For the period ended July 31, 2022, the effect of derivative financial instruments in the Statements of
Operations was as follows:
For more information about the Fund’s investment risks regarding derivative financial instruments, refer to the Notes
to Financial Statements.
Various inputs are used in determining the fair value of financial instruments. For a description of the input levels and information about the
Fund’s policy regarding valuation of financial instruments, refer to the Notes to Financial Statements.
The following table summarizes the
Fund’s financial instruments categorized in the fair value hierarchy. The breakdown of the Fund’s financial instruments into major categories is disclosed in the Schedule of Investments above.
The Fund may hold assets and/or liabilities in which the fair value approximates
the carrying amount for financial statement purposes. As of period end, such assets and/or liabilities are categorized within the fair value hierarchy as follows:
The purpose of these transactions was to combine five 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 March 8, 2021.
Assuming the reorganization had been completed on May 1, 2020, the beginning of the fiscal reporting period of MHD, the pro forma results of
operations for the year ended April 30, 2021, are as follows:
Because the combined investment portfolios have been managed as a single integrated portfolio since the reorganization was completed, it is not
practicable to separate the amounts of revenue and earnings of each Target Fund that have been included in MHD’s Statement of Operations since March 8, 2021.
Reorganization costs incurred by MHD in connection with the reorganization were expensed by MHD. The Manager reimbursed the Fund $123,963.
The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”),
which may require management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements, disclosure of contingent assets and liabilities at the date of 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. Each Fund is considered an investment company under U.S. GAAP and follows the accounting and
reporting guidance applicable to investment companies. Below is a summary of significant accounting policies:
Distributions to Preferred Shareholders are accrued and determined as described
in Note 10.
The Plan is not funded and obligations thereunder
represent general unsecured claims against the general assets of each Fund, as applicable. Deferred compensation liabilities, if any, are included in the Directors’ and Officer’s fees payable in the Statements of Assets and Liabilities and
will remain as a liability of the Funds until such amounts are distributed in accordance with the Plan. Net appreciation (depreciation) in the value of participants’ deferral accounts is allocated among the participating funds in the BlackRock
Fixed-Income Complex and reflected as Directors and Officer expense on the Statements of Operations. The Directors and Officer expense may be negative as a result of a decrease in value of the deferred accounts.
If events (e.g., market volatility, company announcement or a natural disaster) occur that are expected to
materially affect the value of such investment, or 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 Valued Investments”). The fair valuation approaches that may be
used by the Global Valuation Committee include market approach, income approach and cost approach. Valuation techniques such as discounted cash flow, use of market comparables and matrix pricing are types of valuation approaches and are typically
used in determining fair value. When determining the price for Fair Valued Investments, the Global Valuation Committee, or its delegate, seeks to determine the price that each Fund might reasonably expect to receive or pay from the current sale or
purchase of that asset or liability in an arm’s-length transaction. Fair value determinations shall be based upon all available factors that the Global Valuation Committee, or its delegate, deems relevant
and consistent with the principles of fair value measurement. The pricing of all Fair Valued Investments is subsequently reported to the Board or a committee thereof on a quarterly basis.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. The inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for disclosure purposes, the fair value hierarchy classification is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Investments classified within Level 3 have significant unobservable inputs used by the Global Valuation Committee in determining the price for Fair Valued Investments. Level 3 investments include equity or debt issued by privately held
companies or funds that may not have a secondary market and/or may have a limited number of investors. The categorization of a value determined for financial instruments is based on the pricing transparency of the financial instruments and is not
necessarily an indication of the risks associated with investing in those securities.
TOB Trusts are supported by a liquidity facility provided by a third-party bank or
other financial institution (the “Liquidity Provider”) that allows the holders of the TOB Trust Certificates to tender their certificates in exchange for payment of par plus accrued interest on any business day. The tendered TOB Trust
Certificates are remarketed by a Remarketing Agent. In the event of a failed remarketing, the TOB Trust may draw upon a loan from the Liquidity Provider to purchase the tendered TOB Trust Certificates. Any loans made by the Liquidity Provider will
be secured by the purchased TOB Trust Certificates held by the TOB Trust and will be subject to an increased interest rate based on number of days the loan is outstanding.
The TOB Trust may be collapsed without the consent of a fund, upon the occurrence of a termination event as defined in the TOB Trust agreement. Upon the
occurrence of a termination event, a TOB Trust would be liquidated with the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the Remarketing Agent and the Liquidity Provider. Upon certain termination events, TOB Trust
Certificates holders will be paid before the TOB Residuals holders (i.e., the Funds) whereas in other termination events, TOB Trust Certificates holders and TOB Residuals holders will be paid pro rata.
While a fund’s investment policies and restrictions expressly permit investments in inverse floating rate securities, such as TOB Residuals, they
restrict the ability of a fund to borrow money for purposes of making investments. MVT and MQT management believes that a fund’s restrictions on borrowings do not apply to the Funds’ TOB Trust transactions. Each Fund’s transfer of the
municipal bonds to a TOB Trust is considered a secured borrowing for financial reporting purposes. The cash received by the TOB Trust from the sale of the TOB Trust Certificates, less certain transaction expenses, is paid to a Fund. A Fund typically
invests the cash received in additional municipal bonds.
Interest income, including amortization and accretion of premiums and discounts, from the underlying municipal bonds is
recorded by a Fundon an accrual basis. Interest expense incurred on the TOB Trust transaction and other expenses related to remarketing, administration, trustee, liquidity and other services to a TOB Trust are shown as interest expense, fees
and amortization of offering costs in the Statements of Operations. Fees paid upon creation of the TOB Trust are recorded as debt issuance costs and are amortized to interest expense, fees and amortization of offering costs in the Statements of
Operations to the expected maturity of the TOB Trust. In connection with the restructurings of the TOB Trusts to non-bank sponsored TOB Trusts, a Fund incurred
non-recurring, legal and restructuring fees, which are recorded as interest expense, fees and amortization of offering costs in the Statements of Operations. Amounts recorded within interest expense,
fees and amortization of offering costs in the Statements of Operations are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fund Name |
|
Interest Expense |
|
|
Liquidity Fees |
|
|
Other Expenses |
|
|
Total |
|
| BKN |
|
$ |
92,489 |
|
|
$ |
47,253 |
|
|
$ |
14,401 |
|
|
$ |
154,143 |
|
| BFK |
|
|
207,499 |
|
|
|
100,401 |
|
|
|
30,715 |
|
|
|
338,615 |
|
| MHD |
|
|
330,439 |
|
|
|
162,799 |
|
|
|
55,428 |
|
|
|
548,666 |
|
| MVT |
|
|
107,296 |
|
|
|
52,530 |
|
|
|
14,885 |
|
|
|
174,711 |
|
| MQT |
|
|
153,954 |
|
|
|
78,242 |
|
|
|
25,224 |
|
|
|
257,420 |
|
|
|
|
| N O T E S T O F
I N A N C I A L S T A T E M
E N T S |
|
95 |
Notes to Financial Statements (continued)
For the
period ended July 31, 2022, the following table is a summary of each Fund’s TOB Trusts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fund Name |
|
Underlying
Municipal Bonds
Transferred to
TOB Trusts(a)
|
|
|
Liability for
TOB Trust
Certificates(b) |
|
|
Range of
Interest Rates on TOB Trust
Certificates at Period End |
|
|
Average
TOB Trust
Certificates
Outstanding |
|
|
Daily Weighted
Average Rate
of Interest and
Other Expenses
on TOB Trusts |
|
| BKN |
|
$ |
71,651,680 |
|
|
$ |
44,305,864 |
|
|
|
1.36% — 1.48 |
% |
|
$ |
44,959,241 |
|
|
|
1.36 |
% |
| BFK |
|
|
154,722,514 |
|
|
|
100,175,045 |
|
|
|
1.34 — 1.50 |
|
|
|
99,657,003 |
|
|
|
1.35 |
|
| MHD |
|
|
269,769,547 |
|
|
|
164,221,770 |
|
|
|
1.34 — 1.63 |
|
|
|
158,992,326 |
|
|
|
1.37 |
|
| MVT |
|
|
82,509,608 |
|
|
|
52,739,780 |
|
|
|
1.34 — 1.50 |
|
|
|
51,462,748 |
|
|
|
1.35 |
|
| MQT |
|
|
118,707,219 |
|
|
|
72,128,805 |
|
|
|
1.36 — 1.51 |
|
|
|
73,373,602 |
|
|
|
1.39 |
|
| |
(a) |
The municipal bonds transferred to a TOB Trust are generally high grade municipal bonds. In certain cases, when
municipal bonds transferred are lower grade municipal bonds, the TOB Trust transaction may include a credit enhancement feature that provides for the timely payment of principal and interest on the bonds to the TOB Trust by a credit enhancement
provider in the event of default of the municipal bond. The TOB Trust would be responsible for the payment of the credit enhancement fee and the Funds, as TOB Residuals holders, would be responsible for reimbursement of any payments of principal and
interest made by the credit enhancement provider. The maximum potential amounts owed by the Funds, for such reimbursements, as applicable, are included in the maximum potential amounts disclosed for recourse TOB Trusts in the Schedules of
Investments. |
|
| |
(b) |
TOB Trusts may be structured on a non-recourse or recourse basis. When a Fund
invests in TOB Trusts on a non-recourse basis, the Liquidity Provider may be required to make a payment under the liquidity facility to allow the TOB Trust to repurchase TOB Trust Certificates. The Liquidity
Provider will be reimbursed from the liquidation of bonds held in the TOB Trust. If a Fund invests in a TOB Trust on a recourse basis, a Fund enters into a reimbursement agreement with the Liquidity Provider where a Fund is required to reimburse the
Liquidity Provider for any shortfall between the amount paid by the Liquidity Provider and proceeds received from liquidation of municipal bonds held in the TOB Trust (the “Liquidation Shortfall”). As a result, if a Fund invests in a
recourse TOB Trust, a Fund will bear the risk of loss with respect to any Liquidation Shortfall. If multiple funds participate in any such TOB Trust, these losses will be shared ratably, including the maximum potential amounts owed by a Fund at
July 31, 2022, in proportion to their participation in the TOB Trust. The recourse TOB Trusts are identified in the Schedules of Investments including the maximum potential amounts owed by a Fund at July 31, 2022. |
|
| 5. |
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 manage their
exposure to certain risks such as credit risk, equity risk, interest rate risk, foreign currency exchange rate risk, commodity price risk or other risks (e.g., inflation risk). Derivative financial instruments categorized by risk exposure are
included in the Schedules of Investments. These contracts may be transacted on an exchange or over-the-counter (“OTC”).
Futures Contracts: Futures contracts are purchased or sold to gain exposure to, or manage exposure to, changes in interest rates (interest rate
risk) and changes in the value of equity securities (equity risk) or foreign currencies (foreign currency exchange rate risk).
Futures contracts are
exchange-traded agreements between the Funds and a counterparty to buy or sell a specific quantity of an underlying instrument at a specified price and on a specified date. Depending on the terms of a contract, it is settled either through physical
delivery of the underlying instrument on the settlement date or by payment of a cash amount on the settlement date. Upon entering into a futures contract, the Funds are required to deposit initial margin with the broker in the form of cash or
securities in an amount that varies depending on a contract’s size and risk profile. The initial margin deposit must then be maintained at an established level over the life of the contract. Amounts pledged, which are considered restricted, are
included in cash pledged for futures contracts in the Statements of Assets and Liabilities.
Securities deposited as initial margin are designated in
the Schedules of Investments and cash deposited, if any, are shown as cash pledged for futures contracts in the Statements of Assets and Liabilities. 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 market value of the contract (“variation margin”). Variation margin is recorded as unrealized appreciation (depreciation) and, if any, shown as variation margin receivable (or payable) on futures contracts
in the Statements of Assets and Liabilities. When the contract is closed, a realized gain or loss is recorded in the Statements of Operations equal to the difference between the notional amount of the contract at the time it was opened and the
notional amount at the time it was closed. The use of futures contracts involves the risk of an imperfect correlation in the movements in the price of futures contracts and interest rates, foreign currency exchange rates or underlying assets.
| 6. |
INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES |
Investment Advisory: Each Fund entered into an Investment Advisory Agreement with the Manager, the Funds’ investment adviser and an indirect,
wholly-owned subsidiary of BlackRock, Inc. (“BlackRock”), to provide investment advisory and administrative services. The Manager is responsible for the management of each Fund’s portfolio and provides the personnel, facilities,
equipment and certain other services necessary to the operations of each Fund.
For such services, BKN and BFK , pays the Manager a monthly fee at an
annual rate equal to the following percentages of the average weekly value of each Fund’s managed assets:
|
|
|
|
|
|
|
|
|
| |
|
BKN |
|
|
BFK |
|
| Investment advisory fees |
|
|
0.35 |
% |
|
|
0.60 |
% |
For such services, MHD, MVT and MQT pays the Manager a monthly fee at an annual rate equal to the following percentages of
the average daily value of each Fund’s net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
MHD |
|
|
MVT |
|
|
MQT |
|
| Investment advisory fees |
|
|
0.55
|
%
|
|
|
0.50 |
% |
|
|
0.50 |
% |
|
|
|
| 96 |
|
2 0 2 2 B L A C
K R O C K A N N U A L R E P O
R T T O S H A R E H O L D E
R S |
Notes to Financial Statements (continued)
For purposes of calculating
these fees, “managed assets” are determined as total assets of the Fund (including any assets attributable to money borrowed for investment purposes) less the sum of its accrued liabilities (other than money borrowed for investment
purposes).
For purposes of calculating this fee, “net assets” mean the total assets of the Fund minus the sum of its accrued liabilities
(which does not includes liabilities represented by TOB Trusts and the liquidation preference of any outstanding preferred shares). It is understood that the liquidation preference of any outstanding preferred stock (other than accumulated
dividends) and TOB Trusts is not considered a liability in determining a Fund’s NAV.
Distribution Fees : BKN and BFK have entered into a
Distribution Agreement with BlackRock Investments, LLC (“BRIL”), an affiliate of the Manager, to provide for distribution of BKN and BFK common shares on a reasonable best efforts basis through an equity shelf offering (a “Shelf
Offering”) (the “Distribution Agreement”). Pursuant to the Distribution Agreement, BRIL will receive commissions with respect to sales of common shares at a commission rate of 1.00% of the gross proceeds of the sale of BKN’s and
BFK’s common shares and a portion of such commission is re-allowed to broker-dealers engaged by BRIL. The commissions retained by BRIL during the period ended July 31, 2022 amounted to $ 9,622 and $
41 respectively.
Administration: BKN has an Administration Agreement with the Manager. The administration fee paid monthly to the Manager is
computed at an annual rate of 0.15% of the Fund’s average weekly managed assets. For BKN, the Manager may reduce or discontinue this arrangement at any time without notice.
Expense Waivers and Reimbursements: With respect to each Fund, the Manager contractually 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 (the “affiliated money market fund waiver”) through June 30, 2024. The contractual agreement may be
terminated upon 90 days’ notice by a majority of the Independent Directors, or by a vote of a majority of the outstanding voting securities of a Fund. These amounts are included in fees waived and/or reimbursed by the Manager in the Statements
of Operations. The amounts waived were as follows:
|
|
|
|
|
|
|
|
|
| |
|
Amounts Waived |
|
| Fund Name |
|
Period from
05/01/22 to 07/31/22 |
|
|
Year Ended
04/30/22 |
|
| BKN |
|
$ |
664 |
|
|
$ |
1,108 |
|
| BFK |
|
|
2,217 |
|
|
|
2,727 |
|
| MHD |
|
|
1,999 |
|
|
|
4,106 |
|
| MVT |
|
|
2,987 |
|
|
|
2,158 |
|
| MQT |
|
|
356 |
|
|
|
965 |
|
The Manager has contractually agreed to waive its investment advisory fee with respect to any portion of each
Fund’s assets invested in affiliated equity and fixed-income mutual funds and affiliated exchange-traded funds that have a contractual management fee through June 30, 2024. The agreement can be renewed for annual periods thereafter,
and may be terminated on 90 days’ notice, each subject to approval by a majority of the Funds’ Independent Directors. For the period ended July 31, 2022, there were no fees waived by the Manager pursuant to this arrangement.
With respect to MHD,the Manager contractually agreed to waive a portion of its investment advisory fees equal to the annual rate of 0.01% of the average
daily value of net assets through June 30, 2024. The contractual agreement may be terminated upon 90 days’ notice by a majority of the Independent Directors, or by a vote of a majority of the outstanding voting securities of the Fund. This
amount is included in fees waived and/or reimbursed by the Manager in the Statements of Operations.
|
|
|
|
|
|
|
|
|
| |
|
Amounts Waived |
|
| Fund Name |
|
Period from
05/01/22 to 07/31/22 |
|
|
Year Ended
04/30/22 |
|
| MHD |
|
$ |
21,304 |
|
|
$ |
145,647 |
|
Directors and Officers: Certain directors and/or officers of the Funds are directors and/or officers of BlackRock
or its affiliates. The Funds reimburse the Manager for a portion of the compensation paid to the Funds’ Chief Compliance Officer, which is included in Directors and Officer in the Statements of Operations.
For the period ended July 31, 2022, purchases and sales of investments, excluding short-term investments, were as follows:
|
|
|
|
|
|
|
|
|
| Fund Name |
|
Purchases |
|
|
Sales |
|
| BKN |
|
$ |
36,577,957 |
|
|
$ |
38,274,730 |
|
| BFK |
|
|
37,301,373 |
|
|
|
59,022,829 |
|
| MHD |
|
|
50,945,093 |
|
|
|
69,591,648 |
|
| MVT |
|
|
18,715,046 |
|
|
|
27,172,583 |
|
| MQT |
|
|
35,277,039 |
|
|
|
43,314,221 |
|
| 8. |
INCOME TAX INFORMATION |
It is each Fund’s 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 U.S. federal income tax provision is required.
|
|
|
| N O T E S T O F
I N A N C I A L S T A T E M
E N T S |
|
97 |
Notes to Financial Statements (continued)
Each Fund files U.S. federal
and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on each Fund’s U.S. federal tax returns generally remains open for a period of three years after they are filed. The
statutes of limitations on each Fund’s state and local tax returns may remain open for an additional year depending upon the jurisdiction.
Management has analyzed tax laws and regulations and their application to the Funds as of July 31, 2022, inclusive of the open tax return years, and
does not believe that there are any uncertain tax positions that require recognition of a tax liability in the Funds’ financial statements.
The tax character of distributions paid was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fund Name |
|
Period
from
05/01/22 to 07/31/22 |
|
|
Year Ended
04/30/22 |
|
|
Year Ended
04/30/21 |
|
|
|
|
|
| BKN |
|
|
|
|
|
|
|
|
|
|
|
|
| Tax-exempt income |
|
$ |
4,171,579 |
|
|
$ |
15,393,628 |
|
|
$ |
14,824,065 |
|
| Ordinary income |
|
|
— |
|
|
|
— |
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,171,579 |
|
|
$ |
15,393,628 |
|
|
$ |
14,824,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| BFK |
|
|
|
|
|
|
|
|
|
|
|
|
| Tax-exempt income |
|
$ |
7,600,395 |
|
|
$ |
34,470,723 |
|
|
$ |
33,691,532 |
|
| Ordinary income |
|
|
193,005 |
|
|
|
— |
|
|
|
11,358 |
|
| Return of capital |
|
|
396,146 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,189,546 |
|
|
$ |
34,470,723 |
|
|
$ |
33,702,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| MHD |
|
|
|
|
|
|
|
|
|
|
|
|
| Tax-exempt income |
|
$ |
11,439,522 |
|
|
$ |
42,440,742 |
|
|
$ |
13,947,656 |
|
| Ordinary income |
|
|
— |
|
|
|
29,438 |
|
|
|
15,907 |
|
| Long-term capital gains |
|
|
— |
|
|
|
47,830 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,439,522 |
|
|
$ |
42,518,010 |
|
|
$ |
13,963,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| MVT |
|
|
|
|
|
|
|
|
|
|
|
|
| Tax-exempt income |
|
$ |
4,093,661 |
|
|
$ |
16,482,423 |
|
|
$ |
16,096,972 |
|
| Ordinary income |
|
|
— |
|
|
|
6,361 |
|
|
|
2,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,093,661 |
|
|
$ |
16,488,784 |
|
|
$ |
16,099,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| MQT |
|
|
|
|
|
|
|
|
|
|
|
|
| Tax-exempt income |
|
$ |
4,249,825 |
|
|
$ |
15,877,520 |
|
|
$ |
15,227,259 |
|
| Ordinary income |
|
|
— |
|
|
|
118 |
|
|
|
23,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,249,825 |
|
|
$ |
15,877,638 |
|
|
$ |
15,250,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2022, the tax components of accumulated earnings (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fund Name |
|
Undistributed
Tax-Exempt Income |
|
|
Undistributed
Ordinary Income |
|
|
Non-Expiring
Capital Loss
Carryforwards(a) |
|
|
Net Unrealized
Gains (Losses)(b) |
|
|
Total |
|
| BKN |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(6,904,753 |
) |
|
$ |
6,329,453 |
|
|
$ |
(575,300) |
|
| BFK |
|
|
— |
|
|
|
— |
|
|
|
(23,312,349 |
) |
|
|
(21,538,545 |
) |
|
|
(44,850,894 |
) |
| MHD |
|
|
1,015,466 |
|
|
|
130,743 |
|
|
|
(29,508,880 |
) |
|
|
(13,872,086 |
) |
|
|
(42,234,757 |
) |
| MVT |
|
|
— |
|
|
|
55,963 |
|
|
|
(5,432,895 |
) |
|
|
(9,155,746 |
) |
|
|
(14,532,678 |
) |
| MQT |
|
|
32,957 |
|
|
|
40,359 |
|
|
|
(9,127,851 |
) |
|
|
6,834,181 |
|
|
|
(2,220,354 |
) |
| |
(a) |
Amounts available to offset future realized capital gains. |
|
| |
(b) |
The difference between book-basis and tax-basis net unrealized gains were
attributable primarily to the tax deferral of losses on wash sales, amortization and accretion methods of premiums and discounts on fixed income securities, the realization for tax purposes of unrealized losses on certain futures contracts, the
timing of distributions, the deferral of compensation to Directors and the treatment of residual interests in tender option bond trusts. |
|
As of July 31, 2022, gross unrealized appreciation and depreciation based on cost of investments (including
short positions and derivatives, if any) for U.S. federal income tax purposes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fund Name |
|
Tax Cost |
|
|
Gross Unrealized
Appreciation |
|
|
Gross Unrealized
Depreciation |
|
|
Net Unrealized
Appreciation
(Depreciation) |
|
| BKN |
|
$ |
362,245,174 |
|
|
$ |
19,238,686 |
|
|
$ |
(12,548,146) |
|
|
$ |
6,690,540 |
|
| BFK |
|
|
832,362,922 |
|
|
|
22,186,684 |
|
|
|
(41,441,458 |
) |
|
|
(19,254,774 |
) |
| MHD |
|
|
1,118,932,715 |
|
|
|
35,429,027 |
|
|
|
(49,254,289 |
) |
|
|
(13,825,262 |
) |
| MVT |
|
|
420,944,048 |
|
|
|
10,487,077 |
|
|
|
(18,815,777 |
) |
|
|
(8,328,700 |
) |
| MQT |
|
|
384,678,094 |
|
|
|
18,422,051 |
|
|
|
(11,587,870 |
) |
|
|
6,834,181 |
|
|
|
|
| 98 |
|
2 0 2 2 B L A C
K R O C K A N N U A L R E P O
R T T O S H A R E H O L D E
R S |
Notes to Financial Statements (continued)
In the normal course of business, the Funds invest in securities or other instruments and may enter into certain transactions, and such activities
subject each Fund to various risks, including among others, fluctuations in the market (market risk) or failure of an issuer to meet all of its obligations. The value of securities or other instruments may also be affected by various factors,
including, without limitation: (i) the general economy; (ii) the overall market as well as local, regional or global political and/or social instability; (iii) regulation, taxation or international tax treaties between various
countries; or (iv) currency, interest rate and price fluctuations. Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues, recessions, or other events could have a
significant impact on the Funds and their investments.
The Funds may hold a significant amount of bonds subject to calls by the issuers at defined
dates and prices. When bonds are called by issuers and the Funds reinvest the proceeds received, such investments may be in securities with lower yields than the bonds originally held, and correspondingly, could adversely impact the yield and total
return performance of a Fund.
A Fund structures and “sponsors” the TOB Trusts in which it holds TOB Residuals and has certain duties and
responsibilities, which may give rise to certain additional risks including, but not limited to, compliance, securities law and operational risks.
As
short-term interest rates rise, the Funds’ investments in the TOB Trusts may adversely affect the Funds’ net investment income and dividends to Common Shareholders. Also, fluctuations in the market value of municipal bonds deposited into
the TOB Trust may adversely affect the Funds’ NAVs per share.
The U.S. Securities and Exchange Commission (“SEC”) and various federal
banking and housing agencies have adopted credit risk retention rules for securitizations (the “Risk Retention Rules”). The Risk Retention Rules would require the sponsor of a TOB Trust to retain at least 5% of the credit risk of the
underlying assets supporting the TOB Trust’s municipal bonds. The Risk Retention Rules may adversely affect the Funds’ ability to engage in TOB Trust transactions or increase the costs of such transactions in certain circumstances.
TOB Trusts constitute an important component of the municipal bond market. Any modifications or changes to rules governing TOB Trusts may adversely impact
the municipal market and the Funds, including through reduced demand for and liquidity of municipal bonds and increased financing costs for municipal issuers. The ultimate impact of any potential modifications on the TOB Trust market and the overall
municipal market is not yet certain.
Each Fund may invest without limitation in illiquid or less liquid investments or investments in which no
secondary market is readily available or which are otherwise illiquid, including private placement securities. A Fund may not be able to readily dispose of such investments at prices that approximate those at which a Fund could sell such investments
if they were more widely traded and, as a result of such illiquidity, a Fund may have to sell other investments or engage in borrowing transactions if necessary to raise funds to meet its obligations. Limited liquidity can also affect the market
price of investments, thereby adversely affecting a Fund’s NAV and ability to make dividend distributions. Privately issued debt securities are often of below investment grade quality, frequently are unrated and present many of the same risks
as investing in below investment grade public debt securities.
Market Risk: Each Fund may be exposed to prepayment risk, which is the risk
that borrowers may exercise their option to prepay principal earlier than scheduled during periods of declining interest rates, which would force each Fund to reinvest in lower yielding securities. Each Fund may also be exposed to reinvestment risk,
which is the risk that income from each Fund’s portfolio will decline if each Fund invests the proceeds from matured, traded or called fixed-income securities at market interest rates that are below each Fund portfolio’s current earnings
rate.
Municipal securities are subject to the risk that litigation, legislation or other political events, local business or economic conditions,
credit rating downgrades, or the bankruptcy of the issuer could have a significant effect on an issuer’s ability to make payments of principal and/or interest or otherwise affect the value of such securities. Municipal securities can be
significantly affected by political or economic changes, including changes made in the law after issuance of the securities, as well as uncertainties in the municipal market related to, taxation, legislative changes or the rights of municipal
security holders, including in connection with an issuer insolvency. Municipal securities backed by current or anticipated revenues from a specific project or specific assets can be negatively affected by the discontinuance of the tax benefits
supporting the project or assets or the inability to collect revenues for the project or from the assets. Municipal securities may be less liquid than taxable bonds, and there may be less publicly available information on the financial condition of
municipal security issuers than for issuers of other securities.
An outbreak of respiratory disease caused by a novel coronavirus has developed into
a global pandemic and has resulted in closing borders, quarantines, disruptions to supply chains and customer activity, as well as general concern and uncertainty. The impact of this pandemic, and other global health crises that may arise in the
future, could affect the economies of many nations, individual companies and the market in general in ways that cannot necessarily be foreseen at the present time. This pandemic may result in substantial market volatility and may adversely impact
the prices and liquidity of a fund’s investments. Although vaccines have been developed and approved for use by various governments, the duration of this pandemic and its effects cannot be determined with certainty.
Counterparty Credit Risk: The Funds may be exposed to counterparty credit risk, or the risk that an entity may fail to or be unable to perform on
its commitments related to unsettled or open transactions, including making timely interest and/or principal payments or otherwise honoring its obligations. The Funds manage counterparty credit risk by entering into transactions only with
counterparties that the Manager 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
approximately their value recorded in the Statements of Assets and Liabilities, less any collateral held by the Funds.
A derivative contract may
suffer a mark-to-market loss if the value of the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument. Losses can
also occur if the counterparty does not perform under the contract.
With exchange-traded futures, there is less counterparty credit risk to the Funds
since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, credit risk is limited to failure of the
clearinghouse. While offset rights
|
|
|
| N O T E S T O F
I N A N C I A L S T A T E M
E N T S |
|
99 |
Notes to Financial Statements (continued)
may exist under applicable
law, a Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default (including the bankruptcy or insolvency). Additionally, credit risk exists in exchange-traded futures with respect to
initial and variation margin that is held in a clearing broker’s customer accounts. While clearing brokers are required to segregate customer margin from their own assets, in the event that a clearing broker becomes insolvent or goes into
bankruptcy and at that time there is a shortfall in the aggregate amount of margin held by the clearing broker for all its clients, typically the shortfall would be allocated on a pro rata basis across all the clearing broker’s customers,
potentially resulting in losses to the Funds.
Concentration Risk: A diversified portfolio, where this is appropriate and consistent with a
fund’s objectives, minimizes the risk that a price change of a particular investment will have a material impact on the NAV of a fund. The investment concentrations within each Fund’s portfolio are disclosed in its Schedule of Investments.
Certain Funds invest a substantial amount of their assets in issuers located in a single state or limited number of states. When a fund concentrates
its investments in this manner, it assumes the risk that economic, regulatory, political or social conditions affecting that state or group of states could have a significant impact on the fund and could affect the income from, or the value or
liquidity of, the fund’s portfolio. Investment percentages in specific states or U.S. territories are presented in the Schedules of Investments.
Certain Funds invest a significant portion of their assets in securities within a single or limited number of market sectors. When a fund concentrates its
investments in this manner, it assumes the risk that economic, regulatory, political and social conditions affecting such sectors may have a significant impact on the Fund and could affect the income from, or the value or liquidity of, the
Fund’s portfolio. Investment percentages in specific sectors are presented in the Schedules of Investments.
The Funds invest a significant
portion of their assets in fixed-income securities and/or use derivatives tied to the fixed-income markets. Changes in market interest rates or economic conditions may affect the value and/or liquidity of such investments. Interest rate risk is the
risk that prices of bonds and other fixed-income securities will decrease as interest rates rise and increase as interest rates fall. The Funds may be subject to a greater risk of rising interest rates due to the recent period of historically low
interest rates. The Federal Reserve has recently begun to raise the federal funds rate as part of its efforts to address inflation. There is a risk that interest rates will continue to rise, which will likely drive down the prices of bonds and other
fixed-income securities, and could negatively impact the Funds’ performance.
LIBOR Transition Risk: The United Kingdom’s Financial
Conduct Authority announced a phase out of the London Interbank Offered Rate (“LIBOR”). Although many LIBOR rates ceased to be published or no longer are representative of the underlying market they seek to measure after December 31,
2021, a selection of widely used USD LIBOR rates will continue to be published through June 2023 in order to assist with the transition. The Funds may be exposed to financial instruments tied to LIBOR to determine payment obligations, financing
terms, hedging strategies or investment value. The transition process away from LIBOR might lead to increased volatility and illiquidity in markets for, and reduce the effectiveness of new hedges placed against instruments whose terms currently
include LIBOR. The ultimate effect of the LIBOR transition process on the Funds is uncertain.
| 10. |
CAPITAL SHARE TRANSACTIONS |
BKN is authorized to issue 200 million shares, all of which were initially classified as Common Shares. BFK is authorized to issue an unlimited
number of shares, all of which were initially classified as Common Shares. The par value for BFK Common Shares is $0.001. The par value for BKN’s Common Shares is $0.01. The par value for BFK Preferred Shares outstanding is $0.001. The par
value for BKN Preferred Shares outstanding is $0.01. The Board is authorized, however, to reclassify any unissued Common Shares to Preferred Shares without the approval of Common Shareholders.
MHD, MVT and MQT are authorized to issue 200 million shares, all of which were initially classified as Common Shares. The par value for MHD, MVT and
MQT Common Shares is $0.10. The par value for MHD, MVT and MQT Preferred Shares outstanding is $0.10. Each Board is authorized, however, to reclassify any unissued Common Shares to Preferred Shares without the approval of Common Shareholders.
Common Shares
For the periods shown,
shares issued and outstanding increased by the following amounts as a result of dividend reinvestment:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Period from
05/01/22
to 07/31/22 |
|
|
Year Ended |
|
| Fund Name |
|
04/30/22 04/30/21 |
|
| BKN |
|
|
10,125 |
|
|
|
30,858 |
|
|
|
16,349 |
|
| BFK |
|
|
12,935 |
|
|
|
113,057 |
|
|
|
82,096 |
|
| MVT |
|
|
— |
|
|
|
29,928 |
|
|
|
— |
|
| MQT |
|
|
— |
|
|
|
46,172 |
|
|
|
— |
|
For the period ended July 31, 2022 and year ended April 30, 2022, shares issued and outstanding remained
constant for MHD.
For the year ended April 30, 2021, Common Shares of MHD issued and outstanding increased by 39,147,091 as a result of the
reorganization of BAF, BBK, MUH and MUS with and into MHD.
For the year ended April 30, 2021, Common Shares of MHD issued and outstanding
decreased by 25 as a result of a redemption of fractional shares from the reorganization of BAF, BBK, MUH and MUS with and into MHD.
The Funds
participate in an open market share repurchase program (the “Repurchase Program”). From December 1, 2020 through November 30, 2021, each Fund may repurchase up to 5% of its outstanding common shares under the Repurchase Program,
based on common shares outstanding as of the close of business on November 30, 2020, subject to certain conditions. From December 1, 2021 through November 30, 2022, each Fund may repurchase up to 5% of its outstanding common shares
under the
|
|
|
| 100 |
|
2 0 2 2 B L A C
K R O C K A N N U A L R E P O
R T T O S H A R E H O L D E
R S |
Notes to Financial Statements (continued)
Repurchase Program, based on
common shares outstanding as of the close of business on November 30, 2021 subject to certain conditions The Repurchase Program has an accretive effect as shares are purchased at a discount to the Fund’s NAV. There is no assurance that the
Funds will purchase shares in any particular amounts. For the period ended July 31, 2022, the Funds did not repurchase any shares.
BKN and BFK
have filed a prospectus with the SEC allowing it to issue an additional 5,000,000 and 10,000,000 Common Shares, respectively, through a Shelf Offering. Under the Shelf Offerings, BKN and BFK, subject to market conditions, may raise additional equity
capital from time to time in varying amounts and utilizing various offering methods at a net price at or above each Fund’s NAV per Common Share (calculated within 48 hours of pricing). As of period end, 4,652,410 and 9,998,351 Common Shares,
respectively, remain available for issuance under the Shelf Offerings. During the period ended July 31, 2022, BKN and BFK issued 347,590 and 1,649 shares, respectively, under the Shelf Offerings. See Additional Information - Shelf
Offering Program for additional information.
Initial costs incurred by each of BKN and BFK in connection with its respective Shelf Offering are
recorded as “Deferred offering costs” in the Statements of Assets and Liabilities. As shares are sold, a portion of the costs attributable to the shares sold will be charged against paid-in-capital. Any remaining deferred charges at the end of the shelf offering period will be charged to expense.
Preferred Shares
A Fund’s Preferred Shares rank prior
to its Common Shares as to the payment of dividends by the Fund and distribution of assets upon dissolution or liquidation of the Fund. The 1940 Act prohibits the declaration of any dividend on Common Shares or the repurchase of Common Shares if the
Fund fails to maintain asset coverage of at least 200% of the liquidation preference of the Fund’s outstanding Preferred Shares. In addition, pursuant to the Preferred Shares’ governing instruments, a Fund is restricted from declaring and
paying dividends on classes of shares ranking junior to or on parity with its Preferred Shares or repurchasing such shares if the Fund fails to declare and pay dividends on the Preferred Shares, redeem any Preferred Shares required to be redeemed
under the Preferred Shares’ governing instruments or comply with the basic maintenance amount requirement of the ratings agencies rating the Preferred Shares.
Holders of Preferred Shares have voting rights equal to the voting rights of holders of Common Shares (one vote per share) and vote together with holders
of Common Shares (one vote per share) as a single class on certain matters. Holders of Preferred Shares, voting as a separate class, are also entitled to (i) elect two members of the Board, (ii) elect the full Board if dividends on the
Preferred Shares are not paid for a period of two years and (iii) a separate class vote to amend the Preferred Share governing documents. In addition, the 1940 Act requires the approval of the holders of a majority of any outstanding Preferred
Shares, voting as a separate class, to (a) adopt any plan of reorganization that would adversely affect the Preferred Shares, (b) change a Fund’s sub-classification as a closed-end investment company or change its fundamental investment restrictions or (c) change its business so as to cease to be an investment company.
VMTP Shares
Each Fund (for purposes of this section,
“VMTP Fund”) have issued Series W-7 VMTP Shares, $100,000 liquidation preference per share, in one or more privately negotiated offerings to qualified institutional buyers as defined pursuant to Rule
144A under the Securities Act. The VMTP Shares are subject to certain restrictions on transfer, and a VMTP Fund may also be required to register its VMTP Shares for sale under the Securities Act under certain circumstances. As of period end, the
VMTP Shares outstanding and assigned long-term ratings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fund Name |
|
Issue
Date |
|
|
Shares
Issued |
|
|
Aggregate
Principal |
|
|
Term
Redemption
Date |
|
|
Moody’s
Rating |
|
|
Fitch
Rating |
|
| BKN |
|
|
12/16/11 |
|
|
|
1,259 |
|
|
$ |
125,900,000 |
|
|
|
07/02/23 |
|
|
|
Aa1 |
|
|
|
AA |
|
| BFK |
|
|
12/16/11 |
|
|
|
2,708 |
|
|
|
270,800,000 |
|
|
|
07/02/23 |
|
|
|
Aa1 |
|
|
|
AA |
|
| MHD |
|
|
12/16/11 |
|
|
|
837 |
|
|
|
83,700,000 |
|
|
|
07/02/23 |
|
|
|
Aa1 |
|
|
|
AA |
|
|
|
|
03/08/21 |
|
|
|
2,641 |
|
|
|
264,100,000 |
|
|
|
07/02/23 |
|
|
|
Aa1 |
|
|
|
AA |
|
| MVT |
|
|
12/16/11 |
|
|
|
1,400 |
|
|
|
140,000,000 |
|
|
|
07/02/23 |
|
|
|
Aa1 |
|
|
|
AA |
|
| MQT |
|
|
12/16/11 |
|
|
|
1,165 |
|
|
|
116,500,000 |
|
|
|
07/02/23 |
|
|
|
Aa1 |
|
|
|
AA |
|
Redemption Terms: A VMTP Fund is required to redeem its VMTP Shares on the term redemption date, unless earlier
redeemed or repurchased or unless extended. There is no assurance that a term will be extended further or that any VMTP Shares will be replaced with any other preferred shares or other form of leverage upon the redemption or repurchase of the
VMTP Shares. Six months prior to the term redemption date, a VMTP Fund is required to begin to segregate liquid assets with its custodian to fund the redemption. In addition, a VMTP Fund is required to redeem certain of its outstanding VMTP Shares
if it fails to comply with certain asset coverage, basic maintenance amount or leverage requirements.
Subject to certain conditions, VMTP Shares may
be redeemed, in whole or in part, at any time at the option of the VMTP Fund. With respect to each Fund, the redemption price per VMTP Share is equal to the liquidation preference per share plus any outstanding unpaid dividends and applicable
redemption premium. If each Fund redeems the VMTP Shares prior to the term redemption date and the VMTP Shares have long-term ratings above A1/A+ or its equivalent by the ratings agencies then rating the VMTP Shares, then such redemption may be
subject to a prescribed redemption premium (up to 2% of the liquidation preference) payable to the holder of the VMTP Shares based on the time remaining until the term redemption date, subject to certain exceptions for redemptions that are required
to comply with minimum asset coverage requirements.
Dividends: Dividends on the VMTP Shares are declared daily and payable monthly at a
variable rate set weekly at a fixed rate spread to the Securities Industry and Financial Markets Association (“SIFMA”) Municipal Swap Index or to a percentage of the one-month LIBOR rate, as set
forth in the VMTP Shares governing instrument. The fixed spread is determined based on the long-term preferred share rating assigned to the VMTP Shares by the ratings agencies then rating the VMTP Shares.
The dividend rate on VMTP Shares is subject to a step-up spread if the VMTP Fund fails to comply with certain
provisions, including, among other things, the timely payment of dividends, redemptions or gross-up payments, and complying with certain asset coverage and leverage requirements.
|
|
|
| N O T E S T O F
I N A N C I A L S T A T E M
E N T S |
|
101 |
Notes to Financial Statements (continued)
For the period ended
July 31, 2022, the average annualized dividend rates for the VMTP Shares were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
BKN |
|
|
BFK |
|
|
MHD |
|
|
MVT |
|
|
MQT |
|
| Dividend rates |
|
|
2.00 |
% |
|
|
2.00 |
% |
|
|
2.00 |
% |
|
|
2.00 |
% |
|
|
2.00 |
% |
For the period ended July 31, 2022, VMTP Shares issued and outstanding of each VMTP Fund remained constant.
Offering Costs:The Funds incurred costs in connection with the issuance of VMTP Shares, which were recorded as a direct deduction from the
carrying value of the related debt liability and will be amortized over the life of the VMTP Shares. Amortization of these costs is included in interest expense, fees and amortization of offering costs in the Statements of Operations.
Financial Reporting: The VMTP Shares are considered debt of the issuer; therefore, the liquidation preference, which approximates fair value of the
VMTP Shares, is recorded as a liability in the Statements of Assets and Liabilities net of deferred offering costs. Unpaid dividends are included in interest expense and fees payable in the Statements of Assets and Liabilities, and the dividends
accrued and paid on the VMTP Shares are included as a component of interest expense, fees and amortization of offering costs in the Statements of Operations. The VMTP Shares are treated as equity for tax purposes. Dividends paid to holders of the
VMTP Shares are generally classified as tax-exempt income for tax-reporting purposes. Dividends and amortization of deferred offering costs on VMTP Shares are included
in interest expense, fees and amortization of offering costs in the Statements of Operations:
|
|
|
|
|
|
|
|
|
| Fund Name |
|
Dividends Accrued |
|
|
Deferred Offering
Costs Amortization |
|
| BKN |
|
$ |
635,388 |
|
|
$ |
— |
|
| BFK |
|
|
1,366,664 |
|
|
|
— |
|
| MHD |
|
|
1,755,265 |
|
|
|
— |
|
| MVT |
|
|
706,547 |
|
|
|
— |
|
| MQT |
|
|
587,948 |
|
|
|
— |
|
Management’s 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 items were noted:
The Funds declared and paid or will pay distributions to Common
Shareholders as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fund Name |
|
Declaration
Date |
|
|
Record
Date |
|
|
Payable/
Paid Date |
|
|
Dividend Per
Common Share |
|
| BKN |
|
|
08/01/22 |
|
|
|
08/15/22 |
|
|
|
09/01/22 |
|
|
$ |
0.068000 |
|
|
|
|
09/01/22 |
|
|
|
09/15/22 |
|
|
|
10/03/22 |
|
|
|
0.068000 |
|
| BFK |
|
|
08/01/22 |
|
|
|
08/15/22 |
|
|
|
09/01/22 |
|
|
|
0.046500 |
|
|
|
|
09/01/22 |
|
|
|
09/15/22 |
|
|
|
10/03/22 |
|
|
|
0.046500 |
|
| MHD |
|
|
08/01/22 |
|
|
|
08/15/22 |
|
|
|
09/01/22 |
|
|
|
0.060500 |
|
|
|
|
09/01/22 |
|
|
|
09/15/22 |
|
|
|
10/03/22 |
|
|
|
0.060500 |
|
| MVT |
|
|
08/01/22 |
|
|
|
08/15/22 |
|
|
|
09/01/22 |
|
|
|
0.050000 |
|
|
|
|
09/01/22 |
|
|
|
09/15/22 |
|
|
|
10/03/22 |
|
|
|
0.050000 |
|
| MQT |
|
|
08/01/22 |
|
|
|
08/15/22 |
|
|
|
09/01/22 |
|
|
|
0.054000 |
|
| |
|
|
09/01/22 |
|
|
|
09/15/22 |
|
|
|
10/03/22 |
|
|
|
0.054000 |
|
|
|
|
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Notes to Financial Statements (continued)
The Funds declared and paid
or will pay distributions to Preferred Shareholders as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Preferred Shares(a) |
|
| Fund Name |
|
Shares |
|
|
Series |
|
|
Declared |
|
| BKN |
|
|
VMTP |
|
|
|
W-7 |
|
|
$ |
292,877 |
|
| BFK |
|
|
VMTP |
|
|
|
W-7 |
|
|
|
629,953 |
|
| MHD |
|
|
VMTP |
|
|
|
W-7 |
|
|
|
809,076 |
|
| MVT |
|
|
VMTP |
|
|
|
W-7 |
|
|
|
325,677 |
|
| MQT |
|
|
VMTP |
|
|
|
W-7 |
|
|
|
271,010 |
|
| |
(a) |
Dividends declared for period August 1, 2022 to August 31, 2022. |
|
|
|
|
| N O T E S T O F
I N A N C I A L S T A T E M
E N T S |
|
103 |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees/Directors of BlackRock Investment Quality
Municipal Trust, Inc., BlackRock Municipal Income Trust, BlackRock MuniHoldings Fund, Inc., BlackRock MuniVest Fund II, Inc., and BlackRock MuniYield Quality Fund II, Inc.:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statements of assets and liabilities of BlackRock Investment Quality Municipal Trust, Inc., BlackRock Municipal Income
Trust, BlackRock MuniHoldings Fund, Inc., BlackRock MuniVest Fund II, Inc., and BlackRock MuniYield Quality Fund II, Inc. (the “Funds”), including the schedules of investments, as of July 31, 2022, the related statements of operations
and cash flows for the period from May 1, 2022 through July 31, 2022 and for the year ended April 30, 2022, the statements of changes in net assets for the period from May 1, 2022 through July 31, 2022 and for each of the
two years in the period ended April 30, 2022, the financial highlights for the period from May 1, 2022 through July 31, 2022 and for each of the five years in the period ended April 30, 2022, and the related notes. In our
opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Funds as of July 31, 2022, and the results of their operations and their cash flows for the period from
May 1, 2022 through July 31, 2022 and for the year ended April 30, 2022, the changes in their net assets for the period from May 1, 2022 through July 31, 2022 and for each of the two years in the period ended April 30,
2022, and the financial highlights for the period from May 1, 2022 through July 31, 2022 and each of the five years in the period ended April 30, 2022, in conformity with accounting principles generally accepted in the United States
of America.
Basis for Opinion
These financial
statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on the Funds’ financial statements and financial highlights based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Funds in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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, whether due to error or fraud. The Funds are not required to have, nor were we
engaged to perform, an audit of their internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.
Our audits included performing
procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of July 31, 2022, by correspondence with custodians or counterparties; when replies were not received, we performed
other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
Deloitte & Touche LLP
Boston, Massachusetts
September 23, 2022
We have served as the auditor of one or more BlackRock investment companies since 1992.
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Important Tax Information (unaudited)
The following amounts, or
maximum amounts allowable by law, are hereby designated as tax-exempt interest dividends for the fiscal period ended July 31, 2022:
|
|
|
|
|
| Fund Name |
|
Exempt-Interest
Dividends |
|
| BKN |
|
$ |
3,464,912 |
|
| BFK |
|
|
7,209,529 |
|
| MHD |
|
|
10,098,529 |
|
| MVT |
|
|
3,577,181 |
|
| MQT |
|
|
3,735,884 |
|
The Funds hereby designate the following amounts, or maximum amounts allowable by law, as interest income eligible to be
treated as a Section 163(j) interest dividend for the fiscal period ended July 31, 2022:
|
|
|
|
|
| Fund Name |
|
Interest
Dividends |
|
| BKN |
|
$ |
4,658 |
|
| BFK |
|
|
91,205 |
|
| MHD |
|
|
29,967 |
|
| MVT |
|
|
871 |
|
| MQT |
|
|
4,824 |
|
The Funds hereby designate the following amounts, or maximum amounts allowable by law, as interest-related dividends
eligible for exemption from U.S. withholding tax for nonresident aliens and foreign corporations for the fiscal period ended July 31, 2022:
|
|
|
|
|
| Fund Name |
|
Interest
Related
Dividends |
|
| BKN |
|
$ |
4,658 |
|
| BFK |
|
|
91,205 |
|
| MHD |
|
|
29,967 |
|
| MVT |
|
|
871 |
|
| MQT |
|
|
4,824 |
|
|
|
|
| I M P O R T A N T
T A X I N F O R M A T I O N |
|
105 |
Disclosure of Investment Advisory Agreements
The Boards of Directors/Trustees, as applicable (collectively, the
“Board,” the members of which are referred to as “Board Members”) of BlackRock Investment Quality Municipal Trust, Inc. (“BKN”), BlackRock Municipal Income Trust (“BFK”), BlackRock MuniHoldings Fund, Inc.
(“MHD”), BlackRock MuniVest Fund II, Inc. (“MVT”) and BlackRock MuniYield Quality Fund II, Inc. (“MQT”) (collectively, the “Funds” and each, a “Fund”) met on April 14, 2022 (the “April
Meeting”) and May 19-20, 2022 (the “May Meeting”) to consider the approval to continue the investment advisory agreements (the “Advisory Agreements”) or (the “Agreements”)
between each Fund and BlackRock Advisors, LLC (the “Manager” or “BlackRock”), each Fund’s investment advisor.
The Approval Process
Consistent with the requirements of the Investment Company Act of 1940 (the “1940 Act”), the Board considers the approval of the
continuation of the Agreements for each Fund on an annual basis. The Board members who are not “interested persons” of each Fund, as defined in the 1940 Act, are considered independent Board members (the “Independent Board
Members”). The Board’s consideration entailed a year-long deliberative process during which the Board and its committees assessed BlackRock’s various services to each Fund, including through the review of written materials and oral
presentations, and the review of additional information provided in response to requests from the Independent Board Members. The Board had four quarterly meetings per year, each typically extending for two days, as well as additional ad hoc meetings
and executive sessions throughout the year, as needed. The committees of the Board similarly met throughout the year. The Board also had an additional one-day meeting to consider specific information
surrounding the renewal of the Agreements. In particular, the Board assessed, among other things, the nature, extent and quality of the services provided to each Fund by BlackRock, BlackRock’s personnel and affiliates, including (as
applicable): investment management services; accounting oversight; administrative and shareholder services; oversight of each Fund’s service providers; risk management and oversight; and legal, regulatory and compliance services. Throughout the
year, including during the contract renewal process, the Independent Board Members were advised by independent legal counsel, and met with independent legal counsel in various executive sessions outside of the presence of BlackRock’s
management.
During the year, the Board, acting directly and through its committees, considered information that was relevant to its annual
consideration of the renewal of the Agreements, including the services and support provided by BlackRock to each Fund and its shareholders. BlackRock also furnished additional information to the Board in response to specific questions from the
Board. Among the matters the Board considered were: (a) investment performance for one-year, three-year, five-year, and/or since inception periods, as applicable, against peer funds, relevant benchmarks,
and other performance metrics, as applicable, as well as BlackRock senior management’s and portfolio managers’ analyses of the reasons for any outperformance or underperformance relative to its peers, benchmarks, and other performance
metrics, as applicable; (b) leverage management, as applicable; (c) fees, including advisory, administration, if applicable, and other amounts paid to BlackRock and its affiliates by each Fund for services; (d) Fund operating expenses
and how BlackRock allocates expenses to each Fund; (e) the resources devoted to risk oversight of, and compliance reports relating to, implementation of each Fund’s investment objective, policies and restrictions, and meeting regulatory
requirements; (f) BlackRock’s and each Fund’s adherence to applicable compliance policies and procedures; (g) the nature, character and scope of non-investment management services provided
by BlackRock and its affiliates and the estimated cost of such services, as available; (h) BlackRock’s and other service providers’ internal controls and risk and compliance oversight mechanisms; (i) BlackRock’s
implementation of the proxy voting policies approved by the Board; (j) execution quality of portfolio transactions; (k) BlackRock’s implementation of each Fund’s valuation and liquidity procedures; (l) an analysis of
management fees paid to BlackRock for products with similar investment mandates across the open-end fund, closed-end fund,
sub-advised mutual fund, collective investment trust and institutional separate account product channels, as applicable, and the similarities and differences between these products and the services provided as
compared to each Fund; (m) BlackRock’s compensation methodology for its investment professionals and the incentives and accountability it creates, along with investment professionals’ investments in the fund(s) they manage;
(n) periodic updates on BlackRock’s business; and (o) each Fund’s market discount/premium compared to peer funds.
Prior to and in
preparation for the April Meeting, the Board received and reviewed materials specifically relating to the renewal of the Agreements. The Independent Board Members are continuously engaged in a process with their independent legal counsel and
BlackRock to review the nature and scope of the information provided to the Board to better assist its deliberations. The materials provided in connection with the April Meeting included, among other things: (a) information independently
compiled and prepared by Broadridge Financial Solutions, Inc. (“Broadridge”), based on Lipper classifications, regarding each Fund’s fees and expenses as compared with a peer group of funds as determined by Broadridge (“Expense
Peers”) and the investment performance of each Fund as compared with a peer group of funds (“Performance Peers”); (b) information on the composition of the Expense Peers and Performance Peers and a description of Broadridge’s
methodology; (c) information on the estimated profits realized by BlackRock and its affiliates pursuant to the Agreements and a discussion of fall-out benefits to BlackRock and its affiliates; (d) a
general analysis provided by BlackRock concerning investment management fees received in connection with other types of investment products, such as institutional accounts, sub-advised mutual funds, closed-end funds, and open-end funds, under similar investment mandates, as applicable; (e) a review of non-management fees;
(f) the existence, impact and sharing of potential economies of scale, if any, with each Fund; (g) a summary of aggregate amounts paid by each Fund to BlackRock; and (h) various additional information requested by the Board as
appropriate regarding BlackRock’s and each Fund’s operations.
At the April Meeting, the Board reviewed materials relating to its
consideration of the Agreements and the Independent Board Members presented BlackRock with questions and requests for additional information. BlackRock responded to these questions and requests with additional written information in advance of the
May Meeting.
At the May Meeting, the Board concluded its assessment of, among other things: (a) the nature, extent and quality of the services
provided by BlackRock; (b) the investment performance of each Fund as compared to its Performance Peers and to other metrics, as applicable; (c) the advisory fee and the estimated cost of the services and estimated profits realized by
BlackRock and its affiliates from their relationship with each Fund; (d) each Fund’s fees and expenses compared to its Expense Peers; (e) the existence and sharing of potential economies of scale; (f) any fall-out benefits to BlackRock and its affiliates as a result of BlackRock’s relationship with each Fund; and (g) other factors deemed relevant by the Board Members.
The Board also considered other matters it deemed important to the approval process, such as other payments made to BlackRock or its affiliates relating
to securities lending and cash management, and BlackRock’s services related to the valuation and pricing of Fund portfolio holdings. The Board noted the willingness of BlackRock’s personnel to engage in open, candid discussions with the
Board. The Board Members evaluated the information available to it on a fund-by-fund basis. The following paragraphs provide more information about some of the primary
factors that were relevant to the Board’s decision. The Board Members did not identify any particular information, or any single factor as determinative, and each Board Member may have attributed different weights to the various items and
factors considered.
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Disclosure of Investment Advisory Agreements (continued)
A. Nature, Extent and Quality of the
Services Provided by BlackRock
The Board, including the Independent Board Members, reviewed the nature, extent and quality of services
provided by BlackRock, including the investment advisory services, and the resulting performance of each Fund. Throughout the year, the Board compared Fund performance to the performance of a comparable group of
closed-end funds, relevant benchmarks, and performance metrics, as applicable. The Board met with BlackRock’s senior management personnel responsible for investment activities, including the senior
investment officers. The Board also reviewed the materials provided by each Fund’s portfolio management team discussing each Fund’s performance, investment strategies and outlook.
The Board considered, among other factors, with respect to BlackRock: the number, education and experience of investment personnel generally and each
Fund’s portfolio management team; research capabilities; investments by portfolio managers in the funds they manage; portfolio trading capabilities; use of technology; commitment to compliance; credit analysis capabilities; risk analysis and
oversight capabilities; and the approach to training and retaining portfolio managers and other research, advisory and management personnel. The Board also considered BlackRock’s overall risk management program, including the continued efforts
of BlackRock and its affiliates to address cybersecurity risks and the role of BlackRock’s Risk & Quantitative Analysis Group. The Board engaged in a review of BlackRock’s compensation structure with respect to each Fund’s
portfolio management team and BlackRock’s ability to attract and retain high-quality talent and create performance incentives.
In addition to
investment advisory services, the Board considered the nature and quality of the administrative and other non-investment advisory services provided to each Fund. BlackRock and its affiliates provide each Fund
with certain administrative, shareholder and other services (in addition to any such services provided to each Fund by third parties) and officers and other personnel as are necessary for the operations of each Fund. In particular, BlackRock and its
affiliates provide each Fund with administrative services including, among others: (i) responsibility for disclosure documents, registration statements in connection with each of BKN’s and BFK’s and equity shelf program and periodic
shareholder reports; (ii) preparing communications with analysts to support secondary market trading of each Fund; (iii) oversight of daily accounting and pricing; (iv) responsibility for periodic filings with regulators and stock
exchanges; (v) overseeing and coordinating the activities of third-party service providers including, among others, each Fund’s custodian, fund accountant, transfer agent, and auditor; (vi) organizing Board meetings and preparing the
materials for such Board meetings; (vii) providing legal and compliance support; (viii) furnishing analytical and other support to assist the Board in its consideration of strategic issues such as the merger, consolidation or repurposing
of certain closed-end funds; and (ix) performing or managing administrative functions necessary for the operation of each Fund, such as tax reporting, expense management, fulfilling regulatory filing
requirements, and shareholder call center and other services. The Board reviewed the structure and duties of BlackRock’s fund administration, shareholder services, and legal and compliance departments and considered BlackRock’s policies
and procedures for assuring compliance with applicable laws and regulations. The Board considered the operation of BlackRock’s business continuity plans, including in light of the ongoing COVID-19
pandemic.
B. The Investment Performance of each Fund and BlackRock
The Board, including the Independent Board Members, reviewed and considered the performance history of each Fund throughout the year and at the April
Meeting. In preparation for the April Meeting, the Board was provided with reports independently prepared by Broadridge, which included an analysis of each Fund’s performance as of December 31, 2021, as compared to its Performance Peers.
The performance information is based on net asset value (NAV), and utilizes Lipper data. Lipper’s methodology calculates a fund’s total return assuming distributions are reinvested on the ex-date at
a fund’s ex-date NAV. Broadridge ranks funds in quartiles, ranging from first to fourth, where first is the most desirable quartile position and fourth is the least desirable. In connection with its
review, the Board received and reviewed information regarding the investment performance of each Fund as compared to its Performance Peers and certain performance metrics (“Performance Metrics”). The Board and its Performance Oversight
Committee regularly review and meet with Fund management to discuss the performance of each Fund throughout the year.
In evaluating performance, the
Board focused particular attention on funds with less favorable performance records. The Board also noted that while it found the data provided by Broadridge generally useful, it recognized the limitations of such data, including in particular, that
notable differences may exist between a fund and its Performance Peers (for example, the investment objectives and strategies). Further, the Board recognized that the performance data reflects a snapshot of a period as of a particular date and that
selecting a different performance period could produce significantly different results. The Board also acknowledged that long-term performance could be impacted by even one period of significant outperformance or underperformance, and that a single
investment theme could have the ability to disproportionately affect long-term performance.
The Board reviewed and considered BKN’s performance
relative to BKN’s Performance Metrics. Based on an overall rating relative to the Performance Metrics, BKN generally performed above expectations. The Board noted that BlackRock believes that the Performance Metrics are an appropriate
performance comparison for BKN, and that BlackRock has explained its rationale for this belief to the Board.
The Board reviewed and considered
BFK’s performance relative to BFK’s Performance Metrics. Based on an overall rating relative to the Performance Metrics, BFK generally performed above expectations. The Board noted that BlackRock believes that the Performance Metrics are
an appropriate performance comparison for BFK, and that BlackRock has explained its rationale for this belief to the Board.
The Board reviewed and
considered MHD’s performance relative to MHD’s Performance Metrics. Based on an overall rating relative to the Performance Metrics, MHD generally performed in line with expectations. The Board noted that BlackRock believes that the
Performance Metrics are an appropriate performance comparison for MHD, and that BlackRock has explained its rationale for this belief to the Board.
The Board reviewed and considered MVT’s performance relative to MVT’s Performance Metrics. Based on an overall rating relative to the
Performance Metrics, MVT generally performed above expectations. The Board noted that BlackRock believes that the Performance Metrics are an appropriate performance comparison for MVT, and that BlackRock has explained its rationale for this belief
to the Board.
The Board reviewed and considered MQT’s performance relative to MQT’s Performance Metrics. Based on an overall rating
relative to the Performance Metrics, MQT generally performed in line with expectations. The Board noted that BlackRock believes that the Performance Metrics are an appropriate performance comparison for MQT, and that BlackRock has explained its
rationale for this belief to the Board.
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| D I S C L O S U R
E O F I N V E S T M E N T A
D V I S O R Y A G R E E M E
N T S |
|
107 |
Disclosure of Investment Advisory Agreements (continued)
C. Consideration of the
Advisory/Management Fees and the Estimated Cost of the Services and Estimated Profits Realized by BlackRock and its Affiliates from their Relationship with each Fund
The Board, including the Independent Board Members, reviewed each Fund’s contractual management fee rate compared with those of its Expense Peers.
The contractual management fee rate represents a combination of the advisory fee and any administrative fees, before taking into account any reimbursements or fee waivers. The Board also compared each Fund’s total expense ratio, as well as its
actual management fee rate as a percentage of managed assets, which is the total assets of each Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of each Fund’s accrued liabilities (other than
money borrowed for investment purposes) to those of its Expense Peers. The total expense ratio represents a fund’s total net operating expenses, excluding any investment related expenses. The total expense ratio gives effect to any expense
reimbursements or fee waivers, and the actual management fee rate gives effect to any management fee reimbursements or waivers. The Board considered the services provided and the fees charged by BlackRock and its affiliates to other types of clients
with similar investment mandates, as applicable, including institutional accounts and sub-advised mutual funds (including mutual funds sponsored by third parties).
The Board received and reviewed statements relating to BlackRock’s financial condition. The Board reviewed BlackRock’s profitability methodology
and was also provided with an estimated profitability analysis that detailed the revenues earned and the expenses incurred by BlackRock for services provided to each Fund. The Board reviewed BlackRock’s estimated profitability with respect to
each Fund and other funds the Board currently oversees for the year ended December 31, 2021 compared to available aggregate estimated profitability data provided for the prior two years. The Board reviewed BlackRock’s estimated
profitability with respect to certain other U.S. fund complexes managed by the Manager and/or its affiliates. The Board reviewed BlackRock’s assumptions and methodology of allocating expenses in the estimated profitability analysis, noting the
inherent limitations in allocating costs among various advisory products. The Board 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, precision of expense allocations and business mix. The Board thus recognized that calculating and comparing profitability at the individual fund level is difficult.
The Board noted that, in general, individual fund or product line profitability of other advisors is not publicly available. The Board reviewed
BlackRock’s overall operating margin, in general, compared to that of certain other publicly traded asset management firms. The Board considered the differences between BlackRock and these other firms, including the contribution of technology
at BlackRock, BlackRock’s expense management, and the relative product mix.
The Board considered whether BlackRock has the financial resources
necessary to attract and retain high quality investment management personnel to perform its obligations under the Agreements and to continue to provide the high quality of services that is expected by the Board. The Board further considered factors
including but not limited to BlackRock’s commitment of time, assumption of risk, and liability profile in servicing each Fund, including in contrast to what is required of BlackRock with respect to other products with similar investment
mandates across the open-end fund, closed-end fund, sub-advised mutual fund, collective investment trust, and institutional
separate account product channels, as applicable.
The Board noted that BKN’s contractual management fee rate ranked in the first quartile, and
that the actual management fee rate and total expense ratio ranked in the first and second quartiles, respectively, relative to the Expense Peers.
The Board noted that BFK’s contractual management fee rate ranked in the second quartile, and that the actual management fee rate and total expense
ratio ranked in the second and third quartiles, respectively, relative to the Expense Peers.
The Board noted that MHD’s contractual management
fee rate ranked in the first quartile, and that the actual management fee rate and total expense ratio ranked in the first and second quartiles, respectively, relative to the Expense Peers.
The Board noted that MVT’s contractual management fee rate ranked in the first quartile, and that the actual management fee rate and total expense
ratio ranked in the first and second quartiles, respectively, relative to the Expense Peers.
The Board noted that MQT’s contractual management
fee rate ranked in the first quartile, and that the actual management fee rate and total expense ratio ranked in the first and second quartiles, respectively, relative to the Expense Peers.
D. Economies of Scale
The Board, including the
Independent Board Members, considered the extent to which economies of scale might be realized as the assets of each Fund increase. The Board also considered the extent to which each Fund benefits from such economies of scale in a variety of ways,
and whether there should be changes in the advisory fee rate or breakpoint structure in order to enable each Fund to more fully participate in these economies of scale. The Board considered each Fund’s asset levels and whether the current fee
was appropriate.
Based on the Board’s review and consideration of the issue, the Board concluded that most
closed-end funds do not have fund level breakpoints because closed-end funds generally do not experience substantial growth after the initial public offering. Closed-end funds are typically priced at scale at a fund’s inception. The Board noted that although each of BKN and BFK may from
time-to-time make additional share offerings pursuant to its equity shelf program, the growth of each of BKN’s and BFK’s assets will occur primarily through
the appreciation of its investment portfolio.
E. Other Factors Deemed Relevant by the Board Members
The Board, including the Independent Board Members, also took into account other ancillary or “fall-out”
benefits that BlackRock or its affiliates may derive from BlackRock’s respective relationships with each Fund, both tangible and intangible, such as BlackRock’s ability to leverage its investment professionals who manage other portfolios
and its risk management personnel, an increase in BlackRock’s profile in the investment advisory community, and the engagement of BlackRock’s affiliates as service providers to each Fund, including for administrative, securities lending
and cash management services. The Board also considered BlackRock’s overall operations and its efforts to expand the scale of, and improve the quality of, its operations. The Board also noted that, subject to applicable law, 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.
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Disclosure of Investment Advisory Agreements (continued)
In connection with its
consideration of the Agreements, the Board also received information regarding BlackRock’s brokerage and soft dollar practices. The Board received reports from BlackRock which included information on brokerage commissions and trade execution
practices throughout the year.
The Board 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 each Fund’s fees and expenses are too high or if they are dissatisfied with the performance of each Fund.
The Board also considered the various notable initiatives and projects BlackRock performed in connection with its
closed-end fund product line. These initiatives included developing equity shelf programs; efforts to eliminate product overlap with fund mergers; ongoing services to manage leverage that has become
increasingly complex; periodic evaluation of share repurchases and other support initiatives for certain BlackRock funds; and continued communication efforts with shareholders, fund analysts and financial advisers. With respect to the latter, the
Independent Board Members noted BlackRock’s continued commitment to supporting the secondary market for the common shares of its closed-end funds through a comprehensive secondary market communication
program designed to raise investor and analyst awareness and understanding of closed-end funds. BlackRock’s support services included, among other things: sponsoring and participating in conferences;
communicating with closed-end fund analysts covering the BlackRock funds throughout the year; providing marketing and product updates for the closed-end funds; and
maintaining and enhancing its closed-end fund website.
Conclusion
At the May Meeting, as a result of the discussions that occurred during the April Meeting, and as a culmination of the Board’s year-long deliberative
process, the Board, including the Independent Board Members, approved, by unanimous vote of those present, the continuation of the Advisory Agreements between the Manager and each Fund for a one-year term
ending June 30, 2023. Based upon its evaluation of all of the aforementioned factors in their totality, as well as other information, the Board, including the Independent Board Members, was satisfied that the terms of the Agreements were fair
and reasonable and in the best interest of each Fund and its shareholders. In arriving at its decision to approve the Agreements, the Board did not identify any single factor or group of factors as
all-important or controlling, but considered all factors together, and different Board Members may have attributed different weights to the various factors considered. The Independent Board Members were also
assisted by the advice of independent legal counsel in making this determination.
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Recent Changes
The following information is a summary of certain changes since April 30, 2022 (each Fund changed its fiscal year end from April 30 to
July 31 effective July 31, 2022). This information may not reflect all of the changes that have occurred since you purchased the relevant Fund.
During each Fund’s most recent fiscal year, there were no material changes in the Fund’s investment objectives or policies that have not been
approved by shareholders or in the principal risk factors associated with investment in the Fund.
Investment Objectives and Policies
BlackRock Investment Quality Municipal Trust, Inc. (BKN)
The
Fund’s investment objective is to provide high current income exempt from regular federal income tax consistent with the preservation of capital. No assurance can be given that the Fund will achieve its investment objective. As a matter of
fundamental policy, under normal market conditions, the Fund will invest at least 80% of its Managed Assets in investments the income from which is exempt from federal income tax (except that the interest may be subject to the federal alternative
minimum tax). “Managed Assets” means the Fund’s total assets (including any assets attributable to money borrowed for investment purposes) minus the sum of the Fund’s accrued liabilities (other than money borrowed for investment
purposes). The Fund cannot change its investment objectives or the foregoing fundamental policy without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the Fund’s
variable rate muni term preferred shares (“VMTP Shares”), voting together as a single class, and of the holders of a majority of the outstanding preferred shares, including the VMTP Shares, voting as a separate class. A majority of the
outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding shares, whichever is less.
The Fund’s investment policies provide that, under normal market conditions, the Fund will invest at least 80% of its Managed Assets in investment
quality securities. For the purposes of the foregoing policy, an investment quality security is a security that is rated BBB or Baa or higher by Moody’s Investor Service Inc. (“Moody’s”), S&P Global Ratings
(“S&P”), Fitch Ratings, Inc. (“Fitch”) or another nationally recognized rating agency or, if unrated, deemed to be of comparable quality by the BlackRock Advisors, LLC (the “Manager”). Municipal Bonds rated Baa by
Moody’s are investment grade, but Moody’s considers Municipal Bonds rated Baa to have speculative characteristics. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity for issuers of
Municipal Bonds that are rated BBB or Baa (or that have equivalent ratings) to make principal and interest payments than is the case for issues of higher grade Municipal Bonds. “Municipal Bonds” means municipal obligations issued by or on
behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities, each of which pays interest that, in the opinion of bond counsel to the issuer, is excludable from gross income for
federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax). In the case of short term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moody’s and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating categories are A-1+
through A-3 for S&P, Prime-1 through Prime-3 for Moody’s and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moody’s and BBB and F-3 for Fitch), while considered “investment grade,” may have certain
speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the
foregoing requirements, the Manager takes into account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit
enhancement.
The Fund may invest up to 20% of its Managed Assets, measured at the time of investment, in securities rated BB/Ba or B by Moody’s
S&P, Fitch or another nationally recognized rating agency or, if unrated, deemed to be of comparable credit quality by the Manager. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as “junk bonds.”
Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. Such securities, sometimes referred to as “high yield”
or “junk” bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher
rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuer’s ability to pay interest and any required redemption or principal
payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing credit quality
policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security if a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell
a security that a rating agency has downgraded, the Manager may consider such factors as the Manager’s assessment of the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any,
assigned to the security by other rating agencies. In the event that the Fund disposes of a portfolio security subsequent to its being downgraded, the Fund may experience a greater risk of loss than if such security had been sold prior to such
downgrade.
The Fund does not ordinarily invest more than 25% of its managed assets (taken at market value) in municipal obligations whose issuers are
located in the same state.
In addition, the Fund may purchase Municipal Bonds that are additionally secured by insurance, bank credit agreements or
escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for insurance and the higher market
price paid for insured obligations may reduce the Fund’s income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the Fund’s common shares. The Fund may purchase insured bonds
and may purchase insurance for bonds in its portfolio.
The Fund may invest in certain tax exempt securities classified as “private activity
bonds” (or industrial development bonds, under pre-1986 law) (in general, bonds that benefit non-governmental entities) that may subject certain investors in the
Fund to an alternative minimum tax. The percentage of the Fund’s total assets invested in private activity bonds will vary from time to time. The Fund expects that a portion of the income it produces will be includable in alternative minimum
taxable income.
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The average maturity of the
Fund’s portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Manager. The Fund’s portfolio at any given time may include both long- term and intermediate-term Municipal Bonds.
The Fund’s stated expectation is that it will invest in Municipal Bonds that, in the Manager’s opinion, are underrated or undervalued.
Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Manager, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Manager, are worth more than the value assigned
to them in the marketplace. The Manager may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The
Manager may purchase those bonds for the Fund’s portfolio because they represent a market sector or issuer that the Manager considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar
bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market
sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered undervalued. The Fund’s investment in underrated or
undervalued Municipal Bonds will be based on the Manager’s belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will
ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by the Fund will generally result in capital gain distributions subject to federal capital gains taxation.
The Fund ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, the Fund may realize
taxable capital gains.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax
exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by the Fund.
Leverage: The Fund may utilize leverage to seek to enhance the yield and net asset value of its common shares. However, this objective cannot be
achieved in all interest rate environments. The Fund currently leverages its assets through the use of VMTP Shares and residual interest municipal tender option bonds (“TOB Residuals”), which are derivative interests in municipal bonds.
The TOB Residuals in which the Fund will invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax.
The Fund may purchase and sell futures contracts, enter into various interest rate transactions and may purchase and sell exchange-listed and over-the-counter put and call options on securities, financial indices and futures contracts.
The Fund may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. The Fund may enter into credit default swap
agreements for hedging purposes or to seek to increase its return.
As temporary investments, the Fund may invest in repurchase agreements. The Fund
may enter into reverse repurchase agreements with respect to its portfolio investments subject to its investment restrictions.
BlackRock Municipal Income
Trust (BFK)
The Fund’s investment objective is to provide current income exempt from federal income taxes. As a matter of fundamental
policy, under normal market conditions, the Fund will invest at least 80% of its Managed Assets in investments the income from which is exempt from federal income tax (except that the interest may be subject to the alternative minimum tax).
“Managed Assets” means the Fund’s total assets (including any assets attributable to money borrowed for investment purposes) minus the sum of the Fund’s accrued liabilities (other than money borrowed for investment purposes). The
Fund cannot change its investment objectives or the foregoing fundamental policy without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the Fund’s variable rate muni
term preferred shares (“VMTP Shares”), voting together as a single class, and of the holders of a majority of the outstanding preferred shares, including the VMTP Shares, voting as a separate class. A majority of the outstanding means (1)
67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding shares, whichever is less.
The Fund’s investment policies provide that, under normal market conditions, the Fund will invest at least 80% of its total assets in investment
grade quality municipal obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities, each of which pays interest that, in the opinion of bond counsel
to the issuer, is excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax) (“Municipal Bonds”). Investment grade quality
means that such bonds are rated, at the time of investment, within the four highest grades (Baa or BBB or better by Moody’s Investor Service Inc. (“Moody’s”), S&P Global Ratings (“S&P”) or Fitch Ratings, Inc.
(“Fitch”)) or are unrated but judged to be of comparable quality by the BlackRock Advisors, LLC (the “Manager”). Municipal Bonds rated Baa by Moody’s are investment grade, but Moody’s considers Municipal Bonds rated Baa
to have speculative characteristics. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity for issuers of Municipal Bonds that are rated BBB or Baa (or that have equivalent ratings) to make principal
and interest payments than is the case for issues of higher grade Municipal Bonds. In the case of short term notes, the investment grade rating categories are SP-1+ through
SP-2 for S&P, MIG-1 through MIG-3 for Moody’s and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for
S&P, Prime-1 through Prime-3 for Moody’s and F-1+ through F-3 for Fitch.
Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moody’s and BBB and F-3 for Fitch), while considered “investment grade,” may have certain speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the foregoing requirements, the Manager takes into
account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancement.
The Fund may invest up to 20% of its total assets in Municipal Bonds that are rated, at the time of investment, Ba/BB or B by Moody’s, S&P or
Fitch or that are unrated but judged to be of comparable quality by the Manager. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as “junk bonds.” Bonds of below investment grade quality are regarded as
having predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. Such securities, sometimes referred to as “high yield” or “junk” bonds, are predominantly
speculative with respect to the capacity to pay interest and repay principal in accordance
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Investment Objectives, Policies and Risks (continued)
with the terms of the
security and generally involve a greater volatility of price than securities in higher rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect
to the issuer’s ability to pay interest and any required redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing credit quality policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security if a rating
agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Manager may consider such factors as the Manager’s assessment of
the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. Appendix F contains a general description of Moody’s, S&P’s and
Fitch’s ratings of municipal bonds. In the event that the Fund disposes of a portfolio security subsequent to its being downgraded, the Fund may experience a greater risk of loss than if such security had been sold prior to such downgrade.
The Fund may also invest in securities of other open- or closed-end investment companies that invest primarily in
Municipal Bonds of the types in which the Fund may invest directly and in tax-exempt preferred shares that pay dividends that are exempt from regular federal income tax. In addition, the Fund may purchase
Municipal Bonds that are additionally secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature
reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce the Fund’s income. The insurance feature does not guarantee the market value of the insured obligations or the net
asset value of the Fund’s common shares. The Fund may purchase insured bonds and may purchase insurance for bonds in its portfolio.
The Fund may
invest in certain tax exempt securities classified as “private activity bonds” (or industrial development bonds, under pre-1986 law) (in general, bonds that benefit
non-governmental entities) that may subject certain investors in the Fund to an alternative minimum tax. The percentage of the Fund’s total assets invested in private activity bonds will vary from time to
time. The Fund has not established any limit on the percentage of its portfolio that may be invested in Municipal Bonds subject to the alternative minimum tax provisions of federal tax law, and the Fund expects that a portion of the income it
produces will be includable in alternative minimum taxable income.
The average maturity of the Fund’s portfolio securities varies from time to
time based upon an assessment of economic and market conditions by the Manager. The Fund’s portfolio at any given time may include both long- term and intermediate-term Municipal Bonds.
The Fund’s stated expectation is that it will invest in Municipal Bonds that, in the Manager’s opinion, are underrated or undervalued.
Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Manager, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Manager, are worth more than the value assigned
to them in the marketplace. The Manager may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The
Manager may purchase those bonds for the Fund’s portfolio because they represent a market sector or issuer that the Manager considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar
bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market
sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered undervalued. The Fund’s investment in underrated or
undervalued Municipal Bonds will be based on the Manager’s belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will
ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by the Fund will generally result in capital gain distributions subject to federal capital gains taxation.
The Fund ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, the Fund may realize
taxable capital gains.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax
exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by the Fund.
Leverage: The Fund may utilize leverage to seek to enhance the yield and net asset value of its common shares. However, this objective cannot be
achieved in all interest rate environments. The Fund currently leverages its assets through the use of VMTP Shares and residual interest municipal tender option bonds (“TOB Residuals”), which are derivative interests in municipal bonds.
The TOB Residuals in which the Fund will invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax.
The Fund may purchase and sell futures contracts, enter into various interest rate transactions and may purchase and sell exchange-listed and over-the-counter put and call options on securities, financial indices and futures contracts.
The Fund may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. The Fund may enter into credit default swap
agreements for hedging purposes or to seek to increase its return.
As temporary investments, the Fund may invest in repurchase agreements. The Fund
may enter into reverse repurchase agreements with respect to its portfolio investments subject to its investment restrictions.
BlackRock MuniHoldings Fund,
Inc. (MHD)
The Fund’s investment objective is to provide stockholders with current income exempt from federal income taxes. There can be no
assurance that the Fund’s investment objective will be realized. The Fund’s investment policies provide that it seeks to achieve its investment objective by investing, as a fundamental policy at least 80% of an aggregate of the Fund’s
net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in a portfolio of municipal obligations issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies or instrumentalities, each of which pays interest that, in the opinion of bond counsel to the issuer, is excludable from gross income for federal income tax purposes (except that the interest may be
includable in taxable income for purposes of the federal alternative minimum tax).
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The Fund’s investment
objective and its policy of investing at least 80% of an aggregate of the Fund’s net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in municipal bonds are
fundamental policies that may not be changed without the approval of the holders of a majority of the outstanding common stock and the outstanding preferred stock, including the Fund’s outstanding Series
W-7 Variable Rate Muni Term Preferred Shares (“VMTP Shares”), voting together as a single class, and of the holders of a majority of the outstanding preferred stock, including the VMTP Shares, voting
as a separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding
shares, whichever is less.
The Fund’s investment policies provide that it will invest at least 75% of its total assets in a portfolio of
municipal bonds that are commonly referred to as “investment grade” securities, which are obligations rated at the time of purchase within the four highest quality ratings as determined by either Moody’s Investor Service Inc.
(“Moody’s”) (currently Aaa, Aa, A and Baa), S&P Global Ratings (“S&P”) (currently AAA, AA, A and BBB) or Fitch Ratings (“Fitch”) (currently AAA, AA, A and BBB). In the case of short-term notes, the
investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through
MIG-3 for Moody’s and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade
rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for
Moody’s and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2
and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moody’s and BBB and F-3 for Fitch),
while considered “investment grade,” may have certain speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above.
In assessing the quality of municipal bonds with respect to the foregoing requirements, BlackRock Advisors, LLC (the “Manager”) takes into account the nature of any letters of credit or similar credit enhancement to which particular
municipal bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancement. If unrated, such securities will possess creditworthiness comparable, in the opinion of the Manager, to other obligations in
which the Fund may invest.
The Fund may invest up to 25% of its total assets in municipal bonds that are rated below Baa by Moody’s or below BBB
by S&P or Fitch or, if unrated, are considered by the Manager to possess similar credit characteristics. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuer’s
capacity to pay interest and repay principal. Such securities, sometimes referred to as “high yield” or “junk” bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance
with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered
speculative with respect to the issuer’s ability to pay interest and any required redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing credit quality policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security if a rating
agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Manager may consider such factors as the Manager’s assessment of
the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. In the event that the Fund disposes of a portfolio security subsequent to its
being downgraded, the Fund may experience a greater risk of loss than if such security had been sold prior to such downgrade.
The Fund may also
purchase municipal bonds that are additionally secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance
feature reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce the Fund’s income. The insurance feature does not guarantee the market value of the insured obligations or
the net asset value of the common stock. The Fund may purchase insured bonds and may purchase insurance for bonds in its portfolio.
The Fund may
invest in certain tax exempt securities classified as “private activity bonds” (or industrial development bonds, under pre-1986 law) (in general, bonds that benefit
non-governmental entities) that may subject certain investors in the Fund to an alternative minimum tax. The percentage of the Fund’s total assets invested in private activity bonds will vary from time to
time. The Fund has not established any limit on the percentage of its portfolio that may be invested in municipal bonds subject to the federal alternative minimum tax provisions of federal tax law, and the Fund expects that a portion of the income
it produces will be includable in alternative minimum taxable income.
The Fund also may not invest more than 25% of its total assets (taken at market
value at the time of each investment) in municipal bonds whose issuers are located in the same state.
The average maturity of the Fund’s
portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Manager. The Fund’s portfolio at any given time may include both long-term, intermediate-term and short-term municipal bonds.
The Fund’s stated expectation is that it will invest in municipal bonds that, in the Manager’s opinion, are underrated or undervalued.
Underrated municipal bonds are those whose ratings do not, in the opinion of the Manager, reflect their true higher creditworthiness. Undervalued municipal bonds are bonds that, in the opinion of the Manager, are worth more than the value assigned
to them in the marketplace. The Manager may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The
Manager may purchase those bonds for the Fund’s portfolio because they represent a market sector or issuer that the Manager considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar
bonds. Municipal bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market
sector, or because of a general decline in the market price of municipal bonds of the market sector for reasons that do not apply to the particular municipal bonds that are considered undervalued. The Fund’s investment in underrated or
undervalued municipal bonds will be based on the Manager’s belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will
ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by the Fund will generally result in capital gain distributions subject to federal capital gains taxation.
The Fund ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, the Fund may realize
taxable capital gains.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax
exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of municipal bonds for investment by the Fund.
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Leverage: The Fund
may utilize leverage to seek to enhance the yield and net asset value of its common shares. However, this objective cannot be achieved in all interest rate environments. The Fund currently leverages its assets through the use of VMTP Shares and
residual interest municipal tender option bonds (“TOB Residuals”), which are derivative interests in municipal bonds. The TOB Residuals in which the Fund will invest pay interest or income that, in the opinion of counsel to the issuer of
such TOB Residuals, is exempt from regular U.S. federal income tax.
The Fund currently does not intend to borrow money or issue debt securities.
Although it has no present intention to do so, the Fund reserves the right to borrow money from banks or other financial institutions, or issue debt securities, in the future if it believes that market conditions would be conducive to the successful
implementation of a leveraging strategy through borrowing money or issuing debt securities or preferred stock.
The Fund may enter into derivative
transactions that have economic leverage embedded in them.
The Fund may also borrow money as a temporary measure for extraordinary or emergency
purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of Fund securities.
BlackRock MuniVest Fund II, Inc. (MVT)
The Fund’s
investment objective is to provide stockholders with as high a level of current income exempt from federal income taxes as is consistent with its investment policies and prudent investment management. There can be no assurance that the Fund’s
investment objective will be realized. The Fund’s investment policies provide that it seeks to achieve its investment objective by investing, as a fundamental policy at least 80% of an aggregate of the Fund’s net assets (including proceeds
from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in a portfolio of municipal obligations issued by or on behalf of states, territories and possessions of the United States and their political
subdivisions, agencies or instrumentalities, each of which pays interest that, in the opinion of bond counsel to the issuer, is excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable
income for purposes of the federal alternative minimum tax) (“Municipal Bonds”).
The Fund’s investment objective and its policy of
investing at least 80% of an aggregate of the Fund’s net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in Municipal Bonds are fundamental policies that may not
be changed without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the Fund’s outstanding Series W-7 Variable Rate Muni Term
Preferred Shares (the “VMTP Shares”), voting together as a single class, and of the holders of a majority of the outstanding preferred shares, including the VMTP Shares, voting as a separate class. A majority of the outstanding means (1)
67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding shares, whichever is less.
The Fund’s investment policies provide that under normal market conditions, the Fund expects to invest at least 75% of its total assets in a
portfolio of Municipal Bonds that are commonly referred to as “investment grade” securities, which are obligations rated at the time of purchase within the four highest quality ratings as determined by either Moody’s Investors
Service, Inc. (“Moody’s”) (currently Aaa, Aa, A and Baa), Standard & Poor’s (“S&P”) (currently AAA, AA, A and BBB) or Fitch Ratings (“Fitch”) (currently AAA, AA, A and BBB). In the case of short
term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moody’s and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating
categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for
Moody’s and F-1+ through F-3 for Fitch.
Obligations ranked
in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and
Prime-3 for Moody’s and BBB and F-3 for Fitch), while considered “investment grade,” may have certain speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the foregoing requirements, BlackRock Advisors, LLC
(the ”Manager”) takes into account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit
enhancement. If unrated, such securities will possess creditworthiness comparable, in the opinion of the Manager, to other obligations in which the Fund may invest.
The Fund may invest up to 25% of its total assets in Municipal Bonds that are rated below Baa by Moody’s or below BBB by S&P or Fitch or, if
unrated, are considered by the Manager to possess similar credit characteristics. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and
repay principal. Such securities, sometimes referred to as “high yield” or “junk” bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security
and generally involve a greater volatility of price than securities in higher rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the
issuer’s ability to pay interest and any required redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing credit quality policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security if a rating
agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Manager may consider such factors as the Manager’s assessment of
the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. In the event that the Fund disposes of a portfolio security subsequent to its
being downgraded, the Fund may experience a greater risk of loss than if such security had been sold prior to such downgrade.
The Fund may also
purchase Municipal Bonds that are additionally secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance
feature reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce the Fund’s income. The insurance feature does not guarantee the market value of the insured obligations or
the net asset value of the common shares. The Fund may purchase insured bonds and may purchase insurance for bonds in its portfolio.
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The Fund may invest in
certain tax exempt securities classified as “private activity bonds” (or industrial development bonds, under pre-1986 law) (“PABs”) (in general, bonds that benefit non-governmental entities) that may subject certain investors in the Fund to an alternative minimum tax. The percentage of the Fund’s total assets invested in PABs will vary from time to time. The Fund has not
established any limit on the percentage of its portfolio that may be invested in Municipal Bonds subject to the federal alternative minimum tax provisions of federal tax law, and the Fund expects that a portion of the income it produces will be
includable in alternative minimum taxable income.
The Fund also may not invest more than 25% of its total assets (taken at market value at the time
of each investment) in Municipal Bonds whose issuers are located in the same state.
The average maturity of the Fund’s portfolio securities
varies from time to time based upon an assessment of economic and market conditions by the Manager. The Fund’s portfolio at any given time may include both long-term, intermediate-term and short-term Municipal Bonds.
The Fund’s stated expectation is that it will invest in Municipal Bonds that, in the Manager’s opinion, are underrated or undervalued.
Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Manager, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Manager, are worth more than the value assigned
to them in the marketplace. The Manager may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The
Manager may purchase those bonds for the Fund’s portfolio because they represent a market sector or issuer that the Manager considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar
bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market
sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered undervalued. The Fund’s investment in underrated or
undervalued Municipal Bonds will be based on the Managers’ belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will
ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by the Fund will generally result in capital gain distributions subject to federal capital gains taxation.
The Fund ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, the Fund may realize
taxable capital gains.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax
exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by the Fund.
Leverage: The Fund may utilize leverage to seek to enhance the yield and net asset value of its common shares. However, this objective cannot be
achieved in all interest rate environments. The Fund currently leverages its assets through the use of VMTP Shares and residual interest municipal tender option bonds (“TOB Residuals”), which are derivative interests in municipal bonds.
The TOB Residuals in which the Fund will invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax.
BlackRock MuniYield Quality Fund II, Inc. (MQT)
The
Fund’s investment objective is to provide stockholders with as high a level of current income exempt from federal income taxes as is consistent with its investment policies and prudent investment management. The Fund’s investment policies
provide that it seeks to achieve its investment objective by investing, as a fundamental policy, at least 80% of an aggregate of the Fund’s net assets (including proceeds from the issuance of preferred stock), and the proceeds of any borrowings
for investment purposes, in a portfolio of municipal obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities, each of which pays interest that, in
the opinion of bond counsel to the issuer, is excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the Federal alternative minimum tax) (“Municipal
Bonds”). There can be no assurance that the Fund’s investment objective will be realized.
The Fund may invest up to 20% of its managed
assets in securities that are rated below investment grade, or are considered by the Manager to be of comparable quality, at the time of purchase, subject to the Fund’s other investment policies. Bonds of below investment grade quality are
regarded as having predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. Such securities, sometimes referred to as “high yield” or “junk” bonds, are
predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. Below investment
grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuer’s ability to pay interest and any required redemption or principal payments and are susceptible to
default or decline in market value due to adverse economic and business developments.
The Fund’s investment objective and its policy of
investing at least 80% of an aggregate of the Fund’s net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in Municipal Bonds are fundamental policies that may not
be changed without the approval of the holders of a majority of the outstanding common stock and the outstanding preferred shares, including the Fund’s variable rate muni term preferred shares (“VMTP Shares”), voting together as a
single class, and of the holders of a majority of the outstanding preferred shares, including the VMTP Shares, voting as a separate class. A majority of the outstanding means (1) 67% or more of the stock present at a meeting, if the holders of more
than 50% of the outstanding stock are present or represented by proxy, or (2) more than 50% of the outstanding stock, whichever is less.
The
Fund’s credit quality policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security if a rating agency downgrades its assessment of the credit characteristics of a particular issue. In
determining whether to retain or sell a security that a rating agency has downgraded, the Manager may consider such factors as the Manager’s assessment of the credit quality of the issuer of the security, the price at which the security could
be sold and the rating, if any, assigned to the security by other rating agencies. In the event that the Fund disposes of a portfolio security subsequent to its being downgraded, the Fund may experience a greater risk of loss than if such security
had been sold prior to such downgrade.
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Investment Objectives, Policies and Risks (continued)
The Fund may also purchase
Municipal Bonds that are additionally secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature
reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce the Fund’s income. The insurance feature does not guarantee the market value of the insured obligations or the net
asset value of the common stock. The Fund may purchase insured bonds and may purchase insurance for bonds in its portfolio.
The Fund may invest in
certain tax exempt securities classified as “private activity bonds” (or industrial development bonds, under pre-1986 law) (“PABs”) (in general, bonds that benefit non-governmental entities) that may subject certain investors in the Fund to an alternative minimum tax. The percentage of the Fund’s total assets invested in PABs will vary from time to time. The Fund has not
established any limit on the percentage of its portfolio that may be invested in Municipal Bonds subject to the federal alternative minimum tax provisions of federal tax law, and the Fund expects that a portion of the income it produces will be
includable in alternative minimum taxable income.
The Fund also may not invest more than 25% of its total assets (taken at market value at the time
of each investment) in Municipal Bonds whose issuers are located in the same state.
The average maturity of the Fund’s portfolio securities
varies from time to time based upon an assessment of economic and market conditions by the Manager. The Fund’s portfolio at any given time may include both long-term, intermediate-term and short-term Municipal Bonds.
The Fund’s stated expectation is that it will invest in Municipal Bonds that, in the Manager’s opinion, are underrated or undervalued.
Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Manager, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Manager, are worth more than the value assigned
to them in the marketplace. The Manager may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The
Manager may purchase those bonds for the Fund’s portfolio because they represent a market sector or issuer that the Manager considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar
bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market
sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered undervalued. The Fund’s investment in underrated or
undervalued Municipal Bonds will be based on the Manager’s belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will
ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by the Fund will generally result in capital gain distributions subject to federal capital gains taxation.
The Fund ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, the Fund may realize
taxable capital gains.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax
exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by the Fund.
Leverage: The Fund may utilize leverage to seek to enhance the yield and net asset value of its common shares. However, this objective cannot be
achieved in all interest rate environments. The Fund currently leverages its assets through the use of VMTP Shares and residual interest municipal tender option bonds (“TOB Residuals”), which are derivative interests in municipal bonds.
The TOB Residuals in which the Fund will invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax.
The Fund may purchase and sell futures contracts, enter into various interest rate transactions and may purchase and sell exchange-listed and over-the-counter put and call options on securities, financial indices and futures contracts.
The Fund may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. The Fund may enter into credit default swap
agreements for hedging purposes or to seek to increase its return.
As temporary investments, the Fund may invest in repurchase agreements. The Fund
may enter into reverse repurchase agreements with respect to its portfolio investments subject to its investment restrictions.
The Fund is permitted
to authorized to borrow money in amounts up to 5% of the value of its total assets at the time of such borrowings.
Risk Factors
This section contains a discussion of the general risks of investing in each Fund. The net asset value and market price of, and dividends paid on, the
common shares will fluctuate with and be affected by, among other things, the risks more fully described below. As with any fund, there can be no guarantee that a Fund will meet its investment objective or that the Fund’s performance will be
positive for any period of time. Each risk noted below is applicable to each Fund unless the specific Fund or Funds are noted in a parenthetical.
Investment and Market Discount Risk: An investment in the Fund’s common shares is subject to investment risk, including the possible loss of the
entire amount that you invest. As with any stock, the price of the Fund’s common shares will fluctuate with market conditions and other factors. If shares are sold, the price received may be more or less than the original investment. Common
shares are designed for long-term investors and the Fund should not be treated as a trading vehicle. Shares of closed-end management investment companies frequently trade at a discount from their net asset
value. This risk is separate and distinct from the risk that the Fund’s net asset value could decrease as a result of its investment activities. At any point in time an investment in the Fund’s common shares may be worth less than the
original amount invested, even after taking into account distributions paid by the Fund. During periods in which the Fund may use leverage, the Fund’s investment, market discount and certain other risks will be magnified.
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Investment Objectives, Policies and Risks (continued)
Debt Securities Risk:
Debt securities, such as bonds, involve interest rate risk, credit risk, extension risk, and prepayment risk, among other things.
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Interest Rate Risk — The market value of bonds and other fixed-income securities changes in response to interest
rate changes and other factors. Interest rate risk is the risk that prices of bonds and other fixed-income securities will increase as interest rates fall and decrease as interest rates rise. |
The Fund may be subject to a greater risk of rising interest rates due to the recent period of historically low interest rates. For
example, if interest rates increase by 1%, assuming a current portfolio duration of ten years, and all other factors being equal, the value of the Fund’s investments would be expected to decrease by 10%. (Duration is a measure of the price
sensitivity of a debt security or portfolio of debt securities to relative changes in interest rates.) The magnitude of these fluctuations in the market price of bonds and other fixed-income securities is generally greater for those securities with
longer maturities. Fluctuations in the market price of the Fund’s investments will not affect interest income derived from instruments already owned by the Fund, but will be reflected in the Fund’s net asset value. The Fund may lose money
if short-term or long-term interest rates rise sharply in a manner not anticipated by Fund management.
Rates on certain floating rate
debt securities typically reset only periodically, changes in prevailing interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the net asset value of the Fund to the extent that it invests in
floating rate debt securities.
These basic principles of bond prices also apply to U.S. Government securities. A security backed by
the “full faith and credit” of the U.S. Government is guaranteed only as to its stated interest rate and face value at maturity, not its current market price. Just like other fixed-income securities, government-guaranteed securities will
fluctuate in value when interest rates change.
A general rise in interest rates has the potential to cause investors to move out of
fixed-income securities on a large scale, which may increase redemptions from funds that hold large amounts of fixed-income securities. Heavy redemptions could cause the Fund to sell assets at inopportune times or at a loss or depressed value and
could hurt the Fund’s performance.
Credit Risk — Credit risk refers to the possibility that the issuer of a debt security
(i.e., the borrower) will not be able to make payments of interest and principal when due. Changes in an issuer’s credit rating or the market’s perception of an issuer’s creditworthiness may also affect the value of the Fund’s
investment in that issuer. The degree of credit risk depends on both the financial condition of the issuer and the terms of the obligation.
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Extension Risk — When interest rates rise, certain obligations will be paid off by the obligor more slowly than
anticipated, causing the value of these obligations to fall. |
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Prepayment Risk — When interest rates fall, certain obligations will be paid off by the obligor more quickly than
originally anticipated, and the Fund may have to invest the proceeds in securities with lower yields. |
Municipal Securities
Risks: Municipal securities risks include the ability of the issuer to repay the obligation, the relative lack of information about certain issuers of municipal securities, and the possibility of future legislative changes which could affect the
market for and value of municipal securities. These risks include:
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General Obligation Bonds Risks — Timely payments depend on the issuer’s credit quality, ability to raise tax
revenues and ability to maintain an adequate tax base. |
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Revenue Bonds Risks — These payments depend on the money earned by the particular facility or class of facilities,
or the amount of revenues derived from another source. |
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Private Activity Bonds Risks — Municipalities and other public authorities issue private activity bonds to finance
development of industrial facilities for use by a private enterprise. The private enterprise pays the principal and interest on the bond, and the issuer does not pledge its full faith, credit and taxing power for repayment. |
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Moral Obligation Bonds Risks — Moral obligation bonds are generally issued by special purpose public authorities of
a state or municipality. If the issuer is unable to meet its obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the state or municipality. |
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Municipal Notes Risks — Municipal notes are shorter term municipal debt obligations. If there is a shortfall in the
anticipated proceeds, the notes may not be fully repaid and the Fund may lose money. |
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Municipal Lease Obligations Risks — In a municipal lease obligation, the issuer agrees to make payments when due on
the lease obligation. Although the issuer does not pledge its unlimited taxing power for payment of the lease obligation, the lease obligation is secured by the leased property. |
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Tax-Exempt Status Risk — The Fund and its investment manager will rely on
the opinion of issuers’ bond counsel and, in the case of derivative securities, sponsors’ counsel, on the tax-exempt status of interest on municipal bonds and payments under derivative securities.
Neither the Fund nor its investment manager will independently review the bases for those tax opinions, which may ultimately be determined to be incorrect and subject the Fund and its shareholders to substantial tax liabilities.
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Taxability Risk: The Fund intends to minimize the payment of taxable income to shareholders by investing in tax-exempt or municipal securities in reliance at the time of purchase on an opinion of bond counsel to the issuer that the interest paid on those securities will be excludable from gross income for U.S. federal
income tax purposes. Such securities, however, may be determined to pay, or have paid, taxable income subsequent to the Fund’s acquisition of the securities. In that event, the treatment of dividends previously paid or to be paid by the Fund as
“exempt interest dividends” could be adversely affected, subjecting the Fund’s shareholders to increased U.S. federal income tax liabilities. Alternatively, the Fund might enter into an agreement with the IRS to pay an agreed upon
amount in lieu of the IRS adjusting individual shareholders’ income tax liabilities. If the Fund agrees to enter into such an agreement, the Fund’s yield could be adversely affected. Further, shareholders at the time the Fund enters into
such an agreement that were not shareholders when the dividends in question were paid would bear some cost for a benefit they did not receive. Federal tax legislation may limit the types and volume of bonds the interest on which qualifies for a
federal income tax-exemption. As a result, current legislation and legislation that may be enacted in the future
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Investment Objectives, Policies and Risks (continued)
may affect the availability
of municipal securities for investment by the Fund. In addition, future laws, regulations, rulings or court decisions may cause interest on municipal securities to be subject, directly or indirectly, to U.S. federal income taxation or interest on
state municipal securities to be subject to state or local income taxation, or the value of state municipal securities to be subject to state or local intangible personal property tax, or may otherwise prevent the Fund from realizing the full
current benefit of the tax-exempt status of such securities. Any such change could also affect the market price of such securities, and thus the value of an investment in the Fund.
Insurance Risk: Insurance guarantees that interest payments on a municipal security will be made on time and that the principal will be repaid when
the security matures. However, insurance does not protect against losses caused by declines in a municipal security’s value. The Fund cannot be certain that any insurance company will make the payments it guarantees. If a municipal
security’s insurer fails to fulfill its obligations or loses its credit rating, the value of the security could drop.
Junk Bonds Risk:
Although junk bonds generally pay higher rates of interest than investment grade bonds, junk bonds are high risk investments that are considered speculative and may cause income and principal losses for the Fund.
When-Issued and Delayed Delivery Securities and Forward Commitments Risk (BKN and MQT): When-issued and delayed delivery securities and forward
commitments involve the risk that the security the Fund buys will lose value prior to its delivery. There also is the risk that the security will not be issued or that the other party to the transaction will not meet its obligation. If this occurs,
the Fund may lose both the investment opportunity for the assets it set aside to pay for the security and any gain in the security’s price.
Defensive Investing Risk (BKN, BFK and MQT): For defensive purposes, the Fund may, as part of its proprietary volatility control process, allocate
assets into cash or short-term fixed-income securities without limitation. In doing so, the Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective. Further, the value of short-term fixed-income securities may
be affected by changing interest rates and by changes in credit ratings of the investments. If the Fund holds cash uninvested it will be subject to the credit risk of the depositary institution holding the cash.
Repurchase Agreements and Purchase and Sale Contracts Risk (BKN, BFK and MQT): If the other party to a repurchase agreement or purchase and sale
contract defaults on its obligation under the agreement, the Fund may suffer delays and incur costs or lose money in exercising its rights under the agreement. If the seller fails to repurchase the security in either situation and the market value
of the security declines, the Fund may lose money.
Reverse Repurchase Agreements Risk (BKN, BFK and MQT): Reverse repurchase agreements
involve the sale of securities held by the Fund with an agreement to repurchase the securities at an agreed-upon price, date and interest payment. Reverse repurchase agreements involve the risk that the other party may fail to return the securities
in a timely manner or at all. The Fund could lose money if it is unable to recover the securities and the value of the collateral held by the Fund, including the value of the investments made with cash collateral, is less than the value of the
securities. These events could also trigger adverse tax consequences for the Fund. In addition, reverse repurchase agreements involve the risk that the interest income earned in the investment of the proceeds will be less than the interest expense.
Leverage Risk: The Fund uses leverage for investment purposes through the issuance of VMTP Shares and investments in TOB Residuals. The Fund
may also utilize leverage for investment purposes by entering into reverse repurchase agreements and derivative instruments with leverage embedded in them, as applicable. The Fund’s use of leverage may increase or decrease from time to time in
its discretion and the Fund may, in the future, determine not to use leverage.
The use of leverage creates an opportunity for increased common share
net investment income dividends, but also creates risks for the holders of common shares. The Fund cannot assure you that the use of leverage will result in a higher yield on the common shares. Any leveraging strategy the Fund employs may not be
successful.
Leverage involves risks and special considerations for common shareholders, including:
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the likelihood of greater volatility of net asset value, market price and dividend rate of the common shares than a
comparable portfolio without leverage; |
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the risk that fluctuations in interest rates or dividend rates on any leverage that the Fund must pay will reduce the
return to the common shareholders; |
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the effect of leverage in a declining market, which is likely to cause a greater decline in the net asset value of the
common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the common shares; |
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lleverage may increase operating costs, which may reduce total return. |
Any decline in the net asset value of the Fund’s investments will be borne entirely by the holders of common shares. Therefore, if the market value
of the Fund’s portfolio declines, leverage will result in a greater decrease in net asset value to the holders of common shares than if the Fund were not leveraged. This greater net asset value decrease will also tend to cause a greater decline
in the market price for the common shares.
Derivatives Risk: The Fund’s use of derivatives may increase its costs, reduce the Fund’s
returns and/or increase volatility. Derivatives involve significant risks, including:
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Leverage Risk — The Fund’s use of derivatives can magnify the Fund’s gains and losses. Relatively small
market movements may result in large changes in the value of a derivatives position and can result in losses that greatly exceed the amount originally invested. |
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Market Risk — Some derivatives are more sensitive to interest rate changes and market price fluctuations than other
securities. The Fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, the Manager may not be able to predict correctly the direction of
securities prices, interest rates and other economic factors, which could cause the Fund’s derivatives positions to lose value. |
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Counterparty Risk — Derivatives are also subject to counterparty risk, which is the risk that the other party in the
transaction will be unable or unwilling to fulfill its contractual obligation, and the related risks of having concentrated exposure to such a counterparty. |
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Illiquidity Risk — The possible lack of a liquid secondary market for derivatives and the resulting inability of the
Fund to sell or otherwise close a derivatives position could expose the Fund to losses and could make derivatives more difficult for the Fund to value accurately |
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Operational Risk — The use of derivatives includes the risk of potential operational issues, including documentation
issues, settlement issues, systems failures, inadequate controls and human error. |
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Legal Risk — The risk of insufficient documentation, insufficient capacity or authority of counterparty, or legality
or enforceability of a contract. |
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Volatility and Correlation Risk — Volatility is defined as the characteristic of a security, an index or a market to
fluctuate significantly in price within a short time period. A risk of the Fund’s use of derivatives is that the fluctuations in their values may not correlate with the overall securities markets. |
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Valuation Risk — Valuation for derivatives may not be readily available in the market. Valuation may be more
difficult in times of market turmoil since many investors and market makers may be reluctant to purchase complex instruments or quote prices for them. |
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Hedging Risk — Hedges are sometimes subject to imperfect matching between the derivative and the underlying
security, and there can be no assurance that the Fund’s hedging transactions will be effective. The use of hedging may result in certain adverse tax consequences. |
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Tax Risk — Certain aspects of the tax treatment of derivative instruments, including swap agreements and
commodity-linked derivative instruments, are currently unclear and may be affected by changes in legislation, regulations or other legally binding authority. Such treatment may be less favorable than that given to a direct investment in an
underlying asset and may adversely affect the timing, character and amount of income the Fund realizes from its investments. |
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Regulatory Risk — Derivative contracts are subject to regulation under the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”) in the United States and under comparable regimes in Europe, Asia and other non-U.S. jurisdictions. Under the Dodd-Frank Act, with respect to uncleared
swaps, swap dealers are required to collect variation margin from the Fund and may be required by applicable regulations to collect initial margin from the Fund. Both initial and variation margin may be comprised of cash and/or securities, subject
to applicable regulatory haircuts. Shares of investment companies (other than certain money market funds) may not be posted as collateral under applicable regulations. In addition, regulations adopted by global prudential regulators that are now in
effect require certain bank-regulated counterparties and certain of their affiliates to include in certain financial contracts, including many derivatives contracts, terms that delay or restrict the rights of counterparties, such as the Fund, to
terminate such contracts, foreclose upon collateral, exercise other default rights or restrict transfers of credit support in the event that the counterparty and/or its affiliates are subject to certain types of resolution or insolvency proceedings.
The implementation of these requirements with respect to derivatives, as well as regulations under the Dodd-Frank Act regarding clearing, mandatory trading and margining of other derivatives, may increase the costs and risks to the Fund of trading
in these instruments and, as a result, may affect returns to investors in the Fund. |
Tender Option Bonds Risk: The
Fund’s participation in tender option bond transactions may reduce the Fund’s returns and/or increase volatility. Investments in tender option bond transactions expose the Fund to counterparty risk and leverage risk. An investment in a
tender option bond transaction typically will involve greater risk than an investment in a municipal fixed rate security, including the risk of loss of principal. Distributions on TOB Residuals will bear an inverse relationship to short-term
municipal security interest rates. Distributions on TOB Residuals paid to the Fund will be reduced or, in the extreme, eliminated as short-term municipal interest rates rise and will increase when short-term municipal interest rates fall. TOB
Residuals generally will underperform the market for fixed rate municipal securities in a rising interest rate environment. The Fund may invest special purpose trusts formed for the purpose of holding municipal bonds contributed by one or more funds
(“TOB Trusts”) on either a non-recourse or recourse basis. If the Fund invests in a TOB Trust on a recourse basis, it could suffer losses in excess of the value of its TOB Residuals.
Illiquid Investments Risk: The Fund may invest without limitation in illiquid or less liquid investments or investments in which no secondary
market is readily available or which are otherwise illiquid, including private placement securities. The Fund may not be able to readily dispose of such investments at prices that approximate those at which the Fund could sell such investments if
they were more widely traded and, as a result of such illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. Limited liquidity can also affect the market price
of investments, thereby adversely affecting the Fund’s net asset value and ability to make dividend distributions. The financial markets in general, and certain segments of the mortgage-related securities markets in particular, have in recent
years experienced periods of extreme secondary market supply and demand imbalance, resulting in a loss of liquidity during which market prices were suddenly and substantially below traditional measures of intrinsic value. During such periods, some
investments could be sold only at arbitrary prices and with substantial losses. Periods of such market dislocation may occur again at any time. Privately issued debt securities are often of below investment grade quality, frequently are unrated and
present many of the same risks as investing in below investment grade public debt securities.
Investment Companies and ETFs Risk (BFK):
Subject to the limitations set forth in the Investment Company Act of 1940, as amended, and the rules thereunder, the Fund may acquire shares in other investment companies and in exchange-traded funds (“ETFs”), some of which may be
affiliated investment companies. The market value of the shares of other investment companies and ETFs may differ from their net asset value. As an investor in investment companies and ETFs, the Fund would bear its ratable share of that
entity’s expenses, including its investment advisory and administration fees, while continuing to pay its own advisory and administration fees and other expenses (to the extent not offset by the Manager through waivers). As a result,
shareholders will be absorbing duplicate levels of fees with respect to investments in other investment companies and ETFs (to the extent not offset by the Manager through waivers).
The securities of other investment companies and ETFs in which the Fund may invest may be leveraged. As a result, the Fund may be indirectly exposed to
leverage through an investment in such securities. An investment in securities of other investment companies and ETFs that use leverage may expose the Fund to higher volatility in the market value of such securities and the possibility that the
Fund’s long-term returns on such securities (and, indirectly, the long-term returns of shares of the Fund) will be diminished.
As with other
investments, investments in other investment companies, including ETFs, are subject to market and selection risk. To the extent the Fund is held by an affiliated fund, the ability of the Fund itself to hold other investment companies may be limited.
|
|
|
| I N V E S T M E N
T O B J E C T I V E S , P O L
I C I E S A N D R I S K S |
|
119 |
Investment Objectives, Policies and Risks (continued)
Preferred Securities Risk
(BFK): Preferred securities may pay fixed or adjustable rates of return. Preferred securities are subject to issuer-specific and market risks applicable generally to equity securities. In addition, a company’s preferred securities generally
pay dividends only after the company makes required payments to holders of its bonds and other debt. For this reason, the value of preferred securities will usually react more strongly than bonds and other debt to actual or perceived changes in the
company’s financial condition or prospects. Preferred securities of smaller companies may be more vulnerable to adverse developments than preferred securities of larger companies.
Market Risk and Selection Risk: Market risk is the risk that one or more markets in which the Fund invests will go down in value, including the
possibility that the markets will go down sharply and unpredictably. The value of a security or other asset may decline due to changes in general market conditions, economic trends or events that are not specifically related to the issuer of the
security or other asset, or factors that affect a particular issuer or issuers, exchange, country, group of countries, region, market, industry, group of industries, sector or asset class. Local, regional or global events such as war, acts of
terrorism, the spread of infectious illness or other public health issues like pandemics or epidemics, recessions, or other events could have a significant impact on the Fund and its investments. Selection risk is the risk that the securities
selected by Fund management will underperform the markets, the relevant indices or the securities selected by other funds with similar investment objectives and investment strategies. This means you may lose money.
An outbreak of an infectious coronavirus (COVID-19) that was first detected in December 2019 developed into a
global pandemic that has resulted in numerous disruptions in the market and has had significant economic impact leaving general concern and uncertainty. Although vaccines have been developed and approved for use by various governments, the duration
of the pandemic and its effects cannot be predicted with certainty. The impact of this coronavirus, and other epidemics and pandemics that may arise in the future, could affect the economies of many nations, individual companies and the market in
general ways that cannot necessarily be foreseen at the present time.
|
|
|
| 120 |
|
2 0 2 2 B L A C
K R O C K A N N U A L R E P O
R T T O S H A R E H O L D E
R S |
Shareholder Update
The following includes additional required disclosures for BKN, which has an effective shelf offering registration statement as of the fiscal year ended
July 31, 2022.
Summary of Expenses
The following
table and example are intended to assist shareholders in understanding the various costs and expenses directly or indirectly associated with investing in BKN’s common shares.
|
|
|
|
|
| |
|
BKN |
|
| Shareholder Transaction Expenses |
|
|
|
|
| Maximum Sales Load (as a percentage of offering price)(a)
|
|
|
1.00 |
% |
| Offering expenses borne by BKN (as a percentage of offering price)(a) |
|
|
0.02 |
|
| Dividend Reinvestment Plan Fees |
|
|
$0.02 per share
for open market
purchases of
common shares |
(b) |
| Dividend reinvestment plan sale transaction fee |
|
|
$2.50 |
(b) |
| Estimated Annual Expenses (as a percentage of net assets attributable to common shares) |
|
|
|
|
| Investment advisory fees(c)(d) |
|
|
0.60 |
% |
| Other expenses |
|
|
1.73 |
|
| Miscellaneous |
|
|
0.40 |
|
| Interest expense(e) |
|
|
1.33 |
|
| Total annual expenses |
|
|
2.33 |
|
| Fee waiver(d) |
|
|
0.01 |
|
| Total annual fund operating expenses after fee waiver(d) |
|
|
2.32 |
|
| |
(a) |
If the common shares are sold to or through underwriters, the Prospectus Supplement will set forth any applicable sales
load and the estimated offering expenses. Fund shareholders will pay all offering expenses involved with an offering. |
|
| |
(b) |
Computershare Trust Company, N.A. (the “Reinvestment Plan Agent”) fees for the handling of the reinvestment
of dividends will be paid by BKN. However, shareholders will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. Shareholders will also be charged a $2.50 sales fee and
pay a $0.15 per share fee if a shareholder directs the Reinvestment Plan Agent to sell the common shares held in a dividend reinvestment account. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to
pay. |
|
| |
(c) |
BKN currently pays the Manager a monthly fee at an annual contractual investment management fee rate of 0.35% of its
average weekly managed assets. For purposes of calculating these fees, “managed assets” means the total assets of BKN (including any assets attributable to money borrowed for investment purposes) minus the sum of BKN’s accrued
liabilities (other than money borrowed for investment purposes). |
|
| |
(d) |
BKN and the Manager have entered into a fee waiver agreement (the “Fee Waiver Agreement”), pursuant to which
the Manager has contractually agreed to waive the investment advisory fees with respect to any portion of BKN’s assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Manager or its affiliates
that have a contractual management fee, through June 30, 2024. In addition, pursuant to the Fee Waiver Agreement, the Manager has contractually agreed to waive its investment advisory fees by the amount of investment advisory fees BKN pays to
the Manager indirectly through its investment in money market funds managed by the Manager or its affiliates, through June 30, 2024. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by BKN (upon
the vote of a majority of the Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940, as amended (the “Investment Company Act”), of BKN (the “Independent Trustees”)) or a majority of
the outstanding voting securities of BKN), upon 90 days’ written notice by BKN to the Manager. |
|
| |
(e) |
The total expense table includes interest expense associated with BKN’s investments in TOBs (also known as
“inverse floaters”). Although such interest expense is actually paid by special purpose vehicles in which BKN invests, it is recorded on BKN’s financial statements for accounting purposes. The total expense table also includes, in
interest expense, dividends associated with the VMTP Shares, because the VMTP Shares are considered debt of BKN for financial reporting purposes. |
|
BKN uses leverage to seek to enhance its returns to common shareholders. This leverage generally takes two forms:
the issuance of VMTP Shares and investment in TOBs. Both forms of leverage benefit common shareholders if the cost of the leverage is lower than the returns earned by BKN when it invests the proceeds from the leverage. In order to help you better
understand the costs associated with BKN’s leverage strategy, the Total annual fund operating expenses after fee waivers (excluding interest expense) for are 0.99%, which is based on current market conditions. The actual amount of interest
expense borne by BKN will vary over time in accordance with the level of BKN’s use of leverage and variations in market interest rates. Interest expense is required to be treated as an expense of BKN for accounting purposes.
|
|
|
| S H A R E H O L D
E R U P D A T E |
|
121 |
Shareholder Update (continued)
Expense Example
The following example illustrates BKN’s expenses (including the sales load of $10.00 and offering costs of $0.31) that shareholders would pay on a
$1,000 investment in common shares, assuming (i) total net annual expenses of 2.32% of net assets attributable to common shares and (ii) a 5% annual return:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
1 Year |
|
|
3 Years |
|
|
5 Years |
|
|
10 Years |
|
| Total expenses incurred |
|
$ |
34 |
|
|
$ |
82 |
|
|
$ |
133 |
|
|
$ |
274 |
|
The example should not be considered a representation of future expenses. The example assumes that the estimated
“Other expenses” set forth in the Estimated Annual Expenses table are accurate and that all dividends and distributions are reinvested at NAV. Actual expenses may be greater or less than those assumed. Moreover, BKN’s actual rate of
return may be greater or less than the hypothetical 5% return shown in the example.
Share Price Data
The following table summarizes BKN’s highest and lowest daily closing market prices on the NYSE per common share, the NAV per common share, and the
premium to or discount from NAV, on the date of each of the high and low market prices. The trading volume indicates the number of common shares traded on the NYSE during the respective quarters. Effective July 31, 2022, BKN changed its fiscal
year end from April 30 to July 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
NYSE Market Price
Per Common Share |
|
|
NAV per Common
Share on Date of
Market Price |
|
|
Premium/
(Discount)
on Date of
Market Price |
|
|
|
|
| During Quarter Ended |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
Trading Volume |
|
| July 31, 2022 |
|
$ |
16.53 |
|
|
$ |
13.05 |
|
|
$ |
13.44 |
|
|
$ |
13.08 |
|
|
|
22.99 |
% |
|
|
(0.23 |
)% |
|
|
2,939,262 |
|
| April 30, 2022 |
|
|
16.76 |
|
|
|
13.64 |
|
|
|
15.46 |
|
|
|
14.20 |
|
|
|
8.41 |
|
|
|
(3.94 |
) |
|
|
4,299,926 |
|
| January 31, 2022 |
|
|
18.20 |
|
|
|
15.86 |
|
|
|
16.25 |
|
|
|
16.05 |
|
|
|
12.00 |
|
|
|
(1.18 |
) |
|
|
3,241,020 |
|
| October 31, 2021 |
|
|
18.78 |
|
|
|
17.13 |
|
|
|
16.82 |
|
|
|
16.26 |
|
|
|
11.65 |
|
|
|
5.35 |
|
|
|
1,670,594 |
|
| July 31, 2021 |
|
|
19.90 |
|
|
|
17.81 |
|
|
|
16.68 |
|
|
|
16.87 |
|
|
|
19.30 |
|
|
|
5.57 |
|
|
|
2,491,549 |
|
| April 30, 2021 |
|
|
19.20 |
|
|
|
16.88 |
|
|
|
16.71 |
|
|
|
16.58 |
|
|
|
14.90 |
|
|
|
1.81 |
|
|
|
2,609,523 |
|
| January 31, 2021 |
|
|
17.33 |
|
|
|
15.79 |
|
|
|
16.72 |
|
|
|
16.12 |
|
|
|
3.65 |
|
|
|
(2.05 |
) |
|
|
1,898,586 |
|
| October 31, 2020 |
|
|
16.89 |
|
|
|
15.63 |
|
|
|
16.59 |
|
|
|
16.27 |
|
|
|
1.81 |
|
|
|
(3.93 |
) |
|
|
2,279,726 |
|
| July 31, 2020 |
|
|
16.83 |
|
|
|
14.57 |
|
|
|
16.52 |
|
|
|
15.34 |
|
|
|
1.88 |
|
|
|
(5.02 |
) |
|
|
2,504,760 |
|
As of July 31, 2022, BKN’s market price, NAV per Common Share, and premium/(discount) to NAV per Common Share
are $14.61, $13.86, and 5.41% respectively.
Common shares of BKN have historically traded at both a premium and discount to NAV.
Shares of closed-end funds frequently trade at a discount to their NAV. Because of this possibility and the
recognition that any such discount may not be in the interest of shareholders, the Board might consider from time to time engaging in open-market repurchases, managed distribution plans, or other programs intended to reduce the discount. We cannot
guarantee or assure, however, that the Board will decide to engage in any of these actions. Nor is there any guarantee or assurance that such actions, if undertaken, would result in the shares trading at a price equal or close to the NAV.
|
|
|
| 122 |
|
2 0 2 2 B L A C
K R O C K A N N U A L R E P O
R T T O S H A R E H O L D E
R S |
Shareholder Update (continued)
Senior Securities
The following table sets forth information regarding BKN’s outstanding senior securities as of the end of each of BKN’s last ten fiscal years,
as applicable. BKN’s audited financial statements, including Deloitte & Touche LLP’s Report of Independent Registered Public Accounting Firm, and accompanying notes to financial statements, are included in this annual report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount
Outstanding |
|
|
|
Asset |
|
|
|
Liquidating |
|
|
|
Average
Market Value |
|
|
|
Type of |
|
| Fiscal Year Ended |
|
|
(000 |
) |
|
|
Coverage |
|
|
|
Preference |
(a) |
|
|
(000 |
) |
|
|
Senior Security |
|
| July 31, 2022 |
|
$ |
44,306 |
|
|
$ |
9,345 |
(b) |
|
$ |
N/A |
|
|
$ |
44,959 |
(c) |
|
|
TOBs |
|
| July 31, 2022 |
|
|
125,900 |
|
|
|
243,263 |
(d) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2022 |
|
|
125,900 |
|
|
|
288,757 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2021 |
|
|
125,900 |
|
|
|
328,280 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2020 |
|
|
125,900 |
|
|
|
303,244 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2019 |
|
|
125,900 |
|
|
|
315,017 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2018 |
|
|
125,900 |
|
|
|
308,259 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2017 |
|
|
125,900 |
|
|
|
310,128 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2016 |
|
|
125,900 |
|
|
|
329,549 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2015 |
|
|
125,900 |
|
|
|
319,467 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2014 |
|
|
125,900 |
|
|
|
309,133 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2013 |
|
|
125,900 |
|
|
|
322,807 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| |
(a) |
Represents the amount to which a holder of preferred shares would be entitled upon the liquidation of BKN in preference
to common shareholders, expressed as a dollar amount per preferred share. VMTP Shares are considered debt of the issuer; therefore, the liquidation preference approximates fair value. |
|
| |
(b) |
Calculated by subtracting BKN’s total liabilities (not including VMTP Shares and TOBs) from BKN’s total
assets and dividing this by the amount of TOBs, and by multiplying the results by 1,000. |
|
| |
(c) |
Represents weighted average daily market value of TOBs. |
|
| |
(d) |
Calculated by subtracting BKN’s total liabilities (not including VMTP Shares and TOBs) from BKN’s total
assets and dividing this by the sum of the amount of TOBs and liquidation value of the VMTP Shares, and by multiplying the results by 100,000. Effective July 18, 2022, TOB Trust Certificates are treated as senior securities pursuant to Rule 18f-4 of the 1940 Act. |
|
| |
(e) |
Calculated by subtracting BKN’s total liabilities (not including VMTP Shares) from BKN’s total assets and
dividing this by the liquidation value of the VMTP Shares, and by multiplying the results by 100,000. |
|
|
|
|
| S H A R E H O L D
E R U P D A T E |
|
123 |
Shareholder Update
The following includes additional required disclosures for BFK, which has an effective shelf offering registration statement as of the fiscal year ended
July 31, 2022.
Summary of Expenses
The following
table and example are intended to assist shareholders in understanding the various costs and expenses directly or indirectly associated with investing in BFK’s common shares.
|
|
|
|
|
| |
|
BFK |
|
| Shareholder Transaction Expenses |
|
|
|
|
| Maximum Sales Load (as a percentage of offering price)(a)
|
|
|
1.00 |
% |
| Offering expenses borne by BFK (as a percentage of offering price)(a) |
|
|
0.02 |
|
| Dividend Reinvestment Plan Fees |
|
|
$0.02 per share
for open market
purchases of
common shares |
(b) |
| Dividend reinvestment plan sale transaction fee |
|
|
$2.50 |
(b) |
| Estimated Annual Expenses (as a percentage of net assets attributable to common shares) |
|
|
|
|
| Investment advisory fees(c)(d) |
|
|
0.98 |
% |
| Other expenses |
|
|
1.34 |
|
| Miscellaneous |
|
|
0.08 |
|
| Interest expense(e) |
|
|
1.26 |
|
| Total annual expenses |
|
|
2.32 |
|
| Fee waiver(d) |
|
|
— |
|
| Total annual fund operating expenses after fee waiver(d) |
|
|
2.32 |
|
| |
(a) |
If the common shares are sold to or through underwriters, the Prospectus Supplement will set forth any applicable sales
load and the estimated offering expenses. Fund shareholders will pay all offering expenses involved with an offering. |
|
| |
(b) |
Computershare Trust Company, N.A. (the “Reinvestment Plan Agent”) fees for the handling of the reinvestment
of dividends will be paid by BFK. However, shareholders will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. Shareholders will also be charged a $2.50 sales fee and
pay a $0.15 per share fee if a shareholder directs the Reinvestment Plan Agent to sell the common shares held in a dividend reinvestment account. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to
pay. |
|
| |
(c) |
BFK currently pays the Manager a monthly fee at an annual contractual investment management fee rate of 0.60% of its
average weekly managed assets. For purposes of calculating these fees, “managed assets” means the total assets of BFK (including any assets attributable to money borrowed for investment purposes) minus the sum of BFK’s accrued
liabilities (other than money borrowed for investment purposes). |
|
| |
(d) |
BFK and the Manager have entered into a fee waiver agreement (the “Fee Waiver Agreement”), pursuant to which
the Manager has contractually agreed to waive the investment advisory fees with respect to any portion of BFK’s assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Manager or its affiliates
that have a contractual management fee, through June 30, 2024. In addition, pursuant to the Fee Waiver Agreement, the Manager has contractually agreed to waive its investment advisory fees by the amount of investment advisory fees BFK pays to
the Manager indirectly through its investment in money market funds managed by the Manager or its affiliates, through June 30, 2024. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by BFK (upon
the vote of a majority of the Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940, as amended (the “Investment Company Act”), of BFK (the “Independent Trustees”)) or a majority of
the outstanding voting securities of BFK), upon 90 days’ written notice by BFK to the Manager. |
|
| |
(e) |
The total expense table includes interest expense associated with BFK’s investments in TOBs (also known as
“inverse floaters”). Although such interest expense is actually paid by special purpose vehicles in which BFK invests, it is recorded on BFK’s financial statements for accounting purposes. The total expense table also includes, in
interest expense, dividends associated with the VMTP Shares, because the VMTP Shares are considered debt of BFK for financial reporting purposes. |
|
BFK uses leverage to seek to enhance its returns to common shareholders. This leverage generally takes two forms:
the issuance of VMTP Shares and investment in TOBs. Both forms of leverage benefit common shareholders if the cost of the leverage is lower than the returns earned by BFK when it invests the proceeds from the leverage. In order to help you better
understand the costs associated with BFK’s leverage strategy, the Total annual fund operating expenses after fee waivers (excluding interest expense) are 1.06%, which is based on current market conditions. The actual amount of interest expense
borne by BFK will vary over time in accordance with the level of BFK’s use of leverage and variations in market interest rates. Interest expense is required to be treated as an expense of BFK for accounting purposes.
|
|
|
| 124 |
|
2 0 2 2 B L A C
K R O C K A N N U A L R E P O
R T T O S H A R E H O L D E
R S |
Shareholder Update (continued)
Expense Example
The following example illustrates BFK’s expenses (including the sales load of $10.00 and offering costs of $0.18) that shareholders would pay on a
$1,000 investment in common shares, assuming (i) total net annual expenses of 2.32% of net assets attributable to common shares and (ii) a 5% annual return:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
1 Year |
|
|
3 Years |
|
|
5 Years |
|
|
10 Years |
|
| Total expenses incurred |
|
$ |
33 |
|
|
$ |
82 |
|
|
$ |
133 |
|
|
$ |
273 |
|
The example should not be considered a representation of future expenses. The example assumes that the estimated
“Other expenses” set forth in the Estimated Annual Expenses table are accurate and that all dividends and distributions are reinvested at NAV. Actual expenses may be greater or less than those assumed. Moreover, BFK’s actual rate of
return may be greater or less than the hypothetical 5% return shown in the example.
Share Price Data
The following table summarizes BFK’s highest and lowest daily closing market prices on the NYSE per common share, the NAV per common share, and the
premium to or discount from NAV, on the date of each of the high and low market prices. The trading volume indicates the number of common shares traded on the NYSE during the respective quarters. Effective July 31, 2022, BFK changed its fiscal
year end from April 30 to July 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
NYSE Market Price
Per Common Share |
|
|
NAV per Common
Share on Date of
Market Price |
|
|
Premium/
(Discount)
on Date of
Market Price |
|
|
|
|
| During Quarter Ended |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
Trading Volume |
|
| July 31, 2022 |
|
$ |
12.91 |
|
|
$ |
10.37 |
|
|
$ |
12.33 |
|
|
$ |
11.45 |
|
|
|
4.70 |
% |
|
|
(9.43 |
)% |
|
|
11,716,243 |
|
| April 30, 2022 |
|
|
13.97 |
|
|
|
11.50 |
|
|
|
14.07 |
|
|
|
12.34 |
|
|
|
(0.71 |
) |
|
|
(6.81 |
) |
|
|
8,454,787 |
|
| January 31, 2022 |
|
|
15.54 |
|
|
|
13.82 |
|
|
|
14.67 |
|
|
|
13.94 |
|
|
|
5.93 |
|
|
|
(0.86 |
) |
|
|
4,396,715 |
|
| October 31, 2021 |
|
|
15.82 |
|
|
|
14.49 |
|
|
|
14.94 |
|
|
|
14.42 |
|
|
|
5.89 |
|
|
|
0.49 |
|
|
|
3,844,602 |
|
| July 31, 2021 |
|
|
15.71 |
|
|
|
14.86 |
|
|
|
15.12 |
|
|
|
14.72 |
|
|
|
3.90 |
|
|
|
0.95 |
|
|
|
4,000,173 |
|
| April 30, 2021 |
|
|
15.40 |
|
|
|
14.39 |
|
|
|
15.07 |
|
|
|
14.43 |
|
|
|
2.19 |
|
|
|
(0.28 |
) |
|
|
4,550,065 |
|
| January 31, 2021 |
|
|
15.47 |
|
|
|
13.72 |
|
|
|
14.75 |
|
|
|
14.10 |
|
|
|
4.88 |
|
|
|
(2.70 |
) |
|
|
3,829,337 |
|
| October 31, 2020 |
|
|
14.95 |
|
|
|
13.57 |
|
|
|
14.64 |
|
|
|
14.08 |
|
|
|
2.12 |
|
|
|
(3.62 |
) |
|
|
3,865,889 |
|
| July 31, 2020 |
|
|
14.69 |
|
|
|
12.08 |
|
|
|
14.51 |
|
|
|
13.01 |
|
|
|
1.24 |
|
|
|
(7.15 |
) |
|
|
4,759,351 |
|
As of July 31, 2022, BFK’s market price, NAV per Common Share, and premium/(discount) to NAV per Common Share
are $11.25, $12.18, and (7.64)% respectively.
Common shares of BFK have historically traded at both a premium and discount to NAV.
Shares of closed-end funds frequently trade at a discount to their NAV. Because of this possibility and the
recognition that any such discount may not be in the interest of shareholders, the Board might consider from time to time engaging in open-market repurchases, managed distribution plans, or other programs intended to reduce the discount. We cannot
guarantee or assure, however, that the Board will decide to engage in any of these actions. Nor is there any guarantee or assurance that such actions, if undertaken, would result in the shares trading at a price equal or close to the NAV.
Senior Securities
The following table sets forth
information regarding BFK’s outstanding senior securities as of the end of each of BFK’s last ten fiscal years, as applicable. BFK’s audited financial statements, including Deloitte & Touche LLP’s Report of Independent
Registered Public Accounting Firm, and accompanying notes to financial statements, are included in this annual report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year Ended |
|
|
Total Amount
Outstanding
(000) |
|
|
|
Asset
Coverage |
|
|
|
Liquidating
Preference |
(a) |
|
|
Average
Market Value
(000) |
|
|
|
Type of
Senior Security |
|
| July 31, 2022 |
|
$ |
100,175 |
|
|
$ |
9,181 |
(b) |
|
$ |
N/A |
|
|
$ |
99,657 |
(c) |
|
|
TOBs |
|
| July 31, 2022 |
|
|
270,800 |
|
|
|
247,905 |
(d) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2022 |
|
|
270,800 |
|
|
|
302,073 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2021 |
|
|
270,800 |
|
|
|
344,495 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2020 |
|
|
270,800 |
|
|
|
313,740 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2019 |
|
|
270,800 |
|
|
|
334,518 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2018 |
|
|
270,800 |
|
|
|
331,390 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2017 |
|
|
270,800 |
|
|
|
335,616 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2016 |
|
|
270,800 |
|
|
|
351,293 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2015 |
|
|
270,800 |
|
|
|
346,330 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2014 |
|
|
270,800 |
|
|
|
335,811 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| April 30, 2013 |
|
|
270,800 |
|
|
|
354,323 |
(e) |
|
|
100,000 |
|
|
|
N/A |
|
|
|
VMTP Shares |
|
| |
(a) |
Represents the amount to which a holder of preferred shares would be entitled upon the liquidation of BFK in preference
to common shareholders, expressed as a dollar amount per preferred share. VMTP Shares are considered debt of the issuer; therefore, the liquidation preference approximates fair value. |
|
|
|
|
| S H A R E H O L D
E R U P D A T E |
|
125 |
Shareholder Update (continued)
| |
(b) |
Calculated by subtracting BFK’s total liabilities (not including VMTP Shares and TOBs) from BFK’s total
assets and dividing this by the amount of TOBs, and by multiplying the results by 1,000. |
|
| |
(c) |
Represents weighted average daily market value of TOBs. |
|
| |
(d) |
Calculated by subtracting BFK’s total liabilities (not including VMTP Shares and TOBs) from BFK’s total
assets and dividing this by the sum of the amount of TOBs and liquidation value of the VMTP Shares, and by multiplying the results by 100,000. Effective July 18, 2022, TOB Trust Certificates are treated as senior securities pursuant to Rule 18f-4 of the 1940 Act. |
|
| |
(e) |
Calculated by subtracting BFK’s total liabilities (not including VMTP Shares) from BFK’s total assets and
dividing this by the liquidation value of the VMTP Shares, and by multiplying the results by 100,000. |
|
Common shares of BKN and BFK have historically traded at both a premium and discount to NAV.
Shares of closed-end funds frequently trade at a discount to their NAV. Because of this possibility and the
recognition that any such discount may not be in the interest of shareholders, the Board might consider from time to time engaging in open-market repurchases, managed distribution plans, or other programs intended to reduce the discount. We cannot
guarantee or assure, however, that the Board will decide to engage in any of these actions. Nor is there any guarantee or assurance that such actions, if undertaken, would result in the shares trading at a price equal or close to the NAV.
|
|
|
| 126 |
|
2 0 2 2 B L A C
K R O C K A N N U A L R E P O
R T T O S H A R E H O L D E
R S |
Automatic Dividend Reinvestment Plan
Pursuant to BKN, BFK, MHD, MVT and MQT’s Dividend Reinvestment Plan (the
“Reinvestment Plan”), Common Shareholders are automatically enrolled to have all distributions of dividends and capital gains and other distributions reinvested by Computershare Trust Company, N.A. (the “Reinvestment Plan Agent”)
in the respective Fund’s Common 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 BKN, BFK, MHD, MVT and MQT declare a dividend or determine to make a capital gain or other 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 Fund’s primary exchange (“open-market purchases”). If, on the dividend payment date, the net asset value (“NAV”) per share 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 participant’s 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.
You may elect not to participate in the Reinvestment Plan and to receive all dividends in cash by contacting the Reinvestment Plan Agent, at the address
set forth below.
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 Agent’s fees for the handling of the reinvestment of 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 Agent’s open-market purchases in connection with the reinvestment of all distributions. The automatic reinvestment of all distributions will not
relieve participants of any U.S. federal, state or local 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 in BKN, BFK that request a sale of shares are subject to a $2.50 sales fee and a $0.15 per share sold fee. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay.
Participants in MHD, MVT and MQT that request a sale of shares are subject to a $0.02 per share sold brokerage commission. All correspondence concerning the Reinvestment Plan should be directed to Computershare Trust Company, N.A. through the
internet at computershare.com/blackrock, or in writing to Computershare, P.O. Box 43006, Providence, RI 02940-3078, Telephone: (800) 699-1236. Overnight correspondence should be directed to the Reinvestment
Plan Agent at Computershare, 150 Royall Street, Suite 101, Canton, MA 02021.