For the year ended July 31, 2020, the following table is a summary of each Funds TOB Trusts:
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
|
59
|
Disclosure of Investment Advisory Agreements
The Boards of Directors (collectively, the Board, the members of which are referred to
as Board Members) of BlackRock MuniHoldings Quality Fund II, Inc. (MUE), BlackRock MuniYield California Quality Fund, Inc. (MCA), BlackRock MuniYield New York Quality Fund, Inc. (MYN) and BlackRock
MuniYield Quality Fund III, Inc. (MYI and together with MUE, MCA and MYN, the Funds and each, a Fund) met on April 16, 2020 (the April Meeting) and May 20-21, 2020 (the May
Meeting) to consider the approval of the investment advisory agreements (the Advisory Agreements or the Agreements) between each Fund and BlackRock Advisors, LLC (the Manager or BlackRock), each
Funds investment advisor.
Activities and Composition of the Board
On the date of the May Meeting, the Board consisted of ten individuals, eight of whom were not interested persons of each Fund as defined in the Investment
Company Act of 1940, as amended (the 1940 Act) (the Independent Board Members). The Board Members are responsible for the oversight of the operations of each Fund and perform the various duties imposed on the directors of
investment companies by the 1940 Act. The Independent Board Members have retained independent legal counsel to assist them in connection with their duties. The Co-Chairs of the Board are Independent Board Members. The Board has established five
standing committees: an Audit Committee, a Governance and Nominating Committee, a Compliance Committee, a Performance Oversight Committee and an Executive Committee, each of which is chaired by an Independent Board Member and composed of Independent
Board Members (except for the Executive Committee, which also has one interested Board Member).
The Agreements
Consistent with the requirements of the 1940 Act, the Board considers the continuation of the Agreements on an annual basis. The Board has four quarterly meetings per
year, each typically extending for two days, and additional in-person and telephonic meetings throughout the year, as needed. While the Board also has a fifth one-day meeting to consider specific information surrounding the renewal of the
Agreements, the Boards consideration entails a year-long deliberative process whereby the Board and its committees assess BlackRocks services to each Fund. In particular, the Board assessed, among other things, the nature, extent and
quality of the services provided to each Fund by BlackRock, BlackRocks personnel and affiliates, including (as applicable): investment management services; accounting oversight; administrative and shareholder services; oversight of each
Funds 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 BlackRocks management.
During the year, the Board, acting
directly and through its committees, considers information that is 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. This additional information is discussed further in the section titled Board Considerations in Approving the Agreements. 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, applicable benchmarks, and other performance metrics, as applicable, as well as
BlackRock senior managements 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 Funds investment objective, policies and restrictions, and meeting regulatory requirements; (f) BlackRocks and each
Funds 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;
(h) BlackRocks and other service providers internal controls and risk and compliance oversight mechanisms; (i) BlackRocks implementation of the proxy voting policies approved by the Board; (j) execution quality of
portfolio transactions; (k) BlackRocks implementation of each Funds valuation and liquidity procedures; (l) an analysis of management fees 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) BlackRocks 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
BlackRocks business; and (o) each Funds market discount/premium compared to peer funds.
Board Considerations in Approving the Agreements
The Approval Process: Prior to the April Meeting, the Board requested and received materials specifically relating to 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 Funds 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 Broadridges 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 BlackRocks and each Funds operations.
At the April Meeting, the Board reviewed materials relating to its consideration of the Agreements. As a result of the discussions that occurred during the April Meeting,
and as a culmination of the Boards year-long deliberative process, the Board 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. Topics covered included: (a) the methodology for measuring estimated fund profitability; (b) fund expenses and potential fee waivers; (c) differences in services provided and management fees between
closed-end funds and other product channels; and (d) BlackRocks option overwrite strategy.
|
|
|
60
|
|
2020 BLACKROCK ANNUAL
REPORT TO SHAREHOLDERS
|
Disclosure of Investment Advisory Agreements (continued)
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 Funds 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 BlackRocks 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 BlackRocks services related to the valuation and pricing of Fund portfolio holdings. The Board noted the willingness of BlackRocks personnel to engage in open, candid discussions with the Board. The Board
did not identify any particular information as determinative, and each Board Member may have attributed different weights to the various items considered.
A.
Nature, Extent and Quality of the Services Provided by BlackRock: The Board, including the Independent Board Members, reviewed the nature, extent and quality of services 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
BlackRocks senior management personnel responsible for investment activities, including the senior investment officers. The Board also reviewed the materials provided by each Funds portfolio management team discussing each Funds
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 Funds 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 BlackRocks overall risk management
program, including the continued efforts of BlackRock and its affiliates to address cybersecurity risks and the role of BlackRocks Risk & Quantitative Analysis Group. The Board engaged in a review of BlackRocks compensation
structure with respect to each Funds portfolio management team and BlackRocks 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, such as the prospectus and the statement of additional
information in connection with the initial public offering and periodic shareholder reports; (ii) preparing communications with analysts to support secondary market trading of 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 Funds 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 BlackRocks fund administration, shareholder services, and legal & compliance
departments and considered BlackRocks policies and procedures for assuring compliance with applicable laws and regulations.
B. The Investment Performance of
each Fund and BlackRock: The Board, including the Independent Board Members, also reviewed and considered the performance history of each Fund. In preparation for the April Meeting, the Board was provided with reports independently prepared by
Broadridge, which included an analysis of each Funds performance as of December 31, 2019, as compared to its Performance Peers. The performance information is based on net asset value (NAV), and utilizes Lipper data. Lippers
methodology calculates a funds total return assuming distributions are reinvested on the ex-date at a funds 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 a custom peer group of funds as defined
by BlackRock (Customized Peer Group) and a composite measuring a blend of total return and yield (Composite). 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 noted that for each of the one-, three- and five-year periods reported, MUE ranked in the fourth quartile against its Customized Peer Group
Composite. The Board noted that BlackRock believes that the Customized Peer Group Composite is an appropriate performance metric for MUE, and that BlackRock has explained its rationale for this belief to the Board. The Board and BlackRock reviewed
MUEs underperformance relative to its Customized Peer Group Composite during the applicable periods.
The Board noted that for each of the one-, three- and
five-year periods reported, MCA ranked in the second quartile against its Customized Peer Group Composite. The Board noted that BlackRock believes that the Customized Peer Group Composite is an appropriate performance metric for MCA, and that
BlackRock has explained its rationale for this belief to the Board.
The Board noted that for the one-, three- and five-year periods reported, MYI ranked in the
third, first and first quartiles, respectively, against its Customized Peer Group Composite. The Board noted that BlackRock believes that the Customized Peer Group Composite is an appropriate performance metric for MYI, and that BlackRock has
|
|
|
DISCLOSURE OF INVESTMENT ADVISORY AGREEMENTS
|
|
61
|
Disclosure of Investment Advisory Agreements (continued)
explained its rationale for this belief to
the Board. The Board and BlackRock reviewed MYIs underperformance relative to its Customized Peer Group Composite during the applicable period.
The Board noted
that for each of the one-, three- and five-year periods reported, MYN ranked in the second quartile against its Customized Peer Group Composite. The Board noted that BlackRock believes that the Customized Peer Group Composite is an appropriate
performance metric for MYN, and that BlackRock has explained its rationale for this belief to the Board.
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 Funds 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
Funds 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
Funds accrued liabilities (other than money borrowed for investment purposes) to those of its Expense Peers. The total expense ratio represents a funds 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 BlackRocks financial condition. The Board reviewed BlackRocks 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 BlackRocks estimated profitability with respect to each Fund and
other funds the Board currently oversees for the year ended December 31, 2019 compared to available aggregate estimated profitability data provided for the prior two years. The Board reviewed BlackRocks estimated profitability with
respect to certain other U.S. fund complexes managed by the Manager and/or its affiliates. The Board reviewed BlackRocks 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 BlackRocks 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,
BlackRocks 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
BlackRocks 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
MUEs contractual management fee rate ranked in the first quartile, and that the actual management fee rate and total expense ratio each ranked in the first quartile, relative to the Expense Peers.
The Board noted that MCAs contractual management fee rate ranked in the first quartile, and that the actual management fee rate and total expense ratio each ranked
in the first quartile, relative to the Expense Peers.
The Board noted that MYIs 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 third quartiles, respectively, relative to the Expense Peers.
The Board noted that
MYNs contractual management fee rate ranked in the first quartile, and that the actual management fee rate and total expense ratio each ranked in the first quartile, 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 Funds asset levels and whether the current fee was appropriate.
Based on the
Boards review and consideration of the issue, the Board concluded that most closed-end funds do not have fund level breakpoints because closed-end funds generally do not experience substantial growth after the initial public offering.
Closed-end funds are typically priced at scale at a funds inception.
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 BlackRocks respective relationships with each Fund, both tangible and intangible, such as
BlackRocks ability to leverage its investment professionals who manage other portfolios and its risk management personnel, an increase in BlackRocks profile in the investment advisory community, and the engagement of BlackRocks
affiliates as service providers to each Fund, including for administrative, securities lending and cash management services. The Board also considered BlackRocks overall operations and its efforts to expand the scale of, and improve the
quality of, its operations. The Board also noted that, 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.
In connection with its consideration of the Agreements, the Board also received information regarding BlackRocks brokerage
and soft dollar practices. The Board received reports from BlackRock which included information on brokerage commissions and trade execution practices throughout the year.
|
|
|
62
|
|
2020 BLACKROCK ANNUAL
REPORT TO SHAREHOLDERS
|
Disclosure of Investment Advisory Agreements (continued)
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 Funds 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 BlackRocks 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. BlackRocks 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
The Board, including
the Independent Board Members, unanimously approved the continuation of the Advisory Agreements between the Manager and each Fund for a one-year term ending June 30, 2021. 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.
|
|
|
DISCLOSURE OF INVESTMENT ADVISORY AGREEMENTS
|
|
63
|
Fund Investment Objectives, Policies and Risks
Recent Changes
The following information is a summary of certain changes since July 31, 2019. This information may not reflect all of the changes that have occurred since you
purchased the relevant Fund.
Effective March 24, 2020, MCA may enter into reverse repurchase agreements. The Funds use of reverse repurchase
agreements may generate taxable income for the Fund and may increase the amount of ordinary income distributions paid to shareholders. See Risk Factors Reverse Repurchase Agreements below for a discussion of the risks associated
with the use of reverse repurchase agreements to which MCA is now subject.
Except as noted above, during each Funds most recent fiscal year, there were no
material changes in the Funds 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 MuniHoldings Quality Fund
II, Inc. (MUE)
The Funds investment objective is to provide stockholders with current income exempt from federal income taxes. There can be no assurance
that the Funds investment objective will be realized. The Funds investment objective may not be changed without the approval of the holders of a majority of the Funds outstanding common shares and the outstanding preferred shares,
including the 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 Funds investment policies provide that it will invest primarily in a portfolio of long-term, investment grade municipal obligations, the interest on
which, in the opinion of bond counsel to the issuer, is exempt from federal income taxes (except that the interest may be subject to the alternative minimum tax). The Funds investment policies provide that, at all times, except during
temporary defensive periods, it will invest at least 80% of its total assets in a portfolio of obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or
instrumentalities, paying interest that, in the opinion of bond counsel to the issuer, is exempt from federal income taxes (Municipal Bonds). The Funds investment policies provide that, under normal market conditions, the Fund
invests at least 80% of its total assets in Municipal Bonds with remaining maturities of one year or more at the time of investment.
The investment grade Municipal
Bonds in which the Fund will primarily invest are those Municipal Bonds that are rated at the date of purchase in the four highest rating categories of Moodys Investors Service, Inc. (Moodys) (currently Aaa, Aa, A and Baa),
S&P Global Ratings (S&P) (currently AAA, AA, A and BBB) or Fitch Ratings, Inc. (Fitch) (currently AAA, AA, A and BBB) or, if unrated, are considered to be of comparable quality by BlackRock Advisors, LLC (the
Manager). 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 Moodys 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 Moodys 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 Moodys 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. 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 20% of its managed assets in securities that are rated below investment grade, which are
securities rated at the time of purchase Ba or below by Moodys, BB or below by S&P or Fitch, or securities determined by the Manager to be of comparable quality. Below investment grade quality is regarded as predominantly speculative with
respect to the issuers capacity to pay interest and repay principal. Such securities commonly are referred to as high yield or junk bonds.
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 Managers 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 Funds 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.
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 Funds 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 average maturity of the Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Manager. The
Funds portfolio at any given time may include long-term, intermediate-term and short-term Municipal Bonds.
|
|
|
64
|
|
2020 BLACKROCK ANNUAL
REPORT TO SHAREHOLDERS
|
Fund Investment Objectives, Policies and Risks (continued)
The Funds stated expectation is that
it will invest in Municipal Bonds that, in the Managers 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 Funds 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 Funds 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.
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. These derivative transactions may be used for duration management and other risk
management to attempt to protect against possible changes in the market value of the Funds portfolio resulting from trends in the debt securities markets and changes in interest rates, to protect the Funds unrealized gains in the value
of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a position in the securities markets as a temporary substitute for purchasing particular securities and to enhance income or gain.
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 enter into reverse repurchase agreements with respect to its portfolio investments subject to the Funds investment restrictions.
The Fund is authorized to borrow money in amounts of up to 5% of the value of its total assets at the time of such borrowings; provided, however, that the Fund is
authorized to borrow moneys in amounts of up to 33 1/3% of the value of its total assets at the time of such borrowings to finance the repurchase of its own common stock pursuant to tender offers or otherwise to redeem or repurchase shares of
preferred stock.
Other Investment Policies. For temporary periods or to provide liquidity, the Fund has the authority to invest as much as 20% of its total
assets in tax-exempt and taxable money market obligations with a maturity of one year or less (such short-term obligations being referred to herein as Temporary Investments). In addition, the Fund
reserves the right as a defensive measure to invest temporarily a greater portion of its assets in Temporary Investments, when, in the opinion of the Advisors, prevailing market or financial conditions warrant. Taxable money market obligations will
yield taxable income. The tax exempt money market securities may include municipal notes, municipal commercial paper, municipal bonds with a remaining maturity of less than one year, variable rate demand notes and participations therein. The taxable
money market securities in which the Fund may invest as Temporary Investments consist of U.S. Government securities, U.S. Government agency securities, domestic bank or savings institution certificates of deposit and bankers acceptances, short
term corporate debt securities such as commercial paper and repurchase agreements. These Temporary Investments must have a stated maturity not in excess of one year from the date of purchase. The Fund may not invest in any security issued by a
commercial bank or a savings institution unless the bank or institution is organized and operating in the United States, has total assets of at least one billion dollars. To the extent the Fund invests in Temporary Investments, the Fund may not at
such times be in a position to achieve its investment objective of tax-exempt income.
Short-term taxable fixed-income
investments include, without limitation, the following: (i) U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S.
Government agencies or instrumentalities, (ii) certificates of deposit issued against funds deposited in a bank or a savings and loan association, (iii) repurchase agreements, which involve purchases of debt securities, and
(iv) commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations.
Short-term tax-exempt fixed income securities are securities that are exempt from regular federal income tax and mature within
three years or less from the date of issuance. Short-term tax-exempt fixed income securities include, without limitation, the following: (i) Bond Anticipation Notes (BANs), which are usually
general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds, (ii) Tax Anticipation Notes
(TANs), which are issued by state and local governments to finance the current operations of such governments. (iii) Revenue Anticipation Notes (RANs), which are issued by governments or governmental bodies with the
expectation that future revenues from a designated source will be used to repay the notes, (iv) Construction Loan Notes, which are issued to provide construction financing for specific projects, (v) Bank Notes, which are notes issued by
local government bodies and agencies to commercial banks as evidence of borrowings, and (vi) Tax-Exempt Commercial Paper (municipal paper), which represents very short-term unsecured,
negotiable promissory notes, issued by states, municipalities and their agencies.
The Fund may invest in variable rate demand obligations (VRDOs). The
Fund may invest in all types of tax exempt instruments currently outstanding or to be issued in the future which satisfy its short term maturity and quality standards.
The Funds investment policies provide that the Temporary Investments and VRDOs in which the Fund may invest will be in the following rating categories at the time
of purchase: MIG-1/VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as determined by Moodys), SP-1 through
|
|
|
FUND INVESTMENT OBJECTIVES, POLICIES AND
RISKS
|
|
65
|
Fund Investment Objectives, Policies and Risks (continued)
SP-2
for notes and A-1 through A-3 for VRDOs and commercial paper (as determined by S&P), or F-1 through F-3 for notes, VRDOs and commercial paper (as determined by Fitch). Temporary Investments, if not rated, must be of comparable quality in the opinion of the Manager. In addition, the Fund reserves the right to
invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the Manager, market conditions warrant.
The Fund may invest in restricted and illiquid securities.
The Fund may invest in
repurchase agreements as temporary investments.
The Fund may lend its portfolio securities to brokers, dealers and other financial institutions which meet the
creditworthiness standards established by the Board of Directors of the Fund.
BlackRock MuniYield California Quality Fund, Inc. (MCA)
The Funds investment objective is to provide stockholders with as high a level of current income exempt from U.S. federal and California income taxes as is
consistent with its investment policies and prudent investment management. The Fund seeks to achieve its investment objective by investing, as a fundamental policy, at least 80% of an aggregate of the Funds 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 the State of California, its political subdivisions, agencies and instrumentalities
and by other qualifying issuers, 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) and exempt from California income taxes (California Municipal Bonds). The Fund also may invest in 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 is excludable from gross income for federal income tax purposes, in the opinion of bond counsel to the issuer, but is not excludable from
gross income for California income tax purposes (Municipal Bonds). Unless otherwise noted, the term Municipal Bonds also includes California Municipal Bonds. The Fund may invest directly in such securities or synthetically
through the use of derivatives. In general, the Fund does not intend for its investments to earn a large amount of interest income that is (i) includable in gross income for federal income tax purposes or (ii) not exempt from California
income taxes. From time to time, the Fund may realize taxable capital gains.
The Funds investment objective and its policy of investing at least 80% of an
aggregate of the Funds net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in California Municipal Bonds are fundamental policies that may not be changed without
the approval of a majority of the outstanding voting securities of the Fund (as defined in the Investment Company Act of 1940, as amended (the 1940 Act)). There can be no assurance that the Funds investment objective will be
realized.
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 Funds total assets invested in PABs will vary from time to time.
Under normal market conditions, the
Fund expects to invest primarily in a portfolio of long-term 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 Moodys Investors Service, Inc. (Moodys) (currently Aaa, Aa, A and Baa), S&P Global Ratings (S&P) (currently AAA, AA, A and BBB) or Fitch Ratings, Inc. (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
Moodys and F1+ through F3 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 Moodys and F1+ through F3 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 Moodys; and BBB and F3 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. Insurance is expected to protect the Fund against losses caused by a bond issuers failure to make interest or principal payments. However, insurance does not protect the Fund or its stockholders
against losses caused by declines in a bonds market value. If a bonds insurer fails to fulfill its obligations or loses its credit rating, the value of the bond could drop. 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 20% of its managed assets in securities that
are rated below investment grade, which are securities rated at the time of purchase Ba or below by Moodys, BB or below by S&P or Fitch, or securities determined by the Manager to be of comparable quality. Below investment grade quality is
regarded as predominantly speculative with respect to the issuers capacity to pay interest and repay principal. Such securities commonly are referred to as high yield or junk bonds.
All percentage and ratings limitations on securities in which the Fund may invest apply at the time of making an investment and shall not be considered violated as a
result of subsequent market movements or if an investment rating is subsequently downgraded to a rating that would have precluded the Funds initial investment in such security. 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 average maturity
of the Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Manager. The Funds portfolio at any given time may include long-term, intermediate-term and short-term Municipal
Bonds.
The net asset value of the shares of common stock of a closed-end investment company, such as the Fund, which invests
primarily in fixed income securities, changes as the general levels of interest rates fluctuate. When interest rates decline, the value of a fixed income portfolio can be expected to rise. Conversely, when interest rates rise, the value of a fixed
income portfolio can be expected to decline. Prices of longer term securities generally fluctuate more in response to interest rate changes than do shorter term securities. These changes in net asset value are likely to be greater in the case of a
fund having a leveraged capital structure, such as the Fund.
|
|
|
66
|
|
2020 BLACKROCK ANNUAL
REPORT TO SHAREHOLDERS
|
Fund Investment Objectives, Policies and Risks (continued)
For temporary periods or to provide
liquidity, the Fund has the authority to invest as much as 20% of its total assets in tax-exempt and taxable money market obligations with a maturity of one year or less (such short-term obligations being
referred to herein as Temporary Investments). In addition, the Fund reserves the right as a defensive measure to invest temporarily a greater portion of its assets in Temporary Investments, when, in the opinion of the Manager, prevailing
market or financial conditions warrant. Taxable money market obligations will yield taxable income. The Fund also may invest in variable rate demand obligations (VRDOs) and VRDOs in the form of participation interests
(Participating VRDOs) in variable rate tax-exempt obligations held by a financial institution. The Funds hedging strategies are not fundamental policies and may be modified by the Board of
Directors of the Fund without the approval of the Funds stockholders. The Fund is also authorized to invest in indexed and inverse floating rate obligations for hedging purposes and to seek to enhance return.
The Fund may invest in securities not issued by or on behalf of a state or territory or by an agency or instrumentality thereof, if the Fund receives an opinion of
counsel to the issuer that such securities pay interest that is excludable from gross income for federal income tax purposes and, if applicable, exempt from California income taxes (Non-Municipal Tax-Exempt Securities). Non-Municipal Tax-Exempt Securities could include trust certificates, partnership interests or other
instruments evidencing interest in one or more long-term Municipal Bonds. Non-Municipal Tax-Exempt Securities also may include securities issued by other investment
companies that invest in Municipal Bonds, to the extent such investments are permitted by the Funds investment restrictions and applicable law. Non-Municipal
Tax-Exempt Securities are subject to the same risks associated with an investment in Municipal Bonds as well as many of the risks associated with investments in derivatives. If the Internal Revenue Service
were to issue any adverse ruling or take an adverse position with respect to the taxation on these types of securities, there is a risk that the interest paid on such securities would be deemed taxable at the federal level.
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 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 may affect the availability of Municipal Bonds for investment by the Fund.
The Fund may purchase and sell futures contracts, enter into various interest rate transactions and swap contracts (including, but not limited to, credit default swaps)
and may purchase and sell exchange-listed and OTC put and call options on securities and swap contracts, financial indices and futures contracts and use other derivative instruments or management techniques. These derivative transactions may be used
for duration management and other risk management purposes, subject to the Funds investment restrictions.
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 variable rate demand preferred
shares (VRDP 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 enter into reverse repurchase agreements with
respect to its portfolio investments subject to the Funds investment restrictions.
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. Certain short-term borrowings (such as for cash management purposes) are not subject to the 1940 Acts limitations on leverage if
(i) repaid within 60 days, and (ii) not in excess of 5% of the Funds total assets.
Other Investment Policies. The Fund may invest in
short-term tax-exempt and taxable securities subject to the limitations set forth above. The tax-exempt money market securities may include municipal notes, municipal
commercial paper, Municipal Bonds with a remaining maturity of less than one year, variable rate demand notes and participations therein. The taxable money market securities in which the Fund may invest as Temporary Investments consist of U.S.
Government securities, U.S. Government agency securities, domestic bank or savings institution certificates of deposit and bankers acceptances, short-term corporate debt securities such as commercial paper and repurchase agreements. These
Temporary Investments must have a stated maturity not in excess of one year from the date of purchase. The Fund may not invest in any security issued by a commercial bank or a savings institution unless the bank or institution is organized and
operating in the United States, has total assets of at least one billion dollars and is a member of the Federal Deposit Insurance Corporation (FDIC), except that up to 10% of total assets may be invested in certificates of deposit of
smaller institutions if such certificates are fully insured by the FDIC.
Short-term taxable fixed-income investments include, without limitation, the following:
(i) U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities,
(ii) certificates of deposit issued against funds deposited in a bank or a savings and loan association, (iii) repurchase agreements, which involve purchases of debt securities, and (iv) commercial paper, which consists of short-term
unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Short-term tax-exempt fixed income securities are securities that are exempt
from regular federal income tax and mature within three years or less from the date of issuance. Short-term tax-exempt fixed income securities include, without limitation, the following: (i) Bond
Anticipation Notes (BANs), which are usually general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt
obligations or bonds, (ii) Tax Anticipation Notes (TANs), which are issued by state and local governments to finance the current operations of such governments. (iii) Revenue Anticipation Notes (RANs), which are
issued by governments or governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes, (iv) Construction Loan Notes, which are issued to provide construction financing for specific
projects, (v) Bank Notes, which are notes issued by local government bodies and agencies to commercial banks as evidence of borrowings, and (vi) Tax-Exempt Commercial Paper (municipal
paper), which represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and their agencies.
The Fund may invest
in VRDOs and Participating VRDOs. The Fund may invest in all types of tax-exempt instruments currently outstanding or to be issued in the future which satisfy its short-term maturity and quality standards. It
is contemplated that the Fund will not invest more than 20% of its assets in Participating VRDOs.
|
|
|
FUND INVESTMENT OBJECTIVES, POLICIES AND
RISKS
|
|
67
|
Fund Investment Objectives, Policies and Risks (continued)
The Temporary Investments, VRDOs and
Participating VRDOs in which the Fund may invest will be in the following rating categories at the time of purchase: MIG-1/VMIG-1 through
MIG-3/VMIG-3 for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as
determined by Moodys), SP-1 through SP-2 for notes and A-1 through A-3 for VRDOs
and commercial paper (as determined by S&P), or F-1 through F-3 for notes, VRDOs and commercial paper (as determined by Fitch). Temporary Investments, if not rated,
must be of comparable quality in the opinion of the Manager. In addition, the Fund reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the Manager, market
conditions warrant.
In order to seek to hedge the value of the Fund against interest rate fluctuations, to hedge against increases in the Funds costs
associated with the dividend payments on any preferred shares, or to seek to increase the Funds return, the Fund may enter into interest rate swap transactions such as Municipal Market Data AAA Cash Curve swaps (MMD swaps, also
known as MMD rate locks) or Bond Market Association Municipal Swap Index swaps (BMA swaps).
The Fund may enter into credit default swap agreements for
hedging purposes or to seek to increase its return.
The Fund may invest in securities pursuant to repurchase agreements. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System or a primary dealer or an affiliate thereof, in U.S. Government securities.
BlackRock MuniYield New York
Quality Fund, Inc. (MYN)
The Funds investment objective is to provide stockholders with as high a level of current income exempt from federal income taxes
and New York State and New York City personal income taxes as is consistent with its investment policies and prudent investment management. The Fund seeks to achieve its investment objective by investing, as a fundamental policy, at least 80% of an
aggregate of the Funds 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 the State of New
York, its political subdivisions, agencies and instrumentalities and by other qualifying 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) and exempt from New York State and New York City personal income taxes (New York Municipal Bonds). The Fund also
may invest in municipal obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities, which pay interest that is excludable from gross income for
federal income tax purposes, in the opinion of bond counsel to the issuer, but is not exempt from New York State and New York City personal income taxes (Municipal Bonds). Unless otherwise noted, the term Municipal Bonds also
includes New York Municipal Bonds. The Fund may invest directly in such securities or synthetically through the use of derivatives. In general, the Fund does not intend for its investments to earn a large amount of interest income that is
(i) includable in gross income for federal income tax purposes or (ii) not exempt from New York State and New York City personal income taxes. The Funds investment objective and its policy of investing at least 80% of an aggregate of
the Funds net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in New York Municipal Bonds are fundamental policies that may not be changed without the approval of
a majority of the outstanding voting securities of the Fund (as defined in the Investment Company Act of 1940, as amended (the 1940 Act)). There can be no assurance that the Funds investment objective will be realized.
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 Funds total assets invested in PABs will vary from time to time.
Under normal market conditions, the Fund expects to invest
primarily in a portfolio of long-term 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
Moodys Investors Service, Inc. (Moodys) (currently Aaa, Aa, A and Baa), S&P Global Ratings (S&P) (currently AAA, AA, A and BBB) or Fitch Ratings, Inc. (Fitch) (currently AAA, AA, A and BBB) or
are considered by BlackRock Advisors, LLC (the Manager) to be of comparable quality. 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 Moodys and F1+ through F3 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 Moodys and
F1+ through F3 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 Moodys; and BBB and F3 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. Insurance is expected to protect the Fund against losses caused by a bond
issuers failure to make interest or principal payments. However, insurance does not protect the Fund or its stockholders against losses caused by declines in a bonds market value. If a bonds insurer fails to fulfill its obligations
or loses its credit rating, the value of the bond could drop. 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 20% of its managed assets in securities that are rated below investment grade, which are securities rated at the time of purchase Ba or below
by Moodys, BB or below by S&P or Fitch, or securities determined by the Manager to be of comparable quality. Below investment grade quality is regarded as predominantly speculative with respect to the issuers capacity to pay interest
and repay principal. Such securities commonly are referred to as high yield or junk bonds.
All percentage and ratings limitations on
securities in which the Fund may invest apply at the time of making an investment and shall not be considered violated as a result of subsequent market movements or if an investment rating is subsequently downgraded to a rating that would have
precluded the Funds initial investment in such security. 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 average maturity of the Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions
by the Manager. The Funds portfolio at any given time may include both long-term and intermediate-term municipal bonds.
|
|
|
68
|
|
2020 BLACKROCK ANNUAL
REPORT TO SHAREHOLDERS
|
Fund Investment Objectives, Policies and Risks (continued)
The net asset value of the shares of common
stock of a closed-end investment company, such as the Fund, which invests primarily in fixed income securities, changes as the general levels of interest rates fluctuate. When interest rates decline, the value
of a fixed income portfolio can be expected to rise. Conversely, when interest rates rise, the value of a fixed income portfolio can be expected to decline. Prices of longer term securities generally fluctuate more in response to interest rate
changes than do shorter term securities. These changes in net asset value are likely to be greater in the case of a fund having a leveraged capital structure, such as the Fund.
For temporary periods or to provide liquidity, the Fund has the authority to invest as much as 20% of its total assets in
tax-exempt and taxable money market obligations with a maturity of one year or less (such short-term obligations being referred to herein as Temporary Investments). In addition, the Fund reserves
the right as a defensive measure to invest temporarily a greater portion of its assets in Temporary Investments, when, in the opinion of the Manager, prevailing market or financial conditions warrant. Taxable money market obligations will yield
taxable income. The Fund also may invest in variable rate demand obligations (VRDOs) and VRDOs in the form of participation interests (Participating VRDOs) in variable rate tax-exempt
obligations held by a financial institution. The Funds hedging strategies are not fundamental policies and may be modified by the Board of Directors of the Fund without the approval of the Funds stockholders. The Fund is also authorized
to invest in indexed and inverse floating rate obligations for hedging purposes and to seek to enhance return.
The Fund may invest in securities not issued by or on
behalf of a state or territory or by an agency or instrumentality thereof, if the Fund receives an opinion of counsel to the issuer that such securities pay interest that is excludable from gross income for federal income tax purposes and, if
applicable, exempt from New York State and New York City personal income taxes (Non-Municipal Tax-Exempt Securities).
Non-Municipal Tax-Exempt Securities could include trust certificates, partnership interests or other instruments evidencing interest in one or more long-term Municipal
Bonds. Non-Municipal Tax-Exempt Securities also may include securities issued by other investment companies that invest in Municipal Bonds, to the extent such
investments are permitted by the Funds investment restrictions and applicable law. Non-Municipal Tax-Exempt Securities are subject to the same risks associated
with an investment in Municipal Bonds as well as many of the risks associated with investments in derivatives. If the Internal Revenue Service were to issue any adverse ruling or take an adverse position with respect to the taxation on these types
of securities, there is a risk that the interest paid on such securities would be deemed taxable at the federal level.
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 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 may affect the availability
of Municipal Bonds for investment by the Fund.
The Fund may purchase and sell futures contracts, enter into various interest rate transactions and swap contracts
(including, but not limited to, credit default swaps) and may purchase and sell exchange-listed and OTC put and call options on securities and swap contracts, financial indices and futures contracts and use other derivative instruments or management
techniques. These derivative transactions may be used for duration management and other risk management purposes, subject to the Funds investment restrictions.
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 variable rate demand preferred shares (VRDP 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 enter into reverse repurchase agreements with respect to its portfolio investments subject to the Funds investment restrictions. The Fund may enter
into dollar roll transactions.
The Fund may enter into derivative transactions that have economic leverage embedded in them.
The Fund may leverage its portfolio by entering into one or more credit facilities.
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. Certain short-term borrowings (such as for cash management purposes) are not subject to the 1940 Acts limitations on leverage if (i) repaid within 60
days, and (ii) not in excess of 5% of the Funds total assets.
Other Investment Policies. The Fund may invest in short-term tax-exempt and taxable securities subject to the limitations set forth above. The tax-exempt money market securities may include municipal notes, municipal commercial paper,
Municipal Bonds with a remaining maturity of less than one year, variable rate demand notes and participations therein. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes and grant anticipation notes.
Anticipation notes are sold as interim financing in anticipation of tax collection, bond sales, government grants or revenue receipts. Municipal commercial paper refers to short-term unsecured promissory notes generally issued to finance short-term
credit needs. The taxable money market securities in which the Fund may invest as Temporary Investments consist of U.S. Government securities, U.S. Government agency securities, domestic bank or savings institution certificates of deposit and
bankers acceptances, short-term corporate debt securities such as commercial paper and repurchase agreements. These Temporary Investments must have a stated maturity not in excess of one year from the date of purchase. The Fund may not invest
in any security issued by a commercial bank or a savings institution unless the bank or institution is organized and operating in the United States, has total assets of at least one billion dollars and is a member of the Federal Deposit Insurance
Corporation (FDIC), except that up to 10% of total assets may be invested in certificates of deposit of smaller institutions if such certificates are fully insured by the FDIC.
The Fund may invest in VRDOs and Participating VRDOs. The Fund may invest in all types of tax-exempt instruments currently
outstanding or to be issued in the future which satisfy its short-term maturity and quality standards. It is contemplated that the Fund will not invest more than 20% of its assets in Participating VRDOs.
The Temporary Investments, VRDOs and Participating VRDOs in which the Fund may invest will be in the following rating categories at the time of purchase: MIG-1/VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and
Prime-1 through Prime-3 for commercial paper (as determined by Moodys), SP-1 through
SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as determined by S&P), or
F-1 through F-3 for notes, VRDOs and commercial paper (as determined by Fitch).
|
|
|
FUND INVESTMENT OBJECTIVES, POLICIES AND
RISKS
|
|
69
|
Fund Investment Objectives, Policies and Risks (continued)
Temporary Investments, if not rated, must be
of comparable quality in the opinion of the Manager. In addition, the Fund reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the Manager, market
conditions warrant.
The Fund may enter into credit default swap agreements for hedging purposes or to seek to increase its return.
The Fund may invest in securities pursuant to repurchase agreements. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System or a
primary dealer or an affiliate thereof, in U.S. Government securities.
BlackRock MuniYield Quality Fund III, Inc. (MYI)
The Funds 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 seeks to achieve its investment objective by investing at least 80% of an aggregate of the Funds 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 may invest directly in such securities or synthetically through the use of derivatives. The Funds investment objective and its policy of investing at least 80% of an aggregate of the Funds 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 a majority of the
outstanding voting securities of the Fund (as defined in the Investment Company Act of 1940, as amended (the 1940 Act)). There can be no assurance that the Funds investment objective will be realized.
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 Funds total assets invested in PABs will vary from time to time. The Fund also will 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.
Under normal market conditions, the Fund expects to invest primarily in a portfolio of long-term 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 Moodys Investors Service, Inc. (Moodys)
(currently Aaa, Aa, A and Baa), S&P Global Ratings (S&P) (currently AAA, AA, A and BBB) or Fitch Ratings, Inc. (Fitch) (currently AAA, AA, A and BBB) or are considered by BlackRock Advisors, LLC (the
Manager) to be of comparable quality. 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 Moodys and F1+ through F3 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 Moodys and F1+ through F3 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 Moodys; and BBB and F3
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. Insurance is expected to protect the Fund against losses caused by a bond issuers failure to make interest or principal payments. However, insurance
does not protect the Fund or its stockholders against losses caused by declines in a bonds market value. If a bonds insurer fails to fulfill its obligations or loses its credit rating, the value of the bond could drop. 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 20%
of its managed assets in securities that are rated below investment grade, which are securities rated at the time of purchase Ba or below by Moodys, BB or below by S&P or Fitch, or securities determined by the Manager to be of comparable
quality. Below investment grade quality is regarded as predominantly speculative with respect to the issuers capacity to pay interest and repay principal. Such securities commonly are referred to as high yield or junk
bonds.
All percentage and ratings limitations on securities in which the Fund may invest apply at the time of making an investment and shall not be considered
violated as a result of subsequent market movements or if an investment rating is subsequently downgraded to a rating that would have precluded the Funds initial investment in such security. 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 average
maturity of the Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Manager. The Funds portfolio at any given time may include both long-term and intermediate-term
municipal bonds.
The net asset value of the shares of common stock of a closed-end investment company, such as the Fund,
which invests primarily in fixed income securities, changes as the general levels of interest rates fluctuate. When interest rates decline, the value of a fixed income portfolio can be expected to rise. Conversely, when interest rates rise, the
value of a fixed income portfolio can be expected to decline. Prices of longer term securities generally fluctuate more in response to interest rate changes than do shorter term securities. These changes in net asset value are likely to be greater
in the case of a fund having a leveraged capital structure, such as the Fund.
For temporary periods or to provide liquidity, the Fund has the authority to invest as
much as 20% of its total assets in tax-exempt and taxable money market obligations with a maturity of one year or less (such short-term obligations being referred to herein as Temporary
Investments). In addition, the Fund reserves the right as a defensive measure to invest temporarily a greater portion of its assets in Temporary Investments, when, in the opinion of the Manager, prevailing market or financial conditions
warrant. Taxable money market obligations will yield taxable income. The Fund also may invest in variable rate demand obligations (VRDOs) and VRDOs in the form of participation interests (Participating VRDOs) in variable rate
tax-exempt obligations held by a financial institution. The Funds hedging strategies are not fundamental policies and may be modified by the Board of Directors of the Fund without the approval of the
Funds stockholders. The Fund is also authorized to invest in indexed and inverse floating rate obligations for hedging purposes and to seek to enhance return.
|
|
|
70
|
|
2020 BLACKROCK ANNUAL
REPORT TO SHAREHOLDERS
|
Fund Investment Objectives, Policies and Risks (continued)
The Fund may invest in securities not issued
by or on behalf of a state or territory or by an agency or instrumentality thereof, if the Fund receives an opinion of counsel to the issuer that such securities pay interest that is excludable from gross income for federal income tax purposes (Non-Municipal Tax-Exempt Securities). Non-Municipal Tax-Exempt Securities could
include trust certificates, partnership interests or other instruments evidencing interest in one or more long-term Municipal Bonds. Non-Municipal Tax-Exempt Securities
also may include securities issued by other investment companies that invest in Municipal Bonds, to the extent such investments are permitted by the Funds investment restrictions and applicable law.
Non-Municipal Tax-Exempt Securities are subject to the same risks associated with an investment in Municipal Bonds as well as many of the risks associated with
investments in derivatives. If the Internal Revenue Service were to issue any adverse ruling or take an adverse position with respect to the taxation on these types of securities, there is a risk that the interest paid on such securities would be
deemed taxable at the federal level.
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 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 may affect the availability of Municipal Bonds for investment by the Fund.
The Fund may purchase and sell futures contracts, enter into various interest rate transactions and swap contracts (including, but not limited to, credit default swaps)
and may purchase and sell exchange-listed and OTC put and call options on securities and swap contracts, financial indices and futures contracts and use other derivative instruments or management techniques. These derivative transactions may be used
for duration management and other risk management purposes, subject to the Funds investment restrictions.
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 variable rate demand preferred
shares (VRDP 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 enter into reverse repurchase agreements with
respect to its portfolio investments subject to the Funds investment restrictions. The Fund may enter into dollar roll transactions.
The Fund may
enter into derivative transactions that have economic leverage embedded in them.
The Fund may leverage its portfolio by entering into one or more credit facilities.
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. Certain short-term borrowings (such as for cash management purposes) are not subject to the 1940 Acts limitations on leverage if (i) repaid within 60
days, and (ii) not in excess of 5% of the Funds total assets.
Other Investment Policies. The Fund may invest in short-term tax-exempt and taxable securities subject to the limitations set forth above. The tax-exempt money market securities may include municipal notes, municipal commercial paper,
Municipal Bonds with a remaining maturity of less than one year, variable rate demand notes and participations therein. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes and grant anticipation notes.
Anticipation notes are sold as interim financing in anticipation of tax collection, bond sales, government grants or revenue receipts. Municipal commercial paper refers to short-term unsecured promissory notes generally issued to finance short-term
credit needs. The taxable money market securities in which the Fund may invest as Temporary Investments consist of U.S. Government securities, U.S. Government agency securities, domestic bank or savings institution certificates of deposit and
bankers acceptances, short-term corporate debt securities such as commercial paper and repurchase agreements. These Temporary Investments must have a stated maturity not in excess of one year from the date of purchase. The Fund may not invest
in any security issued by a commercial bank or a savings institution unless the bank or institution is organized and operating in the United States, has total assets of at least one billion dollars and is a member of the Federal Deposit Insurance
Corporation (FDIC), except that up to 10% of total assets may be invested in certificates of deposit of smaller institutions if such certificates are fully insured by the FDIC.
The Fund may invest in VRDOs and Participating VRDOs. The Fund may invest in all types of tax-exempt instruments currently
outstanding or to be issued in the future which satisfy its short-term maturity and quality standards. It is contemplated that the Fund will not invest more than 20% of its assets in Participating VRDOs.
The Temporary Investments, VRDOs and Participating VRDOs in which the Fund may invest will be in the following rating categories at the time of purchase: MIG 1/VMIG 1
through MIG 3/VMIG 3 for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as determined by Moodys), SP-1
through SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as determined by S&P), or F1 through F3 for notes,
VRDOs and commercial paper (as determined by Fitch). Temporary Investments, if not rated, must be of comparable quality in the opinion of the Manager. In addition, the Fund reserves the right to invest temporarily a greater portion of its assets in
Temporary Investments for defensive purposes, when, in the judgment of the Manager, market conditions warrant.
The Fund may enter into credit default swap agreements
for hedging purposes or to seek to increase its return.
The Fund may invest in securities pursuant to repurchase agreements. Repurchase agreements may be entered
into only with a member bank of the Federal Reserve System or a primary dealer or an affiliate thereof, in U.S. Government securities.
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 the Fund will meet its investment objective or that the Funds 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.
|
|
|
FUND INVESTMENT OBJECTIVES, POLICIES AND
RISKS
|
|
71
|
Fund Investment Objectives, Policies and Risks (continued)
Non-Diversification Risk (MYN) The Fund is a non-diversified fund.
Because the Fund may invest in securities of a smaller number of issuers, it may be more exposed to the risks associated with and developments affecting an individual issuer than a fund that invests more widely.
Investment and Market Discount Risk An investment in the Funds 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 Funds 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 Funds net asset value could decrease as a result of its investment activities. At any point in time an investment in the Funds 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 Funds investment, market discount and certain other risks will be magnified.
Debt Securities Risk Debt securities, such as bonds, involve interest rate risk, credit risk, extension risk, and prepayment risk, among other
things.
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 current period of historically low 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 Funds investments would be expected to decrease by 10%. 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 Funds investments will not affect interest income derived from instruments already owned by the Fund, but will be reflected in the Funds 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.
To the extent the Fund invests in debt securities that may be prepaid at the
option of the obligor (such as mortgage-backed securities), the sensitivity of such securities to changes in interest rates may increase (to the detriment of the Fund) when interest rates rise. Moreover, because 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 Funds 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 issuers credit rating or the markets perception of an issuers creditworthiness may also affect the value of the Funds investment in that issuer. The degree of credit risk depends on both the
financial condition of the issuer and the terms of the obligation.
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.
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:
General Obligation Bonds Risks Timely payments depend on the issuers credit quality, ability to raise tax revenues and ability to maintain an adequate
tax base.
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.
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 faith, credit and taxing power for repayment. The Funds investments
may consist of private activity bonds that may subject certain shareholders to an alternative minimum tax.
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.
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.
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.
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.
|
|
|
72
|
|
2020 BLACKROCK ANNUAL
REPORT TO SHAREHOLDERS
|
Fund Investment Objectives, Policies and Risks (continued)
State Specific Risk (MCA
and MYN) The Fund invests primarily in municipal bonds issued by or on behalf of its designated state. As a result, the Fund is more exposed to risks affecting issuers of its designated states municipal securities than is a fund
that invests more widely. Fund management does not believe that the current economic conditions will adversely affect the Funds ability to invest in high quality state municipal securities in its designated state.
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 Funds acquisition of the securities. In that event, the Internal Revenue Service may demand that the Fund pay U.S.
federal income taxes on the affected interest income, and, if the Fund agrees to do so, the Funds yield could be adversely affected. In addition, the treatment of dividends previously paid or to be paid by the Fund as exempt interest
dividends could be adversely affected, subjecting the Funds shareholders to increased U.S. federal income tax liabilities. 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 may affect the availability of Municipal Bonds 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 securitys value. The Fund cannot be certain that any insurance company will make the payments it guarantees. If a municipal securitys 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.
Zero Coupon Securities Risk
While interest payments are not made on such securities, holders of such securities are deemed to have received income (phantom income) annually, notwithstanding that cash may not be received currently. The effect of owning
instruments that do not make current interest payments is that a fixed yield is earned not only on the original investment but also, in effect, on all discount accretion during the life of the obligations. This implicit reinvestment of earnings at a
fixed rate eliminates the risk of being unable to invest distributions at a rate as high as the implicit yield on the zero coupon bond, but at the same time eliminates the holders ability to reinvest at higher rates in the future. For this
reason, some of these securities may be subject to substantially greater price fluctuations during periods of changing market interest rates than are comparable securities that pay interest currently. Longer term zero coupon bonds are more exposed
to interest rate risk than shorter term zero coupon bonds. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of
cash.
When-Issued and Delayed Delivery Securities and Forward Commitments Risk 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 securitys price.
Indexed and
Inverse Securities Risk Indexed and inverse securities provide a potential return based on a particular index of value or interest rates. The Funds return on these securities will be subject to risk with respect to the value of
the particular index. These securities are subject to leverage risk and correlation risk. Certain indexed and inverse securities have greater sensitivity to changes in interest rates or index levels than other securities, and the Funds
investment in such instruments may decline significantly in value if interest rates or index levels move in a way Fund management does not anticipate.
U.S.
Government Obligations Risk Certain securities in which the Fund may invest, including securities issued by certain U.S. Government agencies and U.S. Government sponsored enterprises, are not guaranteed by the U.S. Government or
supported by the full faith and credit of the United States.
Variable Rate Demand Obligations Risks Variable rate demand obligations are
floating rate securities that combine an interest in a long term municipal bond with a right to demand payment before maturity from a bank or other financial institution. If the bank or financial institution is unable to pay, the Fund may lose
money.
Repurchase Agreements and Purchase and Sale Contracts Risk 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.
Leverage Risk The Fund uses leverage for investment purposes through the issuance of VMTP Shares or
VRDP Shares, as applicable. The Fund also utilizes leverage for investment purposes by entering into reverse repurchase agreements, derivative instruments with leverage embedded in then, such as TOB Residuals, and, if applicable, dollar rolls. The
Funds use of leverage may increase or decrease from time to time in its discretion and the Trust 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 Trust employs may not be successful.
Leverage involves risks and special considerations for common shareholders, including:
|
|
|
the likelihood of greater volatility of net asset value, market price and dividend rate of the common shares than a
comparable portfolio without leverage;
|
|
|
|
the risk that fluctuations in interest rates or dividend rates on any leverage that the Trust must pay will reduce the
return to the common shareholders;
|
|
|
|
FUND INVESTMENT OBJECTIVES, POLICIES AND
RISKS
|
|
73
|
Fund Investment Objectives, Policies and Risks (continued)
|
|
|
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 Trust were not leveraged, which may result in a greater decline in the market price of the common shares;
|
|
|
|
leverage may increase operating costs, which may reduce total return.
|
Any decline in the net asset value of the Funds investments will be borne entirely by the holders of common shares. Therefore, if the market value of the
Funds 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.
Tender Option Bonds Risk The Funds participation in tender option bond transactions may reduce the
Funds 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.
Reverse
Repurchase Agreements Risk 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.
Dollar Rolls Risk (MYN and MYI) Dollar rolls involve the risk that the
market value of the securities that the Fund is committed to buy may decline below the price of the securities the Fund has sold. These transactions may involve leverage.
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 Funds 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 (MCA, MYN and MYI)
Subject to the limitations set forth in the 1940 Act or as otherwise limited by the SEC, 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 entitys 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 Funds 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.
Derivatives Risk The
Funds use of derivatives may increase its costs, reduce the Funds returns and/or increase volatility. Derivatives involve significant risks, including:
Volatility 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 Funds use of derivatives is that the fluctuations in their values may not correlate with the overall securities markets.
Counterparty
Risk Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation.
Market and 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.
Valuation Risk
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.
Hedging Risk Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurance that the
Funds hedging transactions will be effective. The use of hedging may result in certain adverse tax consequences.
|
|
|
74
|
|
2020 BLACKROCK ANNUAL
REPORT TO SHAREHOLDERS
|
Fund Investment Objectives, Policies and Risks (continued)
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.
Regulatory Risk Derivative contracts, including, without limitation, swaps, currency forwards and non-deliverable
forwards, 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, certain derivatives are subject to margin requirements and swap dealers are required to collect margin from the Fund with respect to such derivatives.
Specifically, regulations are now in effect that require swap dealers to post and collect variation margin (comprised of specified liquid instruments and subject to a required haircut) in connection with trading of OTC swaps with the Fund. Shares of
investment companies (other than certain money market funds) may not be posted as collateral under these regulations. Requirements for posting of initial margin in connection with OTC swaps will be phased-in
through at least 2021. 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.
In November 2019, the SEC proposed new regulations governing the use of derivatives by registered investment companies. If adopted as proposed, new Rule 18f-4 would impose limits on the amount of derivatives a fund could enter into, eliminate the asset segregation framework currently used by funds to comply with Section 18 of the 1940 Act, treat derivatives as
senior securities so that a failure to comply with the proposed limits would result in a statutory violation and require funds whose use of derivatives is more than a limited specified exposure amount to establish and maintain a comprehensive
derivatives risk management program and appoint a derivatives risk manager.
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.
A recent outbreak of an infectious coronavirus has 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. 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.
|
|
|
FUND INVESTMENT OBJECTIVES, POLICIES AND
RISKS
|
|
75
|
Automatic Dividend Reinvestment Plan
Pursuant to each Funds 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 Funds 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
the Funds 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 Funds primary exchange (open-market purchases). If, on the dividend payment
date, the net asset value per share (NAV) is equal to or less than the market price per share plus estimated brokerage commissions (such condition often referred to as a market premium), the Reinvestment Plan Agent will
invest the dividend amount in newly issued shares acquired on behalf of the participants. The number of newly issued shares to be credited to each participants account will be determined by dividing the dollar amount of the dividend by the NAV
on the date the shares are issued. However, if the NAV is less than 95% of the market price on the dividend payment date, the dollar amount of the dividend will be divided by 95% of the market price on the dividend payment date. If, on the dividend
payment date, the NAV is greater than the market price per share plus estimated brokerage commissions (such condition often referred to as a market discount), the Reinvestment Plan Agent will invest the dividend amount in shares acquired
on behalf of the participants in open-market purchases. If the Reinvestment Plan Agent is unable to invest the full dividend amount in open-market purchases, or if the market discount shifts to a market premium during the purchase period, the
Reinvestment Plan Agent will invest any un-invested portion in newly issued shares. Investments in newly issued shares made in this manner would be made pursuant to the same process described above and the date of issue for such newly issued shares
will substitute for the dividend payment date.
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 Agents 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 Agents 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 MUE, MCA and MYI that request a sale of shares are subject to a $2.50 sales fee and a $0.15 per share sold brokerage commission fee. Participants in MYN 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 http://www.computershare.com/blackrock, or in writing to Computershare, P.O. Box 505000, Louisville, KY 40233,
Telephone: (800) 699-1236. Overnight correspondence should be directed to the Reinvestment Plan Agent at Computershare, 462 South 4th Street, Suite 1600, Louisville, KY 40202.
|
|
|
76
|
|
2020 BLACKROCK ANNUAL
REPORT TO SHAREHOLDERS
|