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Notes to Financial
Statements
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1. Organization and Significant Accounting Policies:
BlackRock Fixed Income Value Opportunities (the “Trust”), is registered under the 1940 Act, as a diversified, closed-end management investment company. The Trust is organized as a Delaware statutory
trust. The Trust’s financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), which may require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities in the financial statements and the reported amounts of increase and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the Trust:
Valuation:
US GAAP defines fair value as the price the Trust would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date.
The Trust determines the fair values of its financial instruments at market value using independent dealers or pricing services under policies approved by the Board of Trustees of the Trust (the “Board”). The BlackRock Global Valuation
Methodologies Committee (the “Global Valuation Committee”) is the committee formed by management to develop global pricing policies and procedures and to provide oversight of the pricing function for the Trust for all financial
instruments.
The Trust values its bond investments on the basis of last available bid prices or current market quotations provided by dealers or
pricing services. Floating rate loan interests are valued at the mean of the bid prices from one or more brokers or dealers as obtained from a pricing service. In determining the value of a particular investment, pricing services may use certain
information with respect to transactions in such investments, quotations from dealers, pricing matrixes, market transactions in comparable investments, various relationships observed in the market between investments and calculated yield measures.
Asset-backed and mortgage-backed securities are valued by independent pricing services using models that consider estimated cash flows of each tranche of the security, establish a benchmark yield and develop an estimated tranche specific spread to
the benchmark yield based on the unique attributes of the tranche. Swap agreements are valued utilizing quotes received daily by the Trust’s pricing service or through brokers, which are derived using daily swap curves and models that
incorporate a number of market data factors, such as discounted cash flows, trades and values of the underlying reference instruments. Investments in open-end registered investment companies are valued at NAV each business day. Short-term securities
with remaining maturities of 60 days or less may be valued at amortized cost, which approximates fair value.
Equity investments traded on a recognized
securities exchange or the NASDAQ Global Market System (“NASDAQ”) are valued at the last reported sale price that day or the NASDAQ official closing price, if applicable. For equity investments traded on more than one exchange, the last
reported sale price on the exchange where the stock is primarily
traded is used. Equity investments traded on a recognized exchange for which there were no sales on that day are valued at the last available bid (long positions) or ask (short positions) price.
If no bid or ask price is available, the prior day’s price will be used, unless it is determined that such prior day’s price no longer reflects the fair value of the security.
Securities and other assets and liabilities denominated in foreign currencies are translated into US dollars using exchange rates determined as of the close of business on the New York Stock Exchange
(“NYSE”). Foreign currency exchange contracts are valued at the mean between the bid and ask prices and are determined as of the close of business on the NYSE. Interpolated values are derived when the settlement date of the contract is an
interim date for which quotations are not available.
Exchange-traded options are valued at the mean between the last bid and ask prices at the close of
the options market in which the options trade. An exchange-traded option for which there is no mean price is valued at the last bid (long positions) or ask (short positions) price. If no bid or ask price is available, the prior day’s price will
be used, unless it is determined that the prior day’s price no longer reflects the fair value of the option. Over-the-counter (“OTC”) options are valued by an independent pricing service using a mathematical model, which incorporates
a number of market data factors, such as the trades and prices of the underlying instruments.
In the event that application of these methods of
valuation results in a price for an investment that is deemed not to be representative of the market value of such investment, or if a price is not available, the investment will be valued by the Global Valuation Committee, or its delegate, in
accordance with a policy approved by the Board as reflecting fair value (“Fair Value Assets”). When determining the price for Fair Value Assets, the Global Valuation Committee, or its delegate, seeks to determine the price that each Trust
might reasonably expect to receive from the current sale of that asset in an arm’s-length transaction. Fair value determinations shall be based upon all available factors that the investment advisor and/or sub-advisor deem relevant consistent
with the principles of fair value measurement which include the market approach, income approach and/or in the case of recent investments, the cost approach, as appropriate. A market approach generally consists of using comparable market
transactions. The income approach generally is used to discount future cash flows to present value and adjusted for liquidity as appropriate. These factors include but are not limited to (i) attributes specific to the investment or asset;
(ii) the principal market for the investment or asset; (iii) the customary participants in the principal market for the investment or asset; (iv) data assumptions by market participants for the investment or asset, if reasonably
available; (v) quoted prices for similar investments or assets in active markets; and (vi) other factors, such as future cash flows, interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, recovery
rates, liquidation amounts and/or default rates. Due to the inherent uncertainty of valuations of such investments, the fair values may differ from the values that would have been used had an active market existed. The Global
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BLACKROCK FIXED INCOME VALUE OPPORTUNITIES
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DECEMBER 31, 2012
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17
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Notes to Financial Statements
(continued)
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Valuation Committee, or its delegate, employs various methods for calibrating valuation approaches for investments where an active market does not exist, including regular due diligence of the
Trust’s pricing vendors, a regular review of key inputs and assumptions, transactional back-testing or disposition analysis to compare unrealized gains and losses to realized gains and losses, reviews of missing or stale prices and large
movements in market values and reviews of any market related activity. The pricing of all Fair Value Assets is subsequently reported to the Board or a committee thereof on a quarterly basis.
Generally, trading in foreign instruments is substantially completed each day at various times prior to the close of business on the NYSE. Occasionally, events affecting the values of such instruments may occur
between the foreign market close and the close of business on the NYSE that may not be reflected in the computation of the Trust’s net assets. If events (for example, a company announcement, market volatility or a natural disaster) occur during
such periods that are expected to affect the value of such instruments materially, those instruments may be Fair Value Assets and valued at their fair value, as determined in good faith by the Global Valuation Committee using a pricing service
and/or policies approved by the Board.
Foreign Currency:
The Trust’s books and records are maintained in US dollars. Purchases and sales of
investment securities are recorded at the rates of exchange prevailing on the respective date of such transactions. Generally, when the US dollar rises in value against foreign currency, the Trust’s investments denominated in that currency will
lose value because that currency is worth fewer US dollars; the opposite effect occurs if the US dollar falls in relative value.
The Trust does not
isolate the portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of investments held or sold for financial reporting purposes. Accordingly, the effects of changes in
foreign currency exchange rates on investments are not segregated in the Statement of Operations from the effects of changes in market prices of those investments but are included as a component of net realized and unrealized gain (loss) from
investments. The Trust reports realized currency gains (losses) on foreign currency related transactions as components of net realized gain (loss) for financial reporting purposes, whereas such components are treated as ordinary income for federal
income tax purposes.
Asset-Backed and Mortgage-Backed Securities:
The Trust may invest in asset-backed securities. Asset-backed securities are
generally issued as pass-through certificates, which represent undivided fractional ownership interests in an underlying pool of assets, or as debt instruments, which are also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such assets and issuing such debt. Asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. The yield
characteristics of certain asset-backed securities may differ from traditional debt securities. One such major difference is that all or a principal part of the obligations may
be prepaid at any time because the underlying assets (i.e., loans) may be prepaid at any time. As a result, a decrease in interest rates in the market may result in increases in the level of
prepayments as borrowers, particularly mortgagors, refinance and repay their loans. An increased prepayment rate with respect to an asset-backed security subject to such a prepayment feature will have the effect of shortening the maturity of the
security. If the Trust has purchased such an asset-backed security at a premium, a faster than anticipated prepayment rate could result in a loss of principal to the extent of the premium paid.
The Trust may purchase certain mortgage pass-through securities. There are a number of important differences among the agencies and instrumentalities of the US
Government that issue mortgage-related securities and among the securities that they issue. For example, mortgage-related securities guaranteed by Ginnie Mae are guaranteed as to the timely payment of principal and interest by Ginnie Mae and such
guarantee is backed by the full faith and credit of the United States. However, mortgage-related securities issued by Freddie Mac and Fannie Mae, including Freddie Mac and Fannie Mae guaranteed Mortgage Pass-Through Certificates, which are solely
the obligations of Freddie Mac and Fannie Mae, are not backed by or entitled to the full faith and credit of the United States but are supported by the right of the issuer to borrow from the Treasury.
Multiple Class Pass-Through Securities:
The Trust may invest in multiple class pass-through securities, including collateralized mortgage obligations
(“CMOs”) and commercial mortgage-backed securities. These multiple class securities may be issued by Ginnie Mae, US government agencies or instrumentalities or by trusts formed by private originators of, or investors in, mortgage loans. In
general, CMOs are debt obligations of a legal entity that are collateralized by, and multiple class pass-through securities represent direct ownership interests in, a pool of residential or commercial mortgage loans or mortgage pass-through
securities (the “Mortgage Assets”), the payments on which are used to make payments on the CMOs or multiple pass-through securities. Classes of CMOs include interest only (“IOs”), principal only (“POs”), planned
amortization classes and targeted amortization classes. IOs and POs are stripped mortgage-backed securities representing interests in a pool of mortgages, the cash flow from which has been separated into interest and principal components. IOs
receive the interest portion of the cash flow while POs receive the principal portion. IOs and POs can be extremely volatile in response to changes in interest rates. As interest rates rise and fall, the value of IOs tends to move in the same
direction as interest rates. POs perform best when prepayments on the underlying mortgages rise since this increases the rate at which the principal is returned and the yield to maturity on the PO. When payments on mortgages underlying a PO are
slower than anticipated, the life of the PO is lengthened and the yield to maturity is reduced. If the underlying Mortgage Assets experience greater than anticipated pre-payments of principal, the Trust may not fully recoup its initial investments
in IOs.
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18
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BLACKROCK FIXED INCOME VALUE OPPORTUNITIES
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DECEMBER 31, 2012
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Notes to Financial Statements
(continued)
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Floating Rate Loan Interests:
The Trust may invest in floating rate loan interests. The floating rate loan
interests the Trust holds are typically issued to companies (the “borrower”) by banks, other financial institutions, and privately and publicly offered corporations (the “lender”). Floating rate loan interests are generally
non-investment grade, often involve borrowers whose financial condition is troubled or uncertain and companies that are highly leveraged. The Trust may invest in obligations of borrowers who are in bankruptcy proceedings. Floating rate loan
interests may include fully funded term loans or revolving lines of credit. Floating rate loan interests are typically senior in the corporate capital structure of the borrower. Floating rate loan interests generally pay interest at rates that are
periodically determined by reference to a base lending rate plus a premium. The base lending rates are generally the lending rate offered by one or more European banks, such as London Interbank Offered Rate (“LIBOR”), the prime rate
offered by one or more US banks or the certificate of deposit rate. Floating rate loan interests may involve foreign borrowers, and investments may be denominated in foreign currencies. The Trust considers these investments to be investments in debt
securities for purposes of its investment policies.
When the Trust purchases a floating rate loan interest it may receive a facility fee and when it
sells a floating rate loan interest it may pay a facility fee. On an ongoing basis, the Trust may receive a commitment fee based on the undrawn portion of the underlying line of credit amount of a floating rate loan interest. Facility and commitment
fees are typically amortized to income over the term of the loan or term of the commitment, respectively. Consent and amendment fees are recorded to income as earned. Prepayment penalty fees, which may be received by the Trust upon the prepayment of
a floating rate loan interest by a borrower, are recorded as realized gains. The Trust may invest in multiple series or tranches of a loan. A different series or tranche may have varying terms and carry different associated risks.
Floating rate loan interests are usually freely callable at the borrower’s option. The Trust may invest in such loans in the form of participations in loans
(“Participations”) or assignments (“Assignments”) of all or a portion of loans from third parties. Participations typically will result in the Trust having a contractual relationship only with the lender, not with the borrower.
The Trust will have the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the Participation and only upon receipt by the lender of the payments from the borrower. In connection with
purchasing Participations, the Trust generally will have no right to enforce compliance by the borrower with the terms of the loan agreement, nor any rights of offset against the borrower, and the Trust may not benefit directly from any collateral
supporting the loan in which it has purchased the Participation. As a result, the Trust will assume the credit risk of both the borrower and the lender that is selling the Participation. The Trust’s investment in loan participation interests
involves the risk of insolvency of the financial intermediaries who are parties to the transactions. In the event of the insolvency of the lender selling the Participation, the Trust may be treated as a general creditor of the lender and may not
benefit from any offset between the lender and the borrower. Assignments typically result in the Trust having a
direct contractual relationship with the borrower, and the Trust may enforce compliance by the borrower with the
terms of the loan agreement.
Reverse Repurchase Agreements:
The Trust may enter into reverse repurchase agreements with qualified third party
brokers-dealers. In a reverse repurchase agreement, the Trust sells securities to a bank or broker-dealer and agrees to repurchase the same securities at a mutually agreed upon date and price. Securities sold under reverse repurchase agreements are
recorded as a liability in the Statement of Assets and Liabilities at face value including accrued interest. Due to the short term nature of the reverse repurchase agreements, face value approximates fair value. During the term of the reverse
repurchase agreement, the Trust continues to receive the principal and interest payments on these securities. Certain agreements have no stated maturity and can be terminated by either party at any time. Interest on the value of the reverse
repurchase agreements issued and outstanding is based upon competitive market rates determined at the time of issuance. The Trust may utilize reverse repurchase agreements when it is anticipated that the interest income to be earned from the
investment of the proceeds of the transaction is greater than the interest expense of the transaction. Reverse repurchase agreements involve leverage risk and also the risk that the market value of the securities that the Trust is obligated to
repurchase under the agreement may decline below the repurchase price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Trust’s use of the proceeds of the agreement may be
restricted while the other party, or its trustee or receiver, determines whether or not to enforce the Trust’s obligation to repurchase the securities.
Segregation and Collateralization:
In cases in which the 1940 Act and the interpretive positions of the Securities and Exchange Commission (“SEC”) require that the Trust either deliver collateral
or segregate assets in connection with certain investments (e.g., foreign currency exchange contracts, options written and swaps), or certain borrowings (e.g., reverse repurchase agreements), the Trust will, consistent with SEC rules and/or certain
interpretive letters issued by the SEC, segregate collateral or designate on its books and records cash or liquid securities having a market value at least equal to the amount that would otherwise be required to be physically segregated.
Furthermore, based on requirements and agreements with certain exchanges and third party broker-dealers, a Trust engaging in such transactions may have requirements to deliver/deposit securities to an exchange or broker-dealer as collateral for
certain investments.
Investment Transactions and Investment Income:
For financial reporting purposes, investment transactions are recorded on
the dates the transactions are entered into (the trade dates). Realized gains and losses on investment transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Interest income, including
amortization and accretion of premiums and discounts on debt
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BLACKROCK FIXED INCOME VALUE OPPORTUNITIES
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DECEMBER 31, 2012
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19
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Notes to Financial Statements
(continued)
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securities, is recognized on the accrual basis. Consent fees are compensation for agreeing to changes in the terms of
debt instruments and are included in interest income in the Statement of Operations.
Dividends and Distributions:
Dividends from net investment
income are declared and paid quarterly. Distributions of capital gains are recorded on the ex-dividend dates. The portion of distributions that exceeds the Trust’s current and accumulated earnings and profits, which are measured on a tax basis,
will constitute a nontaxable return of capital. Distributions in excess of the Trust’s taxable income and net capital gains, but not in excess of the Trust’s earnings and profits, will be taxable to shareholders as ordinary income and will
not constitute a nontaxable return of capital. Capital losses carried forward from years beginning before 2011 do not reduce earnings and profits, even if such carried forward losses offset current year realized gains. The character and timing of
dividends and distributions are determined in accordance with federal income tax regulations, which may differ from US GAAP.
Income Taxes:
It is
the Trust’s policy to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no
federal income tax provision is required.
The Trust files US federal and various state and local tax returns. No income tax returns are currently under
examination. The statute of limitations on the Trust’s US federal tax returns remains open for each of the four periods ended December 31, 2012. The statutes of limitations on the Trust’s state and local tax returns may remain open
for an additional year depending upon the jurisdiction. Management does not believe there are any uncertain tax positions that require recognition of a tax liability.
Recent Accounting Standards:
In December 2011, the Financial Accounting Standards Board (the “FASB”) issued guidance that will expand current disclosure requirements on the offsetting of certain
assets and liabilities. The new disclosures will be required for investments and derivative financial instruments subject to master netting or similar agreements which are eligible for offset in the Statements of Assets and Liabilities and will
require an entity to disclose both gross and net information about such investments and transactions in the financial statements. In January 2013, the FASB issued guidance that clarifies which investments and transactions are subject to the
offsetting disclosure requirements. The scope of the disclosure requirements for offsetting will be limited to derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending
transactions. The guidance is effective for financial statements with fiscal years beginning on or after January 1, 2013, and interim periods within those fiscal years. Management is evaluating the impact of this guidance on the Trust’s
financial statement disclosures.
Other:
Expenses directly related to the Trust are charged to the Trust. Other operating expenses shared by
several funds are pro rated among those funds on the basis of relative net assets or other appropriate methods.
The Trust has an arrangement with the
custodian whereby fees may be reduced by credits earned on uninvested cash balances, which if applicable, are shown as fees paid indirectly in the Statement of Operations. The custodian imposes fees on overdrawn cash balances, which can be offset by
accumulated credits earned or may result in additional custody charges.
2. Derivative Financial Instruments:
The Trust engages in various portfolio investment strategies using derivative contracts both to increase the returns of the Trust and/or to economically hedge, or
protect, its exposure to certain risks such as credit risk and foreign currency exchange rate risk. These contracts may be transacted on an exchange or over-the-counter (“OTC”).
Losses may arise if the value of the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument or if the counterparty does not perform under the contract. The
Trust’s maximum risk of loss from counterparty credit risk on OTC derivatives is generally the aggregate unrealized gain netted against any collateral pledged by/posted to the counterparty. For OTC options purchased, the Trust bears the risk of
loss in the amount of the premiums paid plus the positive change in market values net of any collateral received on the options should the counterparty fail to perform under the contracts. Options written by the Trust do not give rise to
counterparty credit risk, as options written obligate the Trust to perform and not the counterparty. Counterparty risk related to exchange-traded financial futures contracts and options and centrally cleared swaps is deemed to be minimal due to the
protection against defaults provided by the exchange on which these contracts trade.
The Trust may mitigate counterparty risk by procuring collateral
and through netting provisions included within an International Swaps and Derivatives Association, Inc. master agreement (“ISDA Master Agreement”) implemented between the Trust and each of its respective counterparties. The ISDA Master
Agreement allows the Trust to offset with each separate counterparty certain derivative financial instrument’s payables and/or receivables with collateral held. The amount of collateral moved to/from applicable counterparties is generally based
upon minimum transfer amounts of up to $500,000. To the extent amounts due to the Trust from its counterparties are not fully collateralized, contractually or otherwise, the Trust bears the risk of loss from counterparty non-performance. See Note 1
“Segregation and Collateralization” for information with respect to collateral practices. In addition, the Trust manages counterparty risk by entering into agreements only with counterparties that it believes have the financial resources
to honor their obligations and by monitoring the financial stability of those counterparties.
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20
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BLACKROCK FIXED INCOME VALUE OPPORTUNITIES
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DECEMBER 31, 2012
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Notes to Financial Statements
(continued)
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Certain ISDA Master Agreements allow counterparties to OTC derivatives to terminate derivative contracts prior to
maturity in the event the Trust’s net assets decline by a stated percentage or the Trust fails to meet the terms of its ISDA Master Agreements, which would cause the Trust to accelerate payment of any net liability owed to the counterparty.
Foreign Currency Exchange Contracts:
The Trust enters into foreign currency exchange contracts as an economic hedge against either specific
transactions or portfolio instruments or to obtain exposure to foreign currencies (foreign currency exchange rate risk). A foreign currency exchange contract is an agreement between two parties to buy and sell a currency at a set exchange rate on a
future date. Foreign currency exchange contracts, when used by the Trust, help to manage the overall exposure to the currencies in which some of the investments held by the Trust are denominated. The contract is marked-to-market daily and the change
in market value is recorded by the Trust as an unrealized gain or loss. When the contract is closed, the Trust records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was
closed. The use of foreign currency exchange contracts involves the risk that the value of a foreign currency contract changes unfavorably due to movements in the value of the referenced foreign currencies and the risk that the counterparty to the
contract does not perform its obligation under the agreement.
Options:
The Trust purchases and writes call and put options to increase or
decrease their exposure to underlying instruments (including equity risk, interest rate risk and/or commodity price risk) and/or, in the case of options written, to generate gains from options premiums. A call option gives the purchaser (holder) of
the option the right (but not the obligation) to buy, and obligates the seller (writer) to sell (when the option is exercised), the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. A
put option gives the holder the right to sell and obligates the writer to buy the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. When the Trust purchases (writes) an option, an
amount equal to the premium paid (received) by the Trust is reflected as an asset (liability). The amount of the asset (liability) is subsequently marked-to-market to reflect the current market value of the option purchased (written). When an
instrument is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the instrument acquired or deducted from (or added to) the proceeds of the instrument sold. When an
option expires (or the Trust enters into a closing transaction), the Trust realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premiums
received or paid). When the Trust writes a call option, such option is “covered,” meaning that the Trust holds the underlying instrument subject to being called by the option counterparty. When the Trust writes a put option, such option is
covered by cash in an amount sufficient to cover the obligation.
Swaps:
The Trust enters into swap agreements, in which the Trust and a
counterparty agree either to make periodic net payments on a specified
notional amount or net payment upon termination. Swap agreements are privately negotiated in the OTC market and may
be entered into as a bilateral contract or centrally cleared (“centrally cleared swaps”). In a centrally cleared swap, immediately following execution of the swap agreement, the swap agreement is novated to a central counterparty (the
“CCP”) and the Trust faces the CCP through a future commission merchant. Unlike a bilateral swap agreement, for centrally cleared swaps, the Trust has no credit exposure to the counterparty as the CCP stands between the Trust and the
counterparty. These payments received or made by the Trust are recorded in the Statement of Operations as realized gains or losses, respectively. Any upfront fees paid are recorded as assets and any upfront fees received are recorded as liabilities
and are shown as swap premiums paid and swap premiums received, respectively in the Statement of Assets and Liabilities and amortized over the term of the swap. Swaps are marked-to-market daily and changes in value are recorded as unrealized
appreciation (depreciation). The daily change in valuation of centrally cleared swaps, if any, is recorded as a receivable or payable for variation margin in the Statement of Assets and Liabilities. When the swap is terminated, the Trust will record
a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Trust’s basis in the contract, if any. Generally, the basis of the contracts is the premium received or paid. Swap
transactions involve, to varying degrees, elements of interest rate, credit and market risk in excess of the amounts recognized in the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for
these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreements, and that there may be unfavorable changes in interest rates and/or market
values associated with these transactions.
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Credit default swaps – The Trust enters into credit default swaps to manage its exposure to the market or certain sectors of the market, to reduce its risk
exposure to defaults of corporate and/or sovereign issuers or to create exposure to corporate and/or sovereign issuers to which it is not otherwise exposed (credit risk). The Trust may either buy or sell (write) credit default swaps on single-name
issuers (corporate or sovereign), a combination or basket of single-name issuers or traded indexes. Credit default swaps on single-name issuers are agreements in which the protection buyer pays fixed periodic payments to the seller in consideration
for a guarantee from the protection seller to make a specific payment should a negative credit event take place with respect to the referenced entity (e.g., bankruptcy, failure to pay, obligation accelerators, repudiation, moratorium or
restructuring). Credit default swaps on traded indexes are agreements in which the buyer pays fixed periodic payments to the seller in consideration for a guarantee from the seller to make a specific payment should a write-down, principal or
interest shortfall or default of all or individual underlying securities included in the index occurs. As a buyer, if an underlying credit event occurs, the Trust will either receive from the seller an amount equal to the notional amount of the swap
and deliver the referenced security or underlying securities comprising of an index or receive a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying securities comprising of an index.
As a seller
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BLACKROCK FIXED INCOME VALUE OPPORTUNITIES
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DECEMBER 31, 2012
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21
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Notes to Financial Statements
(continued)
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(writer), if an underlying credit event occurs, the Trust will either pay the buyer an amount equal to the notional amount of the swap and take delivery of the referenced security or underlying
securities comprising the index or pay a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying securities comprising the index.
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Derivative Financial Instruments Categorized by Risk Exposure:
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Fair Values of Derivative
Financial Instruments as of
December 31, 2012
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Asset Derivatives
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Liability Derivatives
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Statement
of Assets
and Liabilities
Location
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Value
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Statement of
Assets
and Liabilities
Location
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Value
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Foreign currency exchange contracts
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—
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—
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Unrealized
depreciation
on foreign
currency
exchange
contracts
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$
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37,167
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Credit contracts
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Swap
premiums
paid
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$
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95,961
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Unrealized
depreciation
on swaps
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63,353
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Total
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|
|
|
$
|
95,961
|
|
|
|
|
$
|
100,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Financial Instruments in the Statement of
Operations Year
Ended December 31, 2012
|
|
|
Net Realized Gain (Loss) from
|
|
|
Credit contracts:
|
|
|
|
|
|
Swaps
|
|
$
|
(56,518
|
)
|
|
Foreign currency exchange contracts:
|
|
|
|
|
|
Foreign currency transactions
|
|
|
(1,537
|
)
|
|
Equity contracts:
|
|
|
|
|
|
Options
1
|
|
|
73,080
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Options purchased are included in the net realized gain (loss) from
investments-unaffiliated and net change in unrealized appreciation/ depreciation on investments.
|
|
|
|
|
|
|
|
Net Change in Unrealized Appreciation/Depreciation on
|
|
|
|
|
|
Credit contracts:
|
|
|
|
|
|
Swaps
|
|
$
|
(64,293
|
)
|
|
Foreign currency exchange contracts:
|
|
|
|
|
|
Foreign currency translations
|
|
|
(71,580
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
(135,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2012, the average quarterly balances of outstanding derivative financial
instruments were as follows:
|
|
|
|
|
|
|
Foreign currency exchange contracts:
|
|
|
|
|
|
Average number of contracts - US dollars purchased
|
|
|
3
|
|
|
Average number of contracts - US dollars sold
|
|
|
1
|
*
|
|
Average US dollar amounts purchased
|
|
$
|
2,286,929
|
|
|
Average US dollar amounts sold
|
|
$
|
21,000
|
|
|
Credit default swaps:
|
|
|
|
|
|
Average number of contracts - buy protection
|
|
|
1
|
|
|
Average number of contracts - sell protection
|
|
|
1
|
*
|
|
Average notional value - buy protection
|
|
$
|
1,000,000
|
|
|
Average notional value - sell protection
|
|
$
|
575,000
|
|
|
Options:
|
|
|
|
|
|
Average number of contracts purchased
|
|
|
2,200
|
|
|
Average number of contracts written
|
|
|
1,450
|
|
|
Average notional value of contracts purchased
|
|
$
|
3,025,000
|
|
|
Average notional value of contracts written
|
|
$
|
1,921,250
|
|
*Average contract amount shown due to limited activity.
3. Investment Advisory Agreement and Other Transactions with Affiliates:
The PNC Financial Services Group,
Inc. (“PNC”) is the largest stockholder and an affiliate, for 1940 Act purposes, of BlackRock, Inc.
(“BlackRock”).
The Trust entered into an Investment Advisory Agreement with BlackRock Advisors, LLC (the “Manager”), the Trust’s investment advisor, an indirect,
wholly owned subsidiary of BlackRock, to provide investment advisory and administration services. The Manager is responsible for the management of the Trust’s portfolio and provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Trust. For such services, the Trust pays the Manager a monthly fee, at the annual rate of 1.25%, based on the average daily total assets (including any assets attributable to borrowings) minus the
average sum of total liabilities (other than borrowings representing financial leverage).
The Manager voluntarily agreed to waive its investment
advisory fees by the amount of investment advisory fees the Trust pays to the Manager indirectly through its investment in affiliated money market funds. However, the Manager does not waive its investment advisory fees by the amount of investment
advisory fees paid in connection with the Trust’s investment in other affiliated investment companies, if any. This amount is included in fees waived by Manager in the Statement of Operations.
The Manager entered into a sub-advisory agreement with BlackRock Financial Management, Inc. (“BFM”), an affiliate of the Manager. The Manager paid BFM
for services it provided, a monthly fee that was a percentage of the investment advisory fees paid by the Trust to the Manager.
The Trust entered into
a Distribution Agreement with BlackRock Investments, LLC (“BRIL”), an affiliate of the Manager. Pursuant to the Trust’s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
BLACKROCK FIXED INCOME VALUE OPPORTUNITIES
|
|
DECEMBER 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
Notes to Financial Statements
(continued)
|
|
|
Plan of Distribution, the Trust will pay over its life a monthly trail commission at an annual rate of 0.25% of the
Trust’s daily net assets to BRIL, all or a portion of which may be reallowed to selling agents. As of December 31, 2012, the amount of the Trust’s trail commissions that has been estimated to be incurred over the life of the Trust is
$3,955,690. Any changes in the estimated amounts will be recorded as an adjustment to paid-in capital in the period determined. For the year ended December 31, 2012, the Trust recorded $129,648 as an adjustment to paid-in capital for trail
commissions, and paid trail commissions to BRIL of $651,053.
The Trust will also pay out of its assets ongoing compensation to BRIL on an annual basis,
all or a portion of which may be reallowed to selling agents, in connection with the provision of ongoing shareholder services in an amount equal to 0.25% of the net asset value of shares owned by customers of the selling agent or, if applicable,
BRIL. This amount is shown as service in the Statement of Operations.
Certain officers and/or trustees of the Trust are officers and/or directors of
BlackRock or its affiliates. The Trust reimburses the Manager for a portion of the compensation paid to the Trust’s Chief Compliance Officer.
4. Investments:
Purchases and sales of investments,
including paydowns and excluding short-term securities and US government securities for the year ended December 31, 2012, were $30,427,555 and $120,043,894, respectively.
Purchases of US government securities for the year ended December 31, 2012, were $875,000. There were no sales for the year ended December 31, 2012.
Transactions in options written for the year ended December 31, 2012, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puts
|
|
|
|
|
|
|
|
Contracts
|
|
|
Notional
(000)
|
|
|
Premiums
Received
|
|
|
Outstanding options, beginning of year
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Options written
|
|
|
5,800
|
|
|
|
7,685,000
|
|
|
$
|
73,080
|
|
|
Options expired
|
|
|
(5,800
|
)
|
|
|
(7,685,000
|
)
|
|
|
(73,080
|
)
|
|
Options closed
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
Outstanding options, end of year
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Income Tax Information:
US GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These
reclassifications have no effect on net assets or net asset values per share. The following permanent differences as of December 31, 2012 attributable to foreign currency transactions, amortization and accretion methods on fixed income
securities and the accounting for swap agreements, were reclassified to the following accounts:
|
|
|
|
|
|
|
Distributions in excess of net investment income
|
|
$
|
1,637,290
|
|
|
Accumulated net realized gain
|
|
$
|
(1,637,290
|
)
|
The tax character of distributions paid during the fiscal years ended December 31, 2012 and December 31, 2011 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/12
|
|
|
12/31/11
|
|
|
Distributions paid from:
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
21,998,841
|
|
|
$
|
22,852,738
|
|
|
Long-term capital gain
|
|
|
1,226,650
|
|
|
|
6,453,660
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,225,491
|
|
|
$
|
29,306,398
|
|
|
|
|
|
|
|
As of December 31, 2012, the tax components of accumulated net earnings were as follows:
|
|
|
|
|
|
|
Undistributed ordinary income
|
|
$
|
444,417
|
|
|
Undistributed long term capital gains
|
|
|
273,008
|
|
|
Net unrealized gains*
|
|
|
21,378,286
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,095,711
|
|
|
|
|
|
|
|
|
|
*
|
The difference between book-basis and tax-basis net unrealized gains was attributable primarily to amortization and accretion methods of premiums and discounts on fixed income
securities, the realization for tax purposes of unrealized gains/losses on certain foreign currency exchange contracts and the accounting for swap agreements.
|
As of December 31, 2012, gross unrealized appreciation and gross unrealized depreciation based on cost for federal income tax purposes were as follows:
|
|
|
|
|
|
|
Tax cost
|
|
$
|
213,088,065
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
$
|
22,390,125
|
|
|
Gross unrealized depreciation
|
|
|
(913,862
|
)
|
|
|
|
|
|
|
|
Net unrealized appreciation
|
|
$
|
21,476,263
|
|
|
|
|
|
|
|
6. Borrowings:
For the year
ended December 31, 2012, the daily weighted average interest rate for the Trust’s borrowings, which include reverse repurchase agreements, was 0.36%.
7. Concentration, Market, Credit, Liquidity and Limited Term Risk:
The Trust invests a significant portion of
its assets in securities backed by commercial or residential mortgage loans or in issuers that hold mortgage and other asset-backed securities. Please see the Schedule of Investments for these securities. Changes in economic conditions, including
delinquencies and/or defaults on assets underlying these securities, can affect the value, income and/or liquidity of such positions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BLACKROCK FIXED INCOME VALUE OPPORTUNITIES
|
|
DECEMBER 31, 2012
|
|
23
|
|
|
|
|
|
|
|
|
|
Notes to Financial Statements
(concluded)
|
|
|
In the normal course of business, the Trust invests in securities and enters into transactions where risks exist due
to fluctuations in the market (market risk) or failure of the issuer of a security to meet all its obligations (issuer credit risk). The value of securities held by the Trust may decline in response to certain events, including those directly
involving the issuers whose securities are owned by the Trust; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and currency and interest rate and price
fluctuations. Similar to issuer credit risk, the Trust may be exposed to counterparty credit risk, or the risk that an entity with which the Trust has unsettled or open transactions may fail to or be unable to perform on its commitments. The Trust
manages counterparty credit risk by entering into transactions only with counterparties that it believes have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets,
which potentially expose the Trust to market, issuer and counterparty credit risks, consist principally of financial instruments and receivables due from counterparties. The extent of the Trust’s exposure to market, issuer and counterparty
credit risks with respect to these financial assets is generally approximated by their value recorded in the Statement of Assets and Liabilities, less any collateral held by the Trust.
The Trust is designed primarily for long term investors and an investment in the Trust’s shares should be considered to be illiquid. The Trust’s shares are not listed for trading on a securities exchange.
Shareholders may not be able to sell their shares as it is unlikely that a secondary market for the shares will develop or, if a secondary market does develop, shareholders may be able to sell their shares only at substantial discounts from net
asset value. The Trust may, but is not obligated to, conduct tender offers to repurchase outstanding shares. If the Trust does conduct tender offers, it may be required to sell its more liquid, higher quality portfolio securities to purchase shares
that are tendered, which may increase risks for remaining shareholders and increase Trust expenses.
It is anticipated that the Trust will terminate on
or before December 31, 2014. While the Manager expects the Trust to maintain a term of six years, the Trust’s term may be shorter depending on market conditions. Beginning in 2012, the Manager may begin liquidating all or a portion of the
Trust’s portfolio. As the assets of the Trust will be liquidated in connection with its termination, the Trust may be required to sell portfolio securities when it otherwise would not, including at times when market conditions are not
favorable, which may cause the Trust to lose money.
8. Capital Shares Transactions:
The Trust is authorized to issue an unlimited number of shares, par value $0.001 per share. The shares were sold at net asset value plus an initial sales charge not to exceed 2.50% of the offering price.
Offering Costs:
Offering costs totaling $4,523,940, including $3,955,690 in estimated trail commissions to be paid over the life of
the Trust, have been charged to paid-in capital. Under US GAAP, the Trust’s estimated amount of trail
commissions is considered to be an offering cost that is to be charged to paid-in capital upon the sale of the Trust’s shares. This accounting treatment differs from the treatment originally described in the Trust’s offering document,
which presented trail commissions as a period expense. For the year ended December 31, 2012, estimated trail commissions of $129,648 were charged to paid-in-capital.
Beginning in 2011, the Trust may choose to conduct annual tender offers for up to 25% of its shares then outstanding in the sole discretion of its Board. In a tender offer, the Trust repurchases outstanding shares
at the Trust’s net asset value on the last day of the offer. In any given year, the Manager may or may not recommend to the Board that the Trust conduct a tender offer. Accordingly, there may be years in which no tender offer is made. On
March 25, 2011, the Trust commenced a tender offer for 61,225 shares outstanding. Shareholders of the Trust tendered, and the Trust repurchased 33,507 shares. Shares issued and outstanding and paid-in-capital during the year ended
December 31, 2011 decreased by 33,507 and $39,370,132, respectively. On March 27, 2012, the Trust commenced a tender offer for 68,154 shares outstanding. Shareholders of the Trust tendered, and the Trust repurchased 44,917 shares. Shares
issued and outstanding and paid-in-capital during the year ended December 31, 2012 decreased by 44,917 and $49,094,027, respectively.
9.
Subsequent Events:
The Management’s evaluation of the impact of all subsequent events on the Trust’s financial statements was completed
through the date the financial statements were issued and the following items were noted:
On February 7, 2013, the Board approved an offer to
repurchase up to 25% of its outstanding shares, which will commence on February 25, 2013. The final acceptance date of the tender is March 25, 2013 and the payable date is March 28, 2013.
The Trust is scheduled to terminate on or before December 31, 2014 pursuant to the Trust’s agreement and declaration of Trust. On February 7, 2013, the
Board also approved the proposed Plan of Liquidation and Dissolution (the “Plan”) of the Trust and the Trust commenced the process of liquidation. The Fund will make its final liquidating distribution of assets on or prior to
December 31, 2014.
Under the Plan, the Trust continues to exist in order to liquidate the property of the Trust, discharge its liabilities and
distribute remaining capital to shareholders and otherwise conduct its operations for purposes of effecting the complete liquidation and dissolution of the Trust in accordance with the Plan. The Trust may hold assets pending distribution in cash or
cash equivalents and may effect distributions through tender offers for its shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
BLACKROCK FIXED INCOME VALUE OPPORTUNITIES
|
|
DECEMBER 31, 2012
|
|
|