLs contractual management fee ratio (a combination of the advisory fee and the administration fee, if any) was above the median contractual management fee ratio paid by BHLs Peers, in each case before taking into
account any expense reimbursements or fee waivers. BHLs Board also noted, however, that BHLs actual management fee ratio, after giving effect to any expense reimbursement or fee waivers by BlackRock, was reasonable relative to the median
actual management fee ratio paid by BHLs Peers, after giving effect to any expense reimbursement or fee waivers.
The Board of each of DVF, FRA and BLW noted that its respective Funds contractual management fee ratio (a combination of the advisory fee and the administration fee, if any) was lower than or equal to the median contractual management fee ratio
paid by the Funds Peers, in each case before taking into account any expense reimbursements or fee waivers.
D. Economies of Scale:
Each Board, including the Independent Board Members, considered the
extent to which economies of scale might be realized as the assets of its Fund increase. Each Board also considered the extent
to which its Fund benefits from such economies and whether there should be changes in the advisory fee rate or structure in order
to enable the Fund 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 Fund.
Based on the Boards review and consideration of the issue, the Boards 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 Boards noted that only one closed-end fund in the Fund Complex has breakpoints in its advisory fee structure.
E. Other Factors Deemed Relevant by the Board Members:
The Boards, 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 Funds, 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 Funds, including
securities lending and cash management services. The Boards also considered BlackRocks overall operations and its efforts
to expand the scale of, and improve the quality of, its operations. The Boards 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 Boards further noted that they had considered the investment by BlackRocks funds
in exchange traded funds (i.e., ETFs) without any offset against the management fees payable by the funds to BlackRock.
In connection with its consideration of the Agreements, the Boards also received information regarding BlackRocks brokerage and soft dollar practices. The Boards received reports from BlackRock which included information on brokerage commissions
and trade execution practices throughout the year.
The Boards noted the competitive nature of the closed-end fund marketplace, and that shareholders are able to sell their Fund shares in the secondary market if they believe that the Funds fees and expenses are too high or if they are dissatisfied
with the performance of the Fund.
Conclusion
Each Board, including all the Independent Board Members, unanimously approved the continuation of the Advisory Agreement between the Manager and its Fund for a one-year term ending June 30, 2013, and the Sub-Advisory Agreement among the Manager, the
Sub-Advisor, and its Fund for a one-year term ending June 30, 2013. Based upon its evaluation of all of the aforementioned factors in their totality, the Boards, including the Independent Board Members, were satisfied that the terms of the Agreements
were fair and reasonable and in the best interest of the Funds and their shareholders. In arriving at their decision to approve the Agreements, the Boards 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 these
determinations. The contractual fee arrangements for the Funds reflect the results of several years of review by the Board Members and predecessor Board Members, and discussions between such Board Members (and predecessor Board Members) and BlackRock. As
a result, the Board Members conclusions may be based in part on their consideration of these arrangements in prior years.
84
|
ANNUAL REPORT
|
AUGUST 31, 2012
|
Automatic Dividend Reinvestment Plans
Pursuant to each Funds Dividend Reinvestment Plan (the Reinvestment Plan), Common Shareholders are automatically enrolled to have all distributions of dividends and capital gains reinvested by Computershare Trust Company, N.A. (the
Reinvestment Plan Agent) in the respective Funds shares pursuant to the Reinvestment Plan. Shareholders who do not participate in the Reinvestment Plan will receive all distributions in cash paid by check and mailed directly to the
shareholders of record (or if the shares are held in street name or other nominee name, then to the nominee) by the Reinvestment Plan Agent, which serves as agent for the shareholders in administering the Reinvestment Plan.
After the Funds declare a dividend or determine to make a capital gain distribution, the Reinvestment Plan Agent will acquire shares for the participants accounts, depending upon the following circumstances, either (i) through receipt of unissued
but authorized shares from the Funds (newly issued shares) or (ii) by purchase of outstanding shares on the open market or on the Funds primary exchange (open-market purchases). If, on the dividend payment date, the net
asset value per share (NAV) is equal to or less than the market price per share plus estimated brokerage commissions (such condition often referred to as a market premium), the Reinvestment Plan Agent will invest the dividend
amount in newly issued shares acquired on behalf of the participants. The number of newly issued shares to be credited to each participants account will be determined by dividing the dollar amount of the dividend by the NAV on the date the shares
are issued. However, if the NAV is less than 95% of the market price on the dividend payment date, the dollar amount of the dividend will be divided by 95% of the market price on the dividend payment date. If, on the dividend payment date, the NAV is
greater than the market price per share plus estimated brokerage commissions (such condition often referred to as a market discount), the Reinvestment Plan Agent will invest the dividend amount in shares acquired on behalf of the participants
in open-market purchases. If the Reinvestment Plan Agent is unable to invest the full dividend amount in open-market purchases, or if the market discount shifts to a market premium during the purchase period, the Reinvestment Plan Agent will invest any
un-invested portion in newly issued shares. Investments in newly issued shares made in this manner would be made pursuant to the same process described above and the date of issue for such newly issued shares will substitute for the dividend payment
date.
Participation in the Reinvestment Plan is completely voluntary and may be terminated or resumed at any time without penalty by notice if received and processed by the Reinvestment Plan Agent prior to the dividend record date. Additionally, the
Reinvestment Plan Agent seeks to process notices received after the record date but prior to the payable date and such notices often will become effective by the payable date. Where late notices are not processed by the applicable payable date, such
termination or resumption will be effective with respect to any subsequently declared dividend or other distribution.
The Reinvestment Plan Agents fees for the handling of the reinvestment of dividends and distributions will be paid by each Fund. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Reinvestment
Plan Agents open market purchases in connection with the reinvestment of dividends and distributions. The automatic reinvestment of dividends and distributions will not relieve participants of any federal income tax that may be payable on such
dividends or distributions.
Each Fund reserves the right to amend or terminate the Reinvestment Plan. There is no direct service charge to participants in the Reinvestment Plan. However, each Fund reserves the right to amend the Reinvestment Plan to include a service charge payable
by the participants. Participants that request a sale of shares are subject to a $2.50 sales fee and a $0.15 per share fee. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay. All
correspondence concerning the Reinvestment Plan should be directed to Computershare Trust Company, N. A. through the internet at www.computershare.com/ investor, or in writing to Computershare, P. O. Box 43078, Providence, RI 02940-3078, Telephone: (800)
699-1236. Overnight correspondence should be directed to the Reinvestment Plan Agent at 250 Royall Street, Canton, MA 02021.
AUGUST 31, 2012
|
ANNUAL REPORT
|
85
|
Officers and Directors
Name,
Address
and Year of Birth
|
Position(s)
Held with
Funds
|
Length
of Time
Served as
a Director
2
|
Principal
Occupation(s)
During Past Five Years
|
Number
of
BlackRock-
Advised
Registered
Investment
Companies
(“RICs”)
Consisting of
Investment
Portfolios
(“Portfolios”)
Overseen
|
Public
Directorships
|
Independent
Directors
1
|
Richard
E. Cavanagh
55
East 52nd Street
New York, NY 10055
1946
|
Chairman
of the Board and Director
|
Since
2007
|
Trustee,
Aircraft Finance Trust from 1999 to 2009; Director, The Guardian Life Insurance Company of America since 1998; Director, Arch
Chemical (chemical and allied products) from 1999 to 2011; Trustee, Educational Testing Service from 1997 to 2009 and Chairman
thereof from 2005 to 2009; Senior Advisor, The Fremont Group since 2008 and Director thereof since 1996; Adjunct Lecturer,
Harvard University since 2007; President and Chief Executive Officer, The Conference Board, Inc. (global business research
organization) from 1995 to 2007.
|
98
RICS consisting of 94 Portfolios
|
None
|
Karen
P. Robards
55
East 52nd Street
New York, NY 10055
1950
|
Vice
Chairperson of the Board, Chairperson of the Audit Committee and Director
|
Since
2007
|
Partner
of Robards & Company, LLC (financial advisory firm) since 1987; Co-founder and Director of the Cooke Center for Learning
and Development (a not-for-profit organization) since 1987; Director of Care Investment Trust, Inc. (health care real estate
investment trust) from 2007 to 2010; Investment Banker at Morgan Stanley from 1976 to 1987.
|
98
RICs consisting of 94 Portfolios
|
AtriCure,
Inc. (medical devices)
|
Michael
J. Castellano
55
East 52nd Street
New York, NY 10055
1946
|
Director
and Member of the Audit Committee
|
Since
2011
|
Managing
Director and Chief Financial Officer of Lazard Group LLC from 2001 to 2011; Chief Financial Officer of Lazard Ltd from 2004
to 2011; Director, Support Our Aging Religious (non-profit) since 2009; Director, National Advisory Board of Church Management
at Villanova University since 2010.
|
98
RICs consisting of 94 Portfolios
|
None
|
Frank
J. Fabozzi
55
East 52nd Street
New York, NY 10055
1948
|
Director
and Member of the Audit Committee
|
Since
2007
|
Editor
of and Consultant for The Journal of Portfolio Management since 1986; Professor of Finance, EDHEC Business School since 2011;
Professor in the Practice of Finance and Becton Fellow, Yale University School of Management from 2006 to 2011; Adjunct Professor
of Finance and Becton Fellow, Yale University from 1994 to 2006.
|
98
RICs consisting of 94 Portfolios
|
None
|
Kathleen
F. Feldstein
55
East 52nd Street
New York, NY 10055
1941
|
Director
|
Since
2007
|
President
of Economics Studies, Inc. (private economic consulting firm) since 1987; Chair, Board of Trustees, McLean Hospital from 2000
to 2008 and Trustee Emeritus thereof since 2008; Member of the Board of Partners Community Healthcare, Inc. from 2005 to 2009;
Member of the Corporation of Partners HealthCare since 1995; Trustee, Museum of Fine Arts, Boston since 1992; Member of the
Visiting Committee to the Harvard University Art Museum since 2003; Director, Catholic Charities of Boston since 2009.
|
98
RICs consisting of 94 Portfolios
|
The
McClatchy Company (publishing) BellSouth (telecommunications); Knight Ridder (publishing)
|
James
T. Flynn
55
East 52nd Street
New York, NY 10055
1939
|
Director
and Member of the Audit Committee
|
Since
2007
|
Chief
Financial Officer of JP Morgan & Co., Inc. from 1990 to 1995.
|
98
RICs consisting of 94 Portfolios
|
None
|
Jerrold
B. Harris
55
East 52nd Street
New York, NY 10055
1942
|
Director
|
Since
2007
|
Trustee,
Ursinus College since 2000; Director, Troemner LLC (scientific equipment) since 2000; Director of Delta Waterfowl Foundation
since 2001; President and Chief Executive Officer, VWR Scientific Products Corporation from 1990 to 1999.
|
98
RICs consisting of 94 Portfolios
|
BlackRock
Kelso Capital Corp. (business development company)
|
86
|
ANNUAL REPORT
|
AUGUST 31, 2012
|
Officers and Directors (continued)
Name, Address
and Year of Birth
|
Position(s)
Held with
Funds
|
Length
of Time
Served as
a Director
2
|
Principal Occupation(s)
During Past
Five Years
|
Number of
BlackRock-
Advised
Registered
Investment
Companies
(“RICs”)
Consisting of
Investment
Portfolios
(“Portfolios”)
Overseen
|
Public
Directorships
|
Independent
Directors
1
(concluded)
|
R.
Glenn Hubbard
55
East 52nd Street
New York, NY 10055
1958
|
Director
|
Since 2007
|
Dean, Columbia Business School since 2004; Columbia faculty member
since 1988; Co-Director, Columbia Business School’s Entrepreneurship Program from 1997 to 2004; Chairman, U.S. Council
of Economic Advisers under the President of the United States from 2001 to 2003; Chairman, Economic Policy Committee of the
OECD from 2001 to 2003.
|
98 RICs consisting of 94 Portfolios
|
ADP (data and information services); KKR Financial Corporation (finance);
Metropolitan Life Insurance Company (insurance)
|
W.
Carl Kester
55
East 52nd Street
New York, NY 10055
1951
|
Director and Member of the Audit Committee
|
Since 2007
|
George Fisher Baker Jr. Professor of Business Administration, Harvard
Business School; Deputy Dean for Academic Affairs from 2006 to 2010; Chairman of the Finance Department, Harvard Business
School from 2005 to 2006; Senior Associate Dean and Chairman of the MBA Program of Harvard Business School from 1999 to 2005;
Member of the faculty of Harvard Business School since 1981.
|
98 RICs consisting of 94 Portfolios
|
None
|
|
1
Directors
serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. The maximum age limitation
may be waived as to any Director by action of a majority of the Directors upon finding good cause thereof. In 2011, the Board
of Directors unanimously approved extending the mandatory retirement age for James T. Flynn by one additional year, which
the Board believes would be in the best interest of shareholders.
|
|
2
Date
shown is the earliest date a person has served for the Funds covered by this annual report. Following the combination of Merrill
Lynch Investment Managers, L.P. (“MLIM”) and BlackRock, Inc. (“BlackRock”) in September 2006, the
various legacy MLIM and legacy BlackRock fund boards were realigned and consolidated into three new fund boards in 2007. As
a result, although the chart shows certain Directors as joining the Fund’s board in 2007, each Director first became
a member of the board of other legacy MLIM or legacy BlackRock Funds as follows: Richard E. Cavanagh, 1994; Frank J. Fabozzi,
1988; Kathleen F. Feldstein, 2005; James T. Flynn, 1996; Jerrold B. Harris, 1999; R. Glenn Hubbard, 2004; W. Carl Kester,
1995; and Karen P. Robards, 1998.
|
Interested
Directors
3
|
Paul
L. Audet
55
East 52nd Street
New York, NY 10055
1953
|
Director
|
Since 2011
|
Senior Managing Director of BlackRock and Head of U.S.
Mutual Funds since 2011; Chair of the U.S. Mutual Funds Committee reporting to the Global Executive Committee since 2011;
Head of BlackRock’s Real Estate business from 2008 to 2011; Member of BlackRock’s Global Operating and Corporate
Risk Management Committees and of the BlackRock Alternative Investors Executive Committee and Investment Committee for the
Private Equity Fund of Funds business since 2008; Head of BlackRock’s Global Cash Management business from 2005 to 2010;
Acting Chief Financial Officer of BlackRock from 2007 to 2008; Chief Financial Officer of BlackRock from 1998 to 2005.
|
160 RICs consisting of 278 Portfolios
|
None
|
Henry
Gabbay
55
East 52nd Street
New York, NY 10055
1947
|
Director
|
Since 2007
|
Consultant, BlackRock from 2007 to 2008; Managing Director, BlackRock
from 1989 to 2007; Chief Administrative Officer, BlackRock Advisors, LLC from 1998 to 2007; President of BlackRock Funds and
BlackRock Bond Allocation Target Shares from 2005 to 2007; Treasurer of certain closed-end funds in the BlackRock fund complex
from 1989 to 2006.
|
160 RICs consisting of 278 Portfolios
|
None
|
|
3
Mr.
Audet is an “interested person,” as defined in the 1940 Act, of the Funds based on his position with BlackRock and
its affiliates. Mr. Gabbay is an “interested person” of the Funds based on his former positions with BlackRock and
its affiliates as well as his ownership of BlackRock and The PNC Financial Services Group, Inc. securities. Mr. Audet and Mr.
Gabbay are also Directors of the BlackRock registered open-end funds. Directors serve until their resignation, removal or death,
or until December 31 of the year in which they turn 72. The maximum age limitation may be waived as to any Director by action
of a majority of the Directors upon finding good cause thereof.
|
AUGUST 31, 2012
|
ANNUAL REPORT
|
87
|
Officers and Directors (concluded)
Name,
Address
and Year
of Birth
|
Position(s)
Held with
Funds
|
Length
of
Time Served
|
Principal Occupation(s) During
Past Five Years
|
Officers
1
|
John
M. Perlowski
55 East 52nd
Street
New York, NY 10055
1964
|
President and Chief Executive Officer
|
Since 2011
|
Managing Director of BlackRock since 2009; Global Head of BlackRock
Fund Administration since 2009; Managing Director and Chief Operating Officer of the Global Product Group at Goldman Sachs
Asset Management, L.P. from 2003 to 2009; Treasurer of Goldman Sachs Mutual Funds from 2003 to 2009 and Senior Vice President
thereof from 2007 to 2009; Director of Goldman Sachs Offshore Funds from 2002 to 2009; Director of Family Resource Network
(charitable foundation) since 2009.
|
Anne
Ackerley
55 East 52nd
Street
New York, NY 10055
1962
|
Vice President
|
Since 2007
2
|
Managing Director of BlackRock since 2000; Chief Marketing Officer
of BlackRock since 2012; President and Chief Executive Officer of the BlackRock-advised funds from 2009 to 2011; Vice President
of the BlackRock-advised funds from 2007 to 2009; Chief Operating Officer of BlackRock’s Global Client Group since 2009
to 2012; Chief Operating Officer of BlackRock’s U.S. Retail Group from 2006 to 2009; Head of BlackRock’s Mutual
Fund Group from 2000 to 2006.
|
Brendan
Kyne
55 East 52nd
Street
New York, NY 10055
1977
|
Vice President
|
Since 2009
|
Managing Director of BlackRock since 2010; Director of BlackRock
from 2008 to 2009; Head of Product Development and Management for BlackRock’s U.S. Retail Group since 2009; and Co-head
thereof from 2007 to 2009; Vice President of BlackRock from 2005 to 2008.
|
Robert
W. Crothers
55 East 52nd
Street
New York, NY 10055
1981
|
Vice President
|
Since 2012
|
Director of BlackRock since 2011; Vice President of BlackRock from
2008 to 2010; Associate of BlackRock from 2006 to 2007.
|
Neal
Andrews
55 East 52nd
Street
New York, NY 10055
1966
|
Chief Financial Officer
|
Since 2007
|
Managing Director of BlackRock since 2006; Senior Vice President
and Line of Business Head of Fund Accounting and Administration at PNC Global Investment Servicing (U.S.) Inc. from 1992 to
2006.
|
Jay
Fife
55 East 52nd
Street
New York, NY 10055
1970
|
Treasurer
|
Since 2007
|
Managing Director of BlackRock since 2007; Director of BlackRock
in 2006; Assistant Treasurer of the MLIM and Fund Asset Management, L.P. advised funds from 2005 to 2006; Director of MLIM
Fund Services Group from 2001 to 2006.
|
Brian Kindelan
55 East 52nd
Street
New York, NY 10055
1959
|
Chief Compliance Officer and Anti-Money Laundering Officer
|
Since 2007
|
Chief Compliance Officer of the BlackRock-advised funds since 2007;
Managing Director and Senior Counsel of BlackRock since 2005.
|
Janey
Ahn
55 East 52nd
Street
New York, NY 10055
1975
|
Secretary
|
Since 2012
|
Director of BlackRock since 2009; Vice President of BlackRock from
2008 to 2009; Assistant Secretary of the Funds from 2008 to 2012; Associate at Willkie Farr & Gallagher LLP from 2006
to 2008.
|
|
1
Officers
of the Funds serve at the pleasure of the Board.
|
|
2
Ms. Ackerley
was President and Chief Executive Officer from 2009 to 2011.
|
Investment
Advisor
|
Custodian and
|
Transfer Agent
|
Independent Registered
|
Legal Counsel
|
Address of the Funds
|
BlackRock Advisors, LLC
|
Accounting Agent
|
Common Shares
|
Public Accounting Firm
|
Skadden, Arps, Slate,
|
100 Bellevue Parkway
|
Wilmington, DE 19809
|
State Street Bank
|
Computershare Trust
|
Deloitte & Touche LLP
|
Meagher & Flom LLP
|
Wilmington, DE 19809
|
|
and Trust Company
|
Company, N.A.
|
Boston, MA 02116
|
New York, NY 10036
|
|
Sub-Advisor
|
Boston, MA 02110
|
Canton, MA 02021
|
|
|
|
BlackRock Financial
|
|
|
|
|
|
Management, Inc.
|
|
|
|
|
|
New York, NY 10055
|
|
|
|
|
|
Effective May 22, 2012, Robert W. Crothers
became Vice President of the Funds.
Effective
May
22,
2012,
Ira
P.
Shapiro
resigned
as
Secretary
of
the
Funds
and
Janey
Ahn
became
Secretary
of
the
Funds.
|
The Funds are managed by a team of investment professionals. Effective
March 16,2012, Tom Musmanno
became a co-portfolio manager of BLW, responsible for the day-to-day management of the Fund.
|
88
|
ANNUAL REPORT
|
AUGUST 31, 2012
|
Additional Information
Proxy Results
The Annual Meeting of Shareholders was held on July 27, 2012 for shareholders of record on May 31, 2012 to elect director nominees for each Fund. There were no broker non-votes with regard to any of the Funds.
Approved the Class II Directors as follows:
|
Frank J. Fabozzi
|
|
James T. Flynn
|
|
Karen P. Robards
|
|
|
Votes
|
|
|
|
Votes
|
|
|
|
Votes
|
|
|
Votes
For
|
Withheld
|
Abstain
|
|
Votes
For
|
Withheld
|
Abstain
|
|
Votes
For
|
Withheld
|
Abstain
|
BHL
|
8,598,551
|
146,526
|
0
|
|
8,598,551
|
146,526
|
0
|
|
8,591,754
|
153,323
|
0
|
BLW
|
33,321,202
|
624,963
|
0
|
|
33,306,967
|
639,198
|
0
|
|
33,317,004
|
629,161
|
0
|
For the Funds listed above, Directors whose term of office continued after the Annual Meeting of Shareholders because they were not up for election are Paul L. Audet, Michael J. Castellano, Richard E. Cavanagh, Kathleen F. Feldstein, Henry Gabbay,
Jerrold B. Harris, R. Glenn Hubbard and W. Carl Kester.
Approved the Directors as follows:
|
Paul L. Audet
|
|
Michael J. Castellano
|
|
Richard E. Cavanagh
|
|
|
Votes
|
|
|
|
Votes
|
|
|
|
Votes
|
|
|
Votes For
|
Withheld
|
Abstain
|
|
Votes For
|
Withheld
|
Abstain
|
|
Votes For
|
Withheld
|
Abstain
|
DVF
|
11,445,811
|
415,430
|
0
|
|
11,438,562
|
422,679
|
0
|
|
11,445,811
|
415,430
|
0
|
FRA
|
17,065,874
|
225,995
|
0
|
|
17,087,833
|
204,036
|
0
|
|
17,088,066
|
203,803
|
0
|
|
|
Frank J. Fabozzi
|
|
Kathleen F. Feldstein
|
|
James T. Flynn
|
|
|
Votes
|
|
|
|
Votes
|
|
|
|
Votes
|
|
|
Votes For
|
Withheld
|
Abstain
|
|
Votes For
|
Withheld
|
Abstain
|
|
Votes For
|
Withheld
|
Abstain
|
DVF
|
11,438,562
|
422,679
|
0
|
|
11,439,282
|
421,959
|
0
|
|
11,444,888
|
416,353
|
0
|
FRA
|
17,080,197
|
211,672
|
0
|
|
17,065,020
|
226,849
|
0
|
|
17,048,171
|
243,698
|
0
|
|
|
Henry Gabbay
|
|
Jerrold B. Harris
|
|
R. Glenn Hubbard
|
|
|
Votes
|
|
|
|
Votes
|
|
|
|
Votes
|
|
|
Votes For
|
Withheld
|
Abstain
|
|
Votes For
|
Withheld
|
Abstain
|
|
Votes For
|
Withheld
|
Abstain
|
DVF
|
11,438,562
|
422,679
|
0
|
|
11,445,623
|
415,618
|
0
|
|
11,445,811
|
415,430
|
0
|
FRA
|
17,065,886
|
225,983
|
0
|
|
17,066,182
|
225,687
|
0
|
|
17,059,139
|
232,730
|
0
|
|
|
W. Carl Kester
|
|
Karen P. Robards
|
|
|
|
|
|
|
Votes
|
|
|
|
Votes
|
|
|
|
|
|
|
Votes For
|
Withheld
|
Abstain
|
|
Votes For
|
Withheld
|
Abstain
|
|
|
|
|
DVF
|
11,445,811
|
415,430
|
0
|
|
11,439,464
|
421,777
|
0
|
|
|
|
|
FRA
|
17,081,961
|
209,908
|
0
|
|
17,088,050
|
203,819
|
0
|
|
|
|
|
AUGUST 31, 2012
|
ANNUAL REPORT
|
89
|
Additional Information (continued)
Fund Certification
Certain Funds are listed for trading on the NYSE and have filed with the NYSE their annual chief
executive officer certification regarding compliance with the NYSEs listing standards. The Funds filed with the SEC the
certification of their chief executive officer and chief financial officer required by section 302 of the Sarbanes-Oxley Act.
Dividend Policy
The Funds dividend policy is to distribute all or a portion of their net investment income
to its shareholders on a monthly basis. In order to provide shareholders with a more stable level of dividend distributions, the
Funds may at times pay out less than the entire amount of net investment income earned in any particular month and may at times
in any particular month pay out such accumulated but undistributed income in addition to net investment income earned in that
month. As a result, the dividends paid by the Funds for any particular month may be more or less than the amount of net investment
income earned by the Funds during such month. The Funds current accumulated but undistributed net investment income, if
any, is disclosed in the Statements of Assets and Liabilities, which comprises part of the financial information included in this
report.
General Information
On February 9, 2012, the Board of BLW approved the removal of BLWs non-fundamental investment policy requiring that counterparties with respect to swap transactions be rated A or A-1 or better by S&Ps or Fitch Ratings, Inc.
(Fitch) or A or P-1 or better by Moodys. As a result of this investment policy change, BLW may enter into swap transactions with any counterparties approved by the Manager. Such counterparties may entail a greater degree of credit risk
or risk of nonperformance than counterparties rated A or A-1 or better by S&Ps or Fitch or A or P-1 or better by Moodys. The Manager will seek to minimize BLWs exposure to counterparty risk by entering into swap transactions with
counterparties the Manager believe to be creditworthy at the time they enter into such transactions. To the extent BLW engages in swap transactions, shareholders of BLW will be dependent on the analytical ability of the Manager to evaluate the credit
quality of counterparties to such transactions. In the event of the insolvency of a counterparty, BLW may not be able to recover its assets, in full or at all, during the insolvency process. In addition, counterparties to investments may have no
obligation to make markets in such investments and may have the ability to apply essentially discretionary margin and credit requirements. The foregoing investment policy amendment will not alter BLWs investment objective.
The Funds do not make available copies of their Statements of Additional Information because the Funds shares are not continuously offered, which means that the Statement of Additional Information of each Fund has not been updated after completion
of the respective Funds offerings and the information contained in each Funds Statement of Additional Information may have become outdated.
Other than as disclosed above, there were no material changes in the Funds investment objectives or policies or to the Funds charters or by-laws that would delay or prevent a change of control of the Funds that were not approved by
shareholders or in the principal risk factors associated with investment in the Funds. Other than as disclosed on page 88, there have been no changes in the persons who are primarily responsible for the day-to-day management of the Funds
portfolios.
Quarterly performance, semi-annual and annual reports and other information regarding the Funds may be found on BlackRocks website, which can be accessed at http://www.blackrock.com. This reference to BlackRocks website is intended to allow
investors public access to information regarding the Funds and does not, and is not intended to, incorporate BlackRocks website in this report.
Electronic Delivery
Electronic copies of most financial reports are available on the Funds web-sites or shareholders can sign up for e-mail notifications of quarterly statements, annual and semi-annual reports by enrolling in the Funds electronic delivery
program.
Shareholders Who Hold Accounts with Investment Advisors, Banks or Brokerages:
Please contact your financial advisor to enroll. Please note that not all investment advisors, banks or brokerages may offer this service.
Householding
The Funds will mail only one copy of shareholder documents, including annual and semi-annual reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is commonly called householding and is
intended to reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be
combined with those for other members of your household, please call the Funds at (800) 441-7762.
Availability of Quarterly Schedule of Investments
The Funds files their complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds Forms N-Q are available on the SECs website at http://www.sec.gov and may also be reviewed
and copied at the SECs Public Reference Room in Washington, DC. Information on how to access documents on the SECs website without charge may be obtained by calling (800) SEC-0330. The Funds Forms N-Q may also be obtained upon request
and without charge by calling (800) 441-7762.
90
|
ANNUAL REPORT
|
AUGUST 31, 2012
|
Additional Information (concluded)
General Information (concluded)
Availability of Proxy Voting Policies and Procedures
A description of the policies and procedures that the Funds use to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling (800) 441-7762; (2) at http://www.blackrock.com; and (3) on the
SECs website at http://www.sec.gov.
Availability of Proxy Voting Record
Information about how the Funds voted proxies relating to securities held in the Funds portfolios during the most recent 12-month period ended June 30 is available upon request and without charge (1) at http://www.blackrock.com or by calling (800)
441-7762 and (2) on the SECs website at http://www.sec.gov.
Availability of Fund Updates
BlackRock will update performance and certain other data for the Funds on a monthly basis on its website in the Closed-end Funds section of http://www.blackrock.com. Investors and others are advised to periodically check the website for
updated performance information and the release of other material information about the Funds. This reference to BlackRocks website is intended to allow investors public access to information regarding the Funds and does not, and is not intended
to, incorporate Blckrocks website in this report.
Section 19(a) Notice
These reported amounts and sources of distributions are estimates and are not being provided for tax reporting purposes. The actual amounts and sources for tax reporting purposes will depend upon each Funds investment experience during the year and
may be subject to changes based on the tax regulations. Each Fund will provide a Form 1099-DIV each calendar year that will explain the character of these dividends and distributions for federal income tax purposes.
August 31, 2012
|
Total Fiscal Year-to-Date
|
|
Percentage of Fiscal Year-to-Date
|
|
Cumulative Distributions by Character
|
|
Cumulative Distributions by Character
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
Realized
|
Return
|
Total Per
|
|
Net
|
Realized
|
Return
|
Total Per
|
|
Investment
|
Capital
|
of
|
Common
|
|
Investment
|
Capital
|
of
|
Common
|
|
Income
|
Gains
|
Capital
|
Share
|
|
Income
|
Gains
|
Capital
|
Share
|
DVF
1
|
$0.664576
|
|
$0.037424
|
$0.702000
|
|
95
|
%
|
0
|
%
|
5
|
%
|
100
|
%
|
FRA
|
$0.924000
|
|
|
$0.924000
|
|
100
|
%
|
0
|
%
|
0
|
%
|
100
|
%
|
|
1
|
The Fund estimates that it
has distributed more than the amount of earned income and net realized gains; therefore, a portion of the distribution may be
a return of capital. A return of capital may occur, for example, when some or all of the shareholders investment in the
Fund is returned to the shareholder. A return of capital does not necessarily reflect a Funds investment performance and
should not be confused with yield or income.
|
BlackRock Privacy Principles
BlackRock is committed to maintaining the privacy of its current and former fund investors and individual clients (collectively, Clients) and to safeguarding their non-public personal information. The following information is provided to help
you understand what personal information BlackRock collects, how we protect that information and why in certain cases we share such information with select parties.
If you are located in a jurisdiction where specific laws, rules or regulations require BlackRock to provide you with additional or different privacy-related rights beyond what is set forth below, then BlackRock will comply with those specific laws, rules
or regulations.
BlackRock obtains or verifies personal non-public information from and about you from different sources, including the following: (i) information we receive from you or, if applicable, your financial intermediary, on applications, forms or other
documents; (ii) information about your transactions with us, our affiliates, or others; (iii) information we receive from a consumer reporting agency; and (iv) from visits to our websites.
BlackRock does not sell or disclose to non-affiliated third parties any non-public personal information about its Clients, except as permitted by law or as is necessary to respond to regulatory requests or to service Client accounts. These non-affiliated
third parties are required to protect the confidentiality and security of this information and to use it only for its intended purpose.
We may share information with our affiliates to service your account or to provide you with information about other BlackRock products or services that may be of interest to you. In addition, BlackRock restricts access to non-public personal information
about its Clients to those BlackRock employees with a legitimate business need for the information. BlackRock maintains physical, electronic and procedural safeguards that are designed to protect the non-public personal information of its Clients,
including procedures relating to the proper storage and disposal of such information.
AUGUST 31, 2012
|
ANNUAL REPORT
|
91
|
This report is transmitted to shareholders only. It is not a prospectus. Past performance results shown in this report should not be considered a representation of future performance. The Funds have leveraged their Common Shares, which creates risks for
Common Shareholders, including the likelihood of greater volatility of net asset value and market price of Common Shares, and the risk that fluctuations in short-term interest rates may reduce the Common Shares yield. Statements and other
information herein are as dated and are subject to change.
#CEFT-BK4-8/12-AR
|
|
Item 2 – Code of Ethics
– The registrant (or the “Fund”) has adopted a code of ethics, as of the end of the period covered by this report,
applicable to the registrant’s principal executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. During the period covered by this report, there have been no amendments to
or waivers granted under the code of ethics. A copy of the code of ethics is available without charge at www.blackrock.com.
Item 3 – Audit Committee
Financial Expert – The registrant’s board of directors (the “board of directors”), has determined that
(i) the registrant has the following audit committee financial experts serving on its audit committee and (ii) each audit committee
financial expert is independent:
Frank J. Fabozzi
James T. Flynn
W. Carl Kester
Karen P. Robards
The registrant’s board of directors
has determined that W. Carl Kester and Karen P. Robards qualify as financial experts pursuant to Item 3(c)(4) of Form N-CSR.
Prof. Kester has a thorough
understanding of generally accepted accounting principles, financial statements and internal control over financial reporting as
well as audit committee functions. Prof. Kester has been involved in providing valuation and other financial consulting services
to corporate clients since 1978. Prof. Kester’s financial consulting services present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised
by the registrant’s financial statements.
Ms. Robards has a thorough understanding of generally accepted accounting principles, financial statements
and internal control over financial reporting as well as audit committee functions. Ms. Robards has been President of Robards &
Company, a financial advisory firm, since 1987. Ms. Robards was formerly an investment banker for more than 10 years where she
was responsible for evaluating and assessing the performance of companies based on their financial results. Ms. Robards has over
30 years of experience analyzing financial statements. She also is a member of the audit committee of one publicly held company
and a non-profit organization.
Under applicable securities laws, a person determined to be an audit committee financial expert will
not be deemed an “expert” for any purpose, including without limitation for the purposes of Section 11 of the Securities
Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification
as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities greater than the
duties, obligations, and liabilities imposed on such person as a member of the audit committee and board of directors in the absence
of such designation or identification. The designation or identification of a person as an audit committee financial expert does
not affect the duties, obligations, or liability of any other member of the audit committee or board of directors.
Item 4 – Principal Accountant
Fees and Services
The following table presents fees billed by Deloitte
& Touche LLP (“D&T”) in each of the last two fiscal years for the services rendered to the Fund:
|
(a) Audit Fees
|
(b) Audit-Related Fees
1
|
(c) Tax Fees
2
|
(d) All Other Fees
3
|
Entity Name
|
Current
Fiscal Year
End
|
Previous
Fiscal Year
End
|
Current
Fiscal Year
End
|
Previous
Fiscal Year
End
|
Current
Fiscal Year
End
|
Previous
Fiscal Year
End
|
Current
Fiscal Year
End
|
Previous
Fiscal Year
End
|
BlackRock Defined
Opportunity Credit
Trust
|
$60,000
|
$54,500
|
$0
|
$0
|
$9,300
|
$8,800
|
$0
|
$0
|
The following table presents fees billed by D&T that
were required to be approved by the registrant’s audit committee (the “Committee”) for services that relate directly
to the operations or financial reporting of the Fund and that are rendered on behalf of BlackRock Advisors, LLC (“Investment
Adviser” or “BlackRock”) and entities controlling, controlled by, or under common control with BlackRock (not
including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment
adviser) that provide ongoing services to the Fund (“Fund Service Providers”):
|
Current Fiscal Year End
|
Previous Fiscal Year End
|
(b) Audit-Related Fees
1
|
$0
|
$0
|
(c) Tax Fees
2
|
$0
|
$0
|
(d) All Other Fees
3
|
$2,970,000
|
$3,030,000
|
1
The nature of the services includes assurance and related
services reasonably related to the performance of the audit of financial statements not included in Audit Fees.
2
The nature of the
services includes tax compliance, tax advice and tax planning.
3
Aggregate fees borne by
BlackRock in connection with the review of compliance procedures and attestation thereto performed by D&T with respect to all
of the registered closed-end funds and some of the registered open-end funds advised by BlackRock.
(e)(1) Audit Committee Pre-Approval Policies and Procedures:
The Committee has adopted policies and
procedures with regard to the pre-approval of services. Audit, audit-related and tax compliance services provided to the registrant
on an annual basis require specific pre-approval by the Committee. The Committee also must approve other non-audit services provided
to the registrant and those non-audit services provided to the Investment Adviser and Fund Service Providers that relate directly
to the operations and the financial reporting of the registrant. Certain of these non-audit services that the Committee believes
are a) consistent with the SEC’s auditor independence rules and b) routine and recurring services that will not impair the
independence of the independent accountants may be approved by the Committee without consideration on a specific case-by-case basis
(“general pre-approval”). The term of any general pre-approval is 12 months from the date of the pre-approval, unless
the Committee provides for a different period. Tax or other non-audit services provided to the registrant which have a direct impact
on the operations or financial reporting of the registrant will only be deemed pre-approved provided that any individual project
does not exceed $10,000 attributable to the registrant or $50,000 per project. For this purpose, multiple projects will be aggregated
to determine if they exceed the previously mentioned cost levels.
Any proposed services exceeding
the pre-approved cost levels will require specific pre-approval by the Committee, as will any other services not subject to general
pre-approval (e.g.,
unanticipated but permissible services). The Committee
is informed of each service approved subject to general pre-approval at the next regularly scheduled in-person board meeting. At
this meeting, an analysis of such services is presented to the Committee for ratification. The Committee may delegate to the Committee
Chairman the authority to approve the provision of and fees for any specific engagement of permitted non-audit services, including
services exceeding pre-approved cost levels.
(e)(2) None of the services described in each of Items 4(b) through (d) were approved by the Committee pursuant to the de minimis
exception in paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not Applicable
(g) The aggregate non-audit fees paid to the accountant for services rendered by the accountant to the registrant, the Investment
Adviser and the Fund Service Providers were:
Entity Name
|
Current Fiscal Year End
|
Previous Fiscal Year End
|
BlackRock Defined Opportunity Credit Trust
|
$9,300
|
$8,800
|
Additionally, SSAE 16
Review (Formerly, SAS No. 70) fees for the current and previous fiscal years of $2,970,000
and $3,030,000, respectively, were billed by D&T to the Investment Adviser.
(h) The Committee has considered and determined that
the provision of non-audit services that were rendered to the Investment Adviser, and the Fund Service Providers that were not
pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s
independence.
Item 5 – Audit Committee
of Listed Registrants
|
(a)
|
The following individuals are members of the registrant’s separately-designated standing
audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(58)(A)):
Michael Castellano
|
Frank J. Fabozzi
James T. Flynn
W. Carl Kester
Karen P. Robards
Item 6 – Investments
(a) The registrant’s Schedule of Investments
is included as part of the Report to Stockholders filed under Item 1 of this form.
(b) Not Applicable due to no such divestments during the semi-annual period covered since the previous Form N-CSR filing.
Item 7 – Disclosure of
Proxy Voting Policies and Procedures for Closed-End Management Investment Companies – The board of directors has delegated
the voting of proxies for the Fund’s portfolio securities to the Investment Adviser pursuant to the Investment Adviser’s
proxy voting guidelines. Under these guidelines, the Investment Adviser will vote proxies related to Fund securities in the best
interests of the Fund and its stockholders. From time to time, a vote may present a conflict between the interests of the Fund’s
stockholders, on the one hand, and those of the Investment Adviser, or any affiliated person of the Fund or the Investment Adviser,
on the other. In such event, provided that the Investment Adviser’s Equity Investment Policy Oversight Committee, or a sub-committee
thereof (the “Oversight Committee”) is aware of the real or potential conflict or material non-routine matter and if
the Oversight Committee does not reasonably believe it is able to follow its general voting guidelines (or if the particular proxy
matter is not addressed in the guidelines) and vote impartially, the Oversight Committee may retain an independent fiduciary to
advise the Oversight Committee on how to vote or to cast votes on behalf of the Investment Adviser’s clients. If the Investment
Adviser determines not to retain an independent fiduciary, or does not desire to follow the advice of such independent fiduciary,
the Oversight Committee shall determine how to vote the proxy after consulting with the Investment Adviser’s Portfolio Management
Group and/or the Investment Adviser’s Legal and Compliance Department and concluding that the vote cast is in its client’s
best interest notwithstanding the conflict. A copy of the Fund’s Proxy Voting Policy and Procedures are attached as Exhibit
99.PROXYPOL. Information on how the Fund voted proxies relating to portfolio securities during the most recent 12-month period
ended June 30 is available without charge, (i) at www.blackrock.com and (ii) on the SEC’s website at http://www.sec.gov.
Item 8 – Portfolio Managers
of Closed-End Management Investment Companies – as of August 31, 2012.
|
(1)
|
The registrant is managed by a team of investment professionals comprised of Leland Hart, Managing Director at BlackRock, James
E. Keenan, Managing Director of BlackRock, and C. Adrian Marshall, Director of BlackRock. Each of the foregoing professionals is
jointly responsible for the day-to-day management of the registrant’s portfolio, which includes setting the registrant’s
overall investment strategy, overseeing the management of the registrant and/or selection of its investments. Mr. Keenan has been
a member of the registrant’s portfolio management team since 2008. Messrs. Hart and Marshall have been members of the registrant’s
portfolio management team since 2009.
|
Portfolio Manager
|
Biography
|
Leland Hart
|
Managing Director of BlackRock since 2009; Partner of R3 Capital Partners ("R3") in 2009; Managing Director of R3 from 2008 to 2009; Managing Director of Lehman Brothers from 2006 to 2008; Executive Director of Lehman Brothers from 2003 to 2006.
|
James E. Keenan
|
Managing Director of BlackRock since 2008 and Head of the Leveraged Finance Portfolio team; Director of BlackRock from 2006 to 2007; Vice President of BlackRock from 2004 to 2005.
|
C. Adrian Marshall
|
Director of BlackRock since 2007; Vice President of BlackRock from 2004 to 2007.
|
|
(a)(2)
|
As of August 31, 2012:
|
|
(ii) Number of Other Accounts Managed
and Assets by Account Type
|
(iii) Number of Other Accounts and
Assets for Which Advisory Fee is
Performance-Based
|
(i) Name of
Portfolio Manager
|
Other
Registered
Investment
Companies
|
Other Pooled
Investment
Vehicles
|
Other
Accounts
|
Other
Registered
Investment
Companies
|
Other Pooled
Investment
Vehicles
|
Other
Accounts
|
Leland Hart
|
9
|
12
|
11
|
0
|
8
|
0
|
|
$3.35 Billion
|
$3.35 Billion
|
$2.87 Billion
|
$0
|
$2.17 Billion
|
$0
|
James E. Keenan
|
16
|
12
|
29
|
0
|
8
|
4
|
|
$13.14 Billion
|
$8.2 Billion
|
$7.12 Billion
|
$0
|
$2.14 Billion
|
$571.2 Million
|
C. Adrian Marshall
|
9
|
12
|
11
|
0
|
8
|
0
|
|
$3.35 Billion
|
$3.35 Billion
|
$2.87 Billion
|
$0
|
$2.17 Billion
|
$0
|
|
(iv)
|
Potential Material Conflicts of Interest
|
BlackRock has built a professional working
environment, firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives
that may favor one account over another. BlackRock has adopted policies and procedures that address the allocation of investment
opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that
are designed to ensure that all client accounts are treated equitably over time. Nevertheless, BlackRock furnishes investment management
and advisory services to numerous clients in addition to the Fund, and BlackRock may, consistent with applicable law, make investment
recommendations to other clients or accounts (including accounts which are hedge funds or have performance or higher fees paid
to BlackRock, or in which portfolio managers have a personal interest in the receipt of such fees), which may be the same as or
different from those made to the Fund. In addition, BlackRock, its affiliates and significant shareholders and any officer,
director, shareholder or employee may or may not have an interest in the securities whose purchase and sale BlackRock recommends
to the Fund. BlackRock, or any of its affiliates or significant shareholders, or any officer, director, shareholder, employee
or any member of their families may take different actions than those recommended to the Fund by BlackRock with respect to the
same securities. Moreover, BlackRock may refrain from rendering any advice or services concerning securities of companies
of which any of BlackRock’s (or its affiliates’ or significant shareholders’) officers, directors or employees
are directors or officers, or companies as to which BlackRock or any of its affiliates or significant shareholders or the officers,
directors and employees of any of them has any substantial economic interest or possesses material non-public information.
Certain portfolio managers also may manage accounts whose investment strategies may at times be opposed to the strategy utilized
for a fund. It should also be noted that Messrs. Hart, Keenan and Marshall may be managing hedge fund and/or long only accounts,
or may be part of a team managing hedge fund and/or long only accounts, subject to incentive fees. Messrs. Hart, Keenan and Marshall
may therefore be entitled to receive a portion of any incentive fees earned on such accounts.
As a fiduciary, BlackRock owes a
duty of loyalty to its clients and must treat each client fairly. When BlackRock purchases or sells securities for more than
one account, the trades must be allocated in a manner consistent with its fiduciary duties. BlackRock attempts to allocate
investments in a fair and equitable manner among client accounts, with no account receiving preferential treatment. To this
end, BlackRock has adopted policies that are intended to ensure
reasonable efficiency in client transactions and provide
BlackRock with sufficient flexibility to allocate investments in a manner that is consistent with the particular investment discipline
and client base, as appropriate.
|
(a)(3)
|
As of August 31, 2012:
|
Portfolio Manager Compensation Overview
BlackRock’s financial arrangements
with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management
places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors.
The principal components of compensation include a base salary, a performance-based discretionary bonus, participation in various
benefits programs and one or more of the incentive compensation programs established by BlackRock.
Base compensation.
Generally,
portfolio managers receive base compensation based on their position with the firm.
Discretionary Incentive Compensation.
Discretionary incentive compensation
is a function of several components: the performance of BlackRock, Inc., the performance of the portfolio manager’s
group within BlackRock, the investment performance, including risk-adjusted returns, of the firm’s assets under management
or supervision by that portfolio manager relative to predetermined benchmarks, and the individual’s performance and contribution
to the overall performance of these portfolios and BlackRock. In most cases, these benchmarks are the same as the benchmark
or benchmarks against which the performance of the Fund or other accounts managed by the portfolio managers are measured.
Among other things, BlackRock’s Chief Investment Officers make a subjective determination with respect to each portfolio
manager’s compensation based on the performance of the Fund and other accounts managed by each portfolio manager relative
to the various benchmarks. Performance of fixed income funds is measured on a pre-tax and/or after-tax basis over various
time periods including 1-, 3- and 5- year periods, as applicable. With respect to these portfolio managers, such benchmarks for
the Fund and other accounts are:
Portfolio Manager
|
Benchmark
|
Leland Hart
C. Adrian Marshall
|
A combination of market-based indices (e.g., S&P Leveraged All Loan Index), certain customized indices and certain fund industry peer groups.
|
James E. Keenan
|
A combination of market-based indices (e.g., The Barclays Capital U.S. Corporate High Yield 2% Issuer Cap Index), certain customized indices and certain fund industry peer groups.
|
Distribution of Discretionary Incentive Compensation
Discretionary incentive compensation
is distributed to portfolio managers in a combination of cash and BlackRock, Inc. restricted stock units which vest ratably over
a number of years. For some portfolio managers, discretionary incentive compensation is also distributed in deferred cash awards
that notionally track the returns of select BlackRock investment products they manage and
that vest ratably over a number of years. The BlackRock,
Inc. restricted stock units, upon vesting, will be settled in BlackRock, Inc. common stock. Typically, the cash portion of the
discretionary incentive compensation, when combined with base salary, represents more than 60% of total compensation for the portfolio
managers. Paying a portion of discretionary incentive compensation in BlackRock stock puts compensation earned by a portfolio manager
for a given year “at risk” based on BlackRock’s ability to sustain and improve its performance over future periods.
Providing a portion of discretionary incentive compensation in deferred cash awards that notionally track the BlackRock investment
products they manage provides direct alignment with investment product results.
Long-Term Incentive Plan Awards
—
From time to time long-term incentive equity awards are granted to certain key employees to aid in retention, align
their interests with long-term shareholder interests and motivate performance. Equity awards are generally granted in the
form of BlackRock, Inc. restricted stock units that, once vested, settle in BlackRock, Inc. common stock. Messrs. Hart, Keenan
and Marshall have each received long-term incentive awards.
Deferred Compensation Program
—
A portion of the compensation paid to eligible BlackRock employees may be voluntarily deferred at their election for
defined periods of time into an account that tracks the performance of certain of the firm’s investment products. All of
the eligible portfolio managers have participated in the deferred compensation program.
Other compensation benefits.
In addition to base compensation
and discretionary incentive compensation, portfolio managers may be eligible to receive or participate in one or more of the following
incentive savings plans. BlackRock, Inc. has created a variety of incentive savings plans in which BlackRock, Inc. employees
are eligible to participate, including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP), and the BlackRock Employee
Stock Purchase Plan (ESPP). The employer contribution components of the RSP include a company match equal to 50% of the first 8%
of eligible pay contributed to the plan capped at $5,000 per year, and a company retirement contribution equal to 3-5% of eligible
compensation up to the IRS limit ($250,000 for 2012). The RSP offers a range of investment options, including registered
investment companies and collective investment funds managed by the firm. BlackRock, Inc. contributions follow the investment direction
set by participants for their own contributions or, absent participant investment direction, are invested into an index target
date fund that corresponds to, or is closest to, the year in which the participant attains age 65. The ESPP allows for investment
in BlackRock, Inc. common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual participation
in the ESPP is limited to the purchase of 1,000 shares of common stock or a dollar value of $25,000 based on its fair market value
on the purchase date. Messrs. Hart, Keenan and Marshall are each eligible to participate in these plans.
|
(a)(4)
|
Beneficial Ownership of Securities
– As of August 31, 2012.
|
Portfolio Manager
|
Dollar Range of Equity Securities of the Fund Beneficially Owned
|
Leland Hart
|
$100,001-$500,000
|
James E. Keenan
|
Over $1 Million
|
C. Adrian Marshall
|
None
|
(b) Not Applicable
Item 9 – Purchases of
Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers – Not Applicable due to no such purchases
during the period covered by this report.
Item 10 – Submission of Matters
to a Vote of Security Holders – There have been no material changes to these procedures.
Item 11 – Controls and Procedures
(a) – The registrant’s principal executive
and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure
controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”))
are effective as of a date within 90 days of the filing of this report based on the evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act and Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended.
(b) – There were no changes in the registrant’s
internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal
quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the
registrant’s internal control over financial reporting.
Item 12 – Exhibits attached
hereto
(a)(1) – Code of Ethics – See Item 2
(a)(2) – Certifications – Attached hereto
(a)(3) – Not Applicable
(b) – Certifications – Attached hereto
Pursuant
to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BlackRock
Defined Opportunity Credit Trust
By:
|
/s/ John M. Perlowski
|
|
|
John M. Perlowski
|
|
Chief Executive Officer (principal executive officer) of
|
|
BlackRock Defined Opportunity Credit Trust
|
Date: November
5, 2012
Pursuant
to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:
|
/s/ John M. Perlowski
|
|
|
John M. Perlowski
|
|
Chief Executive Officer (principal executive officer) of
|
|
BlackRock Defined Opportunity Credit Trust
|
Date: November
5, 2012
By:
|
/s/ Neal J. Andrews
|
|
|
Neal J. Andrews
|
|
Chief Financial Officer (principal financial officer) of
|
|
BlackRock Defined Opportunity Credit Trust
|
Date: November
5, 2012
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