PROPOSAL 2ISSUANCE OF ACQUIRING FUND COMMON SHARES
In connection with the proposed Reorganizations described under Proposal 1: Reorganizations of the Funds, the
common shareholders and the VMTP Holders of the Acquiring Fund are being asked to approve the issuance of additional Acquiring Fund common shares.
Please see Information about the Common Shares of the Funds for information about the Funds common shares.
In the Reorganization, the Acquiring Fund will acquire substantially all of the assets of the applicable Target Fund and assume substantially all of the liabilities of the applicable Target Fund in
exchange for newly issued Acquiring Fund common shares, with a par value $0.001 per share, and newly issued Acquiring Fund VMTP Shares, with a par value of $0.001 per share and liquidation preference of $100,000 per share (plus any accumulated and
unpaid dividends that have accrued on the Target Fund VMTP Shares up to and including the day immediately preceding the Closing Date if such dividends have not been paid prior to the Closing Date). The Acquiring Fund will list the newly issued
common shares on the NYSE. Each Target Fund will distribute Acquiring Fund Shares received by it pro rata to its shareholders (although cash may be paid in lieu of any fractional common shares). The newly-issued Acquiring Fund Shares will be issued
in the form of book-entry interests. Such distribution of Acquiring Fund Shares to Target Fund shareholders will be accomplished by opening new accounts on the books of the Acquiring Fund in the names of the Target Fund shareholders and transferring
to those shareholder accounts Acquiring Fund Shares.
The Acquiring Fund will continue to operate after the Reorganizations as
a registered, diversified, closed-end management investment company with the investment objective, investment strategies, investment policies and investment restrictions described in this Proxy Statement. As a
result of the Reorganizations, however, a shareholder of each Fund may hold a reduced percentage of ownership in the larger Combined Fund than such shareholder did in any of the individual Funds before the Reorganizations.
If the Issuance with respect to a Funds Reorganization(s) is not approved, the Investment Advisor may, in connection with ongoing
management of that Fund and its product line, recommend alternative proposals to the Board of that Fund.
The Board of the
Acquiring Fund recommends that the Acquiring Fund VMTP Holders vote FOR each Issuance at the Special Meeting.
The affirmative vote of shareholders representing the holders of a majority of the outstanding Acquiring Fund common shares and Acquiring
Fund VMTP Shares present at the Special Meeting or represented by proxy, voting together as a single class, is required to approve each Issuance. For additional information regarding voting requirements, see Vote Required and Manner of Voting
Proxies.
Subject to the requisite approval of the shareholders of each Fund with respect to the Reorganization, as
well as certain consents, confirmations and/or waivers from various third parties, including the liquidity provider with respect to the outstanding BBF VRDP Shares, it is expected that the Closing Date of the Reorganizations will be sometime during
the first quarter of 2021, but it may be at a different time as described herein.
38
INFORMATION ABOUT THE PREFERRED SHARES OF THE FUNDS
BBFs, BSDs, MFTs and the Acquiring Funds respective Agreement and Declaration of Trust authorizes
the issuance of an unlimited number of shares, par value $.001 per share, all of which were initially classified as common shares. The Board of each Fund is authorized, however, to reclassify any unissued common shares to preferred shares without
the approval of its common shareholders.
Upon the closing of the Reorganization, the Target Funds VMTP Holders will receive
on a one-for-one basis one newly issued Acquiring Fund VMTP Share, par value $0.001 per share and with a liquidation preference of $100,000 per share (plus any
accumulated and unpaid dividends that have accrued on such Target Fund VMTP Share up to and including the day immediately preceding the Closing Date if such dividends have not been paid prior to the Closing Date), in exchange for each Target Fund
VMTP Share held by such Target Fund VMTP Holder immediately prior to the Closing Date. The newly issued Acquiring Fund VMTP Share may be of the same series as the Acquiring Funds outstanding VMTP Shares or a substantially identical series. No
fractional Acquiring Fund VMTP Shares will be issued. The terms of the Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will be substantially identical to the terms of the Acquiring Funds outstanding VMTP Shares
and will rank on parity with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The newly issued Acquiring
Fund VMTP Shares will have the same term redemption date applicable to the outstanding Acquiring Fund VMTP Shares as of the Closing Date of the Reorganization. Such term redemption date is July 2, 2021, unless extended. The Reorganizations will
not result in any changes to the terms of the Acquiring Funds VMTP Shares currently outstanding.
The newly issued
Acquiring Fund VMTP Shares will have terms that are substantially identical to the terms of the currently outstanding BSD and MFT VMTP Shares and the BBF VMTP Shares to be issued in connection with the VRDP Refinancing, including the same term
redemption date of July 2, 2021.
In connection with the Reorganizations, and assuming that the VRDP Refinancing is
completed prior to the Closing Date of the BBF Reorganization, the Acquiring Fund expects to issue 429 additional VMTP Shares to BSD VMTP Holders, 565 additional VMTP Shares to MFT VMTP Holders and 520 additional VMTP Shares to BBF VMTP Holders.
Following the completion of the Reorganizations, the Combined Fund is expected to have 3,027 VMTP Shares outstanding. As a result of the Reorganizations, the Acquiring Funds Statement of Preferences will be amended to authorize an additional
1,514 VMTP Shares. A form of such amendment is attached as Appendix C.
Set forth below is information about each
Funds preferred shares as of August 31, 2020.
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Fund
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Title of Class
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Amount
Authorized
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Amount
Authorized
Under Each
Series
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Amount
Held by
Fund
for its
Own
Account
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Amount
Outstanding
Exclusive of
Amount
Shown in
Previous
Column
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Issue Date
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Mandatory/
Term
Redemption
Date
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BSD
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VMTP Shares
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429
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Series W-7 429
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None
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429
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12/16/2011
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7/2/2021
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MFT
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VMTP Shares
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565
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Series W-7 565
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None
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565
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12/16/2011
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7/2/2021
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BBF
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VRDP Shares
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520
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Series W-7 520
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None
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520
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9/15/2011
and
5/16/2016
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10/1/2041
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Acquiring Fund (BLE)
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VMTP Shares
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1,513
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Series W-7 1,513
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None
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1,513
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12/16/2011
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7/2/2021
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The outstanding preferred shares of each Fund are fully paid and
non-assessable and have no preemptive or cumulative voting rights.
39
Below is a table that details, as of August 31, 2020, (i) each Funds current
leverage attributable to preferred shares as a percentage of its total net assets, (ii) the Combined Funds leverage attributable to preferred shares on a pro forma basis as a percentage of its total net assets assuming only the BSD
Reorganization was consummated as of August 31, 2020, and (iii) the Combined Funds leverage attributable to preferred shares on a pro forma basis as a percentage of its total net assets assuming all of the Reorganizations were
consummated as of August 31, 2020.
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Fund
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Title of Class
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Shares
Outstanding
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Liquidation
Preference
Per Share
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Aggregate
Liquidation
Preference
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Total Managed
Assets
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As
Percentage
of Net
Assets
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BSD
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VMTP Shares
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429
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$
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100,000
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$
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42,900,000
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176,637,803
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24.3
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%
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MFT
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VMTP Shares
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565
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$
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100,000
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$
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56,500,000
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203,973,174
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27.7
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%
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BBF
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VRDP Shares
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520
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$
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100,000
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$
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52,000,000
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229,143,93
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22.7
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%
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Acquiring Fund (BLE)
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VMTP Shares
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1,513
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$
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100,000
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$
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151,300,000
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573,392,764
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26.4
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%
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Pro forma Combined Fund (BSD into BLE)
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VMTP Shares
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1,942
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$
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100,000
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$
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194,200,000
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750,030,568
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25.9
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%
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Pro forma Combined Fund (BSD, MFT and BBF into BLE)
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VMTP Shares
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3,027
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$
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100,000
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$
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302,700,000
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1,183,147,335
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25.6
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%
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BBF has issued VRDP Shares, $100,000 liquidation value per share. The Acquiring Fund has issued, and
following the VRDP Refinancing BBF will issue, VMTP Shares, $100,000 liquidation value per share, with substantially identical terms. Please see Description of the VMTP Shares of the Acquiring Fund, BSD and MFT,
Description of the VRDP Shares of BBF for additional information.
BSD, MFT and the Acquiring Fund have each
issued VMTP Shares, $100,000 liquidation value per share, with substantially identical terms, including the same term redemption date of July 2, 2021. BBF has issued VRDP Shares, $100,000 liquidation value per share, with a mandatory redemption
date of October 1, 2041. The outstanding VRDP Shares of BBF are currently in a one year Special Rate Period that will end on April 15, 2021, unless extended. Please see Description of the VMTP Shares of the Acquiring Fund, BSD
and MFT, Description of the VRDP Shares of BBF for additional information.
The VMTP Shares and VRDP
Shares were offered to qualified institutional buyers in private transactions exempt from registration under the Securities Act.
The annualized dividend rates for the preferred shares for each Funds most recent fiscal year end were as follows:
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Fund
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Rate
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BSD
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2.18
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%
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MFT
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1.79
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%
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BBBF
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1.70
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%
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Acquiring Fund (BLE)
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1.67
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%
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If the BBF Reorganization Agreement is approved by its shareholders, prior to the Closing Date of the
Reorganizations, it is expected that BBF will issue VMTP Shares with terms substantially identical to the terms of the Acquiring Fund VMTP Shares and use the proceeds from such issuance to redeem all of outstanding VRDP Shares of BBF, respectively.
The BBF VMTP Shares that will be issued in connection with the VRDP Refinancing will have the same $100,000 liquidation preference per share, dividend period, dividend payment
40
date, voting rights, redemption provisions, transfer restrictions and covenants with respect to effective leverage, asset coverage and eligible investments, mechanism for determining the
applicable dividend rate and maximum rate, and the same redemption and paying agent as the outstanding Acquiring Fund VMTP Shares. If the VRDP Refinancing is not completed prior to the Closing Date of the BBF Reorganization, then the BBF
Reorganization will not be consummated.
In connection with the Reorganizations, the Acquiring Fund expects to issue 429
additional VMTP Shares to BSD VMTP Holders, 565 additional VMTP Shares to MFT VMTP Holders and 520 additional VMTP Shares to BBF VMTP Holders. Following the completion of the Reorganizations, the Combined Fund is expected to have 3,027 VMTP Shares
outstanding. Assuming all of the Reorganizations are approved by shareholders and the VRDP Refinancing is completed prior to the Closing Date of the BBF Reorganization, upon the Closing Date of the Reorganizations, BSD, MFT and BBF VMTP Holders will
receive on a one-for-one basis one newly issued Acquiring Fund VMTP Share, par value $0.001 per share and with a liquidation preference of $100,000 per share (plus any
accumulated and unpaid dividends that have accrued on the BSD, MFT or BBF VMTP Shares up to and including the day immediately preceding the Closing Date of the Reorganizations if such dividends have not been paid prior to the Closing Date), in
exchange for each BSD, MFT or BBF VMTP Share held by the BSD, MFT or BBF VMTP Holders immediately prior to the Closing Date. The newly issued Acquiring Fund VMTP Shares will have terms that are substantially identical to the terms of the BBF VMTP
Shares to be issued in connection with the VRDP Refinancing. The newly issued Acquiring Fund VMTP Shares may be of the same series as the Acquiring Funds outstanding VMTP Shares or a substantially identical series. No fractional Acquiring Fund
VMTP Shares will be issued. The terms of the Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will be substantially identical to the terms of the Acquiring Funds outstanding VMTP Shares and will rank on parity
with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The newly issued Acquiring Fund VMTP Shares will
have the same term redemption date applicable to the outstanding Acquiring Fund VMTP Shares as of the Closing Date of the Reorganization. Such term redemption date is July 2, 2021, unless extended. The Reorganizations will not result in any
changes to the terms of the Acquiring Funds VMTP Shares currently outstanding.
The newly issued Acquiring Fund VMTP
Shares will have terms that are substantially identical to the terms of the currently outstanding BSD and MFT VMTP Shares and the BBF VMTP Shares to be issued in the VRDP Refinancing, including the same term redemption date of July 2, 2021.
Description of the VMTP Shares of the Acquiring Fund, BSD and MFT
Each of the Acquiring Funds, BSDs and MFTs VMTP Shares may be redeemed, in whole or in part, at any time at the option
of the Acquiring Fund, BSD or MFT, as applicable. The redemption price per VMTP Share is equal to the liquidation preference per share plus any outstanding unpaid dividends. Each of the Acquiring Fund, BSD and MFT is required to redeem its VMTP
Shares on the term redemption date of the VMTP Shares, unless earlier redeemed or repurchased or unless extended. Such term redemption date is July 2, 2021, unless extended. Six months prior to the term redemption date of the VMTP Shares, each
of the Acquiring Fund, BSD and MFT is required to begin to segregate liquid assets with such Funds custodian to fund the redemption. In addition, each of the Acquiring Fund, BSD and MFT is required to redeem certain of its outstanding VMTP
Shares if it fails to comply with certain asset coverage, basic maintenance amount or leverage requirements.
Dividends on the
Acquiring Funds, BSDs and MFTs VMTP Shares are declared daily and payable monthly at a variable rate set weekly at a fixed rate spread to 0.75% of the one-month LIBOR Rate. The fixed spread
is determined based on the long-term preferred share rating assigned to the Acquiring Funds, BSDs and MFTs VMTP Shares by the ratings agencies then rating the Acquiring Funds, BSDs and MFTs VMTP Shares. At the
date of issuance, the Acquiring Funds, BSDs and MFTs VMTP Shares were assigned long-term ratings of Aaa from Moodys and AAA from Fitch. Subsequent to the issuance of the Acquiring Funds, BSDs and
41
MFTs VMTP Shares, Moodys completed a review of its methodology for rating securities issued by registered closed-end funds. As of
August 31, 2020, the Acquiring Funds VMTP Shares were assigned a long-term rating of Aa1 from Moodys under its new rating methodology. The Acquiring Funds VMTP Shares continue to be assigned a long-term rating of AAA from
Fitch. As of April 30, 2020, BSDs VMTP Shares were assigned a long-term rating of Aa1 from Moodys under its new rating methodology. BSDs VMTP Shares continue to be assigned a long-term rating of AAA from Fitch. As of July 31,
2020, MFTs VMTP Shares were assigned a long-term rating of Aa1 from Moodys under its new rating methodology. MFTs VMTP Shares continue to be assigned a long-term rating of AAA from Fitch. The dividend rate on the Acquiring
Funds, BSDs and MFTs VMTP Shares is subject to a step-up spread if such Fund fails to comply with certain provisions, including, among other things, the timely payment of dividends,
redemptions or gross-up payments, and complying with certain asset coverage and leverage requirements. For the fiscal year ended August 31, 2020, the annualized dividend rate for the VMTP Shares
of the Acquiring Fund was 1.67%. For the fiscal year ended April 30, 2020, the annualized dividend rate for the VMTP Shares of BSD was 2.18%. For the fiscal year ended July 31, 2020, the annualized dividend rate for the VMTP Shares of MFT
was 1.79%.
The Acquiring Funds, BSDs and MFTs VMTP Shares are subject to certain restrictions on transfer,
and each of the Acquiring Fund, BSD and MFT may also be required to register its VMTP Shares for sale under the Securities Act under certain circumstances. In addition, amendments to the Acquiring Funds, BSDs and MFTs VMTP
Shares governing documents generally require the consent of the holders of VMTP Shares.
For each of the Acquiring Fund,
BSD and MFT, its VMTP Shares rank prior to such Funds common shares as to the payment of dividends by the Fund, and distribution of assets upon dissolution or liquidation of the Fund. For each of the Acquiring Fund, BSD and MFT, the 1940 Act
prohibits the declaration of any dividend on the Funds common shares or the repurchase of the Funds common shares if the Fund fails to maintain asset coverage of at least 200% of the liquidation preference of the Funds outstanding
VMTP Shares. In addition, pursuant to the VMTP Shares governing instruments, each of the Acquiring Fund, BSD and MFT are restricted from declaring and paying dividends on classes of shares ranking junior to or on parity with the such
Funds VMTP Shares or repurchasing such shares if the Fund fails to declare and pay dividends on the VMTP Shares, redeem any VMTP Shares required to be redeemed under the VMTP Shares governing instruments or comply with the basic
maintenance amount requirement of the ratings agencies rating the VMTP Shares.
For each of the Acquiring Fund, BSD and MFT,
the holders of the Funds VMTP Shares have voting rights equal to the voting rights of the holders of the Funds common shares (one vote per share) and will vote together with holders of the Funds common shares (one vote per share)
as a single class on certain matters. However, for each of the Acquiring Fund, BSD, and MFT, the VMTP Shareholders, voting as a separate class, are also entitled to elect two trustees to the Board of the Fund. For each of the Acquiring Fund, BSD and
MFT, VMTP Shareholders are also entitled to elect the Funds full board of trustees if dividends on the VMTP Shares are not paid for a period of two years. VMTP Shareholders are also generally entitled to a separate class vote to amend the VMTP
Shares governing documents. In addition, the 1940 Act requires the approval of the holders of a majority of any outstanding VMTP Shares, voting as a separate class, to (a) adopt any plan of reorganization that would adversely affect the
VMTP Shares, (b) change the applicable Funds sub-classification as a closed-end investment company or change its fundamental investment
restrictions or (c) change its business so as to cease to be an investment company.
Description of the VRDP
Shares of BBF
If the BBF Reorganization Agreement is approved by BBF shareholders, prior to the Closing Date of the BBF
Reorganization, it is expected that BBF will issue VMTP Shares with terms substantially identical to the terms of the outstanding Acquiring Fund VMTP Shares and use the proceeds from such issuance to redeem all of outstanding VRDP Shares of BBF.
BBFs VRDP Shares have the benefit of an unconditional demand feature pursuant to a purchase agreement provided by
Bank of America, N.A. acting as liquidity provider to ensure full and timely repayment of the
42
liquidation preference amount plus any accumulated and unpaid dividends to holders upon the occurrence of certain events (the Liquidity Facility). BBF entered into a fee agreement
with the liquidity provider (the Fee Agreement) in connection with the Liquidity Facility that requires a per annum liquidity fee payable to the liquidity provider. The Fee Agreement between BBF and the liquidity provider is scheduled to
expire, unless renewed or terminated in advance, on April 30, 2021.
The Liquidity Facility requires the liquidity
provider to purchase all BBFs VRDP Shares tendered for sale that were not successfully remarketed. BBF is required to redeem its VRDP Shares owned by the liquidity provider after six months of continuous, unsuccessful remarketing. Upon the
occurrence of the first unsuccessful remarketing, BBF is required to segregate liquid assets to fund the redemption.
In the
event the VRDP Shares Purchase Agreement (the Purchase Agreement) for BBF is not renewed, and BBF does not arrange for a Purchase Agreement with an alternate liquidity provider, BBFs VRDP Shares will be subject to mandatory
purchase by the liquidity provider prior to the termination of the Purchase Agreement. There is no assurance BBF will replace such redeemed VRDP Shares with any other preferred shares or other form of leverage.
Except during the Special Rate Period (as defined and described below), VRDP Holders have the right to give notice on any business day to
tender BBFs VRDP Shares for remarketing in seven days, the VRDP Shares are subject to a mandatory tender for remarketing upon the occurrence of certain events, and should a remarketing be unsuccessful, the dividend rate for such VRDP Shares
will reset to a maximum rate as defined in the governing documents of the VRDP Shares. BBFs VRDP Shares are also subject to certain restrictions on transfer outside of the remarketing process. Except during the Special Rate Period, BBF may
incur remarketing fees at the annual rate of 0.10% on the aggregate principal amount of the VRDP Shares.
BBF is required to
redeem its VRDP Shares on October 1, 2041, the mandatory redemption date for such VRDP Shares, unless earlier redeemed or repurchased. Six months prior to the mandatory redemption date, BBF is required to begin to segregate liquid assets with
its custodian to fund the redemption. In addition, BBF is required to redeem certain of its outstanding VRDP Shares if it fails to maintain certain asset coverage, basic maintenance amount or leverage requirements.
Subject to certain conditions, BBFs VRDP Shares may be redeemed, in whole or in part, at any time at the option of BBF. The
redemption price per VRDP Share is equal to the liquidation value per VRDP Share plus any outstanding unpaid dividends, except that a redemption premium may be applicable during the Special Rate Period.
Except during the Special Rate Period, dividends on BBFs VRDP Shares are payable monthly at a variable rate set weekly by the
remarketing agent. Such dividend rates are generally based upon a spread over a base rate and cannot exceed a maximum rate. In the event of a failed remarketing, the dividend rate of the VRDP Shares will be reset to a maximum rate. The maximum rate
is determined based on, among other things, the long-term preferred share rating assigned to the VRDP Shares and the length of time that the VRDP Shares fail to be remarketed. The maximum rate of the VRDP Shares will not exceed 15% per annum,
exclusive of any applicable gross-up payments or increased dividend payment relating to the inclusion in any dividend of net capital gains or ordinary income taxable for regular U.S. federal income tax
purposes. At the date of issuance, the VRDP Shares of BBF were assigned a long-term rating of Aaa from Moodys and AAA from Fitch. Subsequent to the issuance of the VRDP Shares, Moodys completed a review of its methodology for rating
securities issued by registered closed-end funds. As of September 30, 2020, the VRDP Shares of BBF were assigned a long-term rating of Aa2 from Moodys under its new ratings methodology. The
VRDP Shares of BBF continue to be assigned a long-term rating of AAA from Fitch.
The short-term ratings on the VRDP
Shares were withdrawn by Moodys, Fitch and/or S&P at the commencement of the Special Rate Period, as described below. The short-term ratings on BBFs VRDP Shares are directly related to the short-term ratings of the liquidity provider
for such VRDP Shares. Changes in the
43
credit quality of the liquidity provider could cause a change in the short-term credit ratings of the VRDP Shares. Except during the Special Rate Period, a change in the short-term credit rating
of the liquidity provider or the VRDP Shares may adversely affect the dividend rate paid on such VRDP Shares, although the dividend rate paid on the VRDP Shares is not directly related to the short-term rating. The liquidity provider may be
terminated prior to the scheduled termination date if the liquidity provider fails to maintain short-term debt ratings in one of the two highest rating categories.
BBFs VRDP Shares are senior in priority to BBFs common shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of such
Fund. The VRDP Shares will rank on parity with other preferred shares of BBF as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of BBF. The 1940 Act prohibits the declaration of
any dividend on BBFs common shares or the repurchase of BBFs common shares if BBF fails to maintain the asset coverage of at least 200% of the liquidation preference of the outstanding VRDP Shares. In addition, pursuant to the VRDP
Shares governing instruments, BBF is restricted from declaring and paying dividends on classes of shares ranking junior to or on parity with the VRDP Shares or repurchasing such shares if BBF fails to declare and pay dividends on the VRDP
Shares, redeem any VRDP Shares required to be redeemed under the VRDP Shares governing instruments or comply with the basic maintenance amount requirement of the agencies rating the VRDP Shares.
The VRDP Holders have voting rights equal to BBFs common shareholders (one vote per Share) and will vote together with such common
shareholders (one vote per Share) as a single class. However, the VRDP Holders, voting as a separate class, are also entitled to elect two Board Members for BBF. In addition, the 1940 Act requires that along with approval by shareholders that might
otherwise be required, the approval of a 1940 Act Majority of the VRDP Holders of BBF, voting separately as a class, would be required to (a) adopt any plan of reorganization that would adversely affect the VRDP Shares of BBF, (b) change
BBFs sub-classification as a closed-end management investment company or change its fundamental investment restrictions or (c) change its business so as to
cease to be an investment company.
On October 22, 2015, BBF commenced a special rate period ending April 18, 2018
with respect to its VRDP Shares (the Special Rate Period). This Special Rate Period was extended and is currently set to expire on April 15, 2021. The VRDP Holders and BBF may mutually agree to extend the Special Rate Period prior
to the expiration of the Special Rate Period. If the Special Rate Period is not extended, the VRDP Shares will revert to remarketable securities upon the termination of the Special Rate Period and will be remarketed and available for purchase by
qualified institutional investors. The Liquidity Facility remains in effect for the duration of the Special Rate Period and the VRDP Shares are still subject to mandatory redemption by BBF on their respective mandatory redemption date. However, the
VRDP Shares will not be remarketed or subject to optional or mandatory tender events during such time. The short-term ratings of the VRDP Shares were withdrawn by Moodys, Fitch and/or S&P upon the commencement of the Special Rate Period.
Short-term ratings may be re-assigned upon the termination of the Special Rate Period.
During the Special Rate Period, BBF is required to maintain the same asset coverage, basic maintenance amount and leverage requirements
for the VRDP Shares as was required prior to the Special Rate Period.
During the Special Rate Period, BBF will pay no
fees to the liquidity provider and remarketing agent, but will instead pay dividends monthly based on the sum of 0.75% of the one-month LIBOR Rate and a percentage per annum based on the long-term ratings
assigned to the VRDP Shares. As of September 30, 2020, the BBF VRDP Shares were assigned long-term ratings of Aa2 from Moodys and AAA from Fitch. The annualized dividend rate of the BBF VRDP Shares as of
July 31, 2020 was as follows:
44
The Ratings Spread will increase in the event the VRDP Shares are rated below
Aaa/AAA by all of the rating agencies rating the VRDP Shares at the time such Ratings Spread is determined, up to a maximum of 4.00% in the event the VRDP Shares are either rated below Baa3/BBB- by at least
one of the rating agencies then rating the VRDP Shares or not rated by any rating agency.
Under BBFs Fee
Agreement with the liquidity provider, to the extent the liquidity provider together with certain affiliates individually or in the aggregate own at least 20% of the outstanding VRDP Shares and BBF has not failed to pay dividends on the VRDP Shares
for two years, the liquidity provider agreed to enter into and maintain a voting trust agreement and convey into the voting trust the right to vote all of its VRDP Shares owned by it or such affiliates, with respect to: (i) the election of the
two members of the Board for which VRDP Holders are entitled to vote under the 1940 Act and all other rights given to VRDP Holders with respect to the election of the Board; (ii) the conversion of BBF from a
closed-end management investment company to an open-end fund, or to change BBFs classification from diversified to
non-diversified; (iii) the deviation from a policy in respect of concentration of investments in any particular industry or group of industries as recited in BBFs registration statement; and
(iv) borrowing money, issuing senior securities, underwriting securities issued by other persons, purchasing or selling real estate or commodities or making loans to other persons other than in accordance with the recitals of policy with
respect thereto in BBFs registration statement.
If the Special Rate Period is not extended, the VRDP Shares will revert
back to remarketable securities and will be remarketed and available for purchase by qualified institutional investors. There is no assurance that the VRDP Shares will be remarketed or purchased by investors after the termination of the Special Rate
Period. If the VRDP Shares are not remarketed or purchased, then a failed remarketing will occur. As described above, in the event of a failed remarketing, the dividend rate of the VRDP Shares will be reset to the maximum rate and the VRDP Shares
that have not been remarketed are required to be purchased by the liquidity provider and subject to redemption by BBF after six months of continuous, unsuccessful remarketing.
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RISK FACTORS AND SPECIAL CONSIDERATIONS
Comparison of Risks
Because of their similar investment objectives and similar investment strategies, each Fund is subject to similar investment risks. With respect to the differences in risks, those risks of BSD, MFT and/or
BBF that are not shared with the Acquiring Fund are generally as a result of differences in the Funds principal investment strategies described above under SummaryInvestment Objective and Policies.
Each Fund utilizes leverage through the issuance of either VMTP Shares or VRDP Shares and TOBs. See The Acquiring Funds
InvestmentsLeverage; General Risks of Investing in the Acquiring FundLeverage Risk; and General Risks of Investing in the Acquiring FundTender Option Bond Risk. Each of BSD, MFT and the Acquiring Fund
currently leverages its assets through the use of VMTP Share and TOBs. BBF currently leverages its assets through the use of VRDP Shares and TOBs. The Acquiring Fund is expected to continue to leverage its assets after the Closing Date of the
Reorganizations through the use of VMTP Shares and TOBs. Please see Information about the Preferred Shares of the Funds for additional information about the preferred shares of each Fund.
In the normal course of business, each Fund 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 Funds may decline in response to certain events, including those directly involving the issuers
whose securities are owned by the Funds; conditions affecting the general economy; overall market changes; pandemics, epidemics and other global health events; local, regional or global political, social or economic instability; and currency and
interest rate and price fluctuations. Similar to issuer credit risk, the Funds may be exposed to counterparty credit risk, or the risk that an entity with which the Funds have unsettled or open transactions may fail to or be unable to perform on its
commitments.
The Combined Fund will be managed in accordance with the same investment objective, investment strategies
and investment policies, and subject to the same risks, as the Acquiring Fund. Risk is inherent in all investing. An investment in the Acquiring Fund should not be considered a complete investment program. Each shareholder should take into
account the Acquiring Funds investment objective as well as the shareholders other investments when considering an investment in the Acquiring Fund. You may lose part or all of your investment in the Acquiring Fund or your investment may
not perform as well as other similar investments.
BBF VRDP Shares will be subject to the same risks that currently apply
to the Acquiring Fund VMTP Shares and will apply to the Acquiring Fund VMTP Shares, assuming the Acquiring Fund VRDP Refinancing is completed.
General Risks of Investing in the Acquiring Fund
Municipal Bond Market Risk. Economic exposure to the municipal securities market involves certain risks. The Acquiring Funds economic exposure to municipal securities includes municipal
securities in the Acquiring Funds portfolio and municipal securities to which the Acquiring Fund is exposed through the ownership of residual interests in municipal TOBs (TOB Residuals). The municipal market is one in which dealer
firms make markets in bonds on a principal basis using their proprietary capital, and during the financial crisis of 2007-2009 these firms capital was severely constrained. As a result, some firms were unwilling to commit their capital to
purchase and to serve as a dealer for municipal securities. Certain municipal securities may not be registered with the SEC or any state securities commission and will not be listed on any national securities exchange. The amount of public
information available about the municipal securities to which the Acquiring Fund is economically exposed is generally less than that for corporate equities or bonds, and the investment performance of the Acquiring Fund may therefore be more
dependent on the analytical abilities of the Investment Advisor than would be a fund investing solely in stocks or taxable bonds. The secondary market for municipal
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securities, particularly the below investment grade securities to which the Acquiring Fund may be economically exposed, also tends to be less well-developed or liquid than many other securities
markets, which may adversely affect the Acquiring Funds ability to sell such securities at attractive prices or at prices approximating those at which the Acquiring Fund currently values them.
In addition, many state and municipal governments that issue securities are under significant economic and financial stress and may not
be able to satisfy their obligations. The ability of municipal issuers to make timely payments of interest and principal may be diminished during general economic downturns and as governmental cost burdens are reallocated among federal, state and
local governments. The taxing power of any governmental entity may be limited by provisions of state constitutions or laws and an entitys credit will depend on many factors, including the entitys tax base, the extent to which the entity
relies on federal or state aid, and other factors which are beyond the entitys control. In addition, laws enacted in the future by Congress or state legislatures or referenda could extend the time for payment of principal and/or interest, or
impose other constraints on enforcement of such obligations or on the ability of municipalities to levy taxes. Issuers of municipal securities might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, holders of
municipal securities could experience delays in collecting principal and interest and such holders may not, in all circumstances, be able to collect all principal and interest to which they are entitled. To enforce its rights in the event of a
default in the payment of interest or repayment of principal, or both, the Acquiring Fund may take possession of and manage the assets securing the issuers obligations on such securities, which may increase the Acquiring Funds operating
expenses. Any income derived from the Acquiring Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to
regulated investment companies (RICs).
Taxable Municipal Securities Risk. Build America Bonds involve
similar risks as municipal bonds, including credit and market risk. In particular, should a Build America Bonds issuer fail to continue to meet the applicable requirements imposed on the bonds as provided by the American Recovery and
Reinvestment Act (ARRA), it is possible that such issuer may not receive federal cash subsidy payments, impairing the issuers ability to make scheduled interest payments. The Build America Bond program expired on December 31,
2010 and no further issuance is permitted unless Congress renews the program. As a result, the number of available Build America Bonds is limited, which may negatively affect the value of the Build America Bonds. In addition, there can be no
assurance that Build America Bonds will be actively traded. It is difficult to predict the extent to which a market for such bonds will continue, meaning that Build America Bonds may experience greater illiquidity than other municipal obligations.
The Build America Bonds outstanding as of December 31, 2010 will continue to be eligible for the federal interest rate subsidy, which continues for the life of the Build America Bonds; however, no bonds issued following expiration of the Build
America Bond program will be eligible for the U.S. federal tax subsidy.
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 the
value of municipal securities. These risks include:
General Obligation Bonds Risks. General obligation bonds are
typically secured by the issuers pledge of its faith, credit and taxing power for the repayment of principal and the payment of interest. The taxing power of any governmental entity may be limited, however, by provisions of its state
constitution or laws, and an entitys creditworthiness will depend on many factors, including potential erosion of its tax base due to population declines, natural disasters, declines in the states industrial base or inability to attract
new industries, economic limits on the ability to tax without eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on federal or state aid, access to
capital markets or other factors beyond the states or entitys control. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the
issuers maintenance of its tax base.
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Revenue Bonds Risks. Revenue or special obligation bonds are typically payable only
from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue sources such as payments from the user of the facility being financed. Accordingly,
the timely payment of interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source. Revenue bonds issued by state or
local agencies to finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal securities generally, including that the underlying properties
may not generate sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the
properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not
generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.
Private Activity Bonds Risks. The Acquiring Fund may invest in certain tax-exempt
securities classified as private activity bonds. These bonds may subject certain investors in the Acquiring Fund to the federal alternative minimum tax.
Moral Obligation Bonds Risks. Municipal bonds may also include moral obligation bonds, which are normally issued by special purpose public authorities. If an issuer of moral obligation
bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality in question.
Municipal Notes Risks. Municipal notes are shorter term municipal debt obligations. They may provide interim financing in anticipation of tax collection, bond sales or revenue receipts. If there is
a shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid, and the Acquiring Fund may lose money.
Municipal Lease Obligations Risks. Also included within the general category of municipal bonds are certificates of participation (COPs) issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities. COPs represent participations in a lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called lease obligations)
relating to such equipment, land or facilities. Municipal leases, like other municipal debt obligations, are subject to the risk of non-payment. Although lease obligations do not constitute general obligations
of the issuer for which the issuers unlimited taxing power is pledged, a lease obligation is frequently backed by the issuers covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain
lease obligations contain non-appropriation clauses which provide that the issuer has no obligation to make lease or installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Although non-appropriation lease obligations are secured by the leased property, disposition of the property in the event of foreclosure might prove difficult and
the value of the property may be insufficient to issue lease obligations. Certain investments in lease obligations may be illiquid.
The ability of issuers of municipal leases to make timely lease payments may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated
among federal, state and local governmental units. Such non-payment would result in a reduction of income to the Acquiring Fund, and could result in a reduction in the value of the municipal lease experiencing
non-payment and a potential decrease in the NAV of the Acquiring Fund. Issuers of municipal lease obligations might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, the
Acquiring Fund could experience delays and limitations with respect to the collection of principal and interest on such municipal leases and the Acquiring Fund may not, in all circumstances, be able to collect all principal and interest to which it
is entitled. To enforce its rights in the event of a default in lease payments, the Acquiring Fund might take possession of and manage the assets securing the issuers obligations on such securities, which may increase the
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Acquiring Funds operating expenses and adversely affect the NAV of the Acquiring Fund. When the lease contains a non-appropriation clause, however,
the failure to pay would not be a default and the Acquiring Fund would not have the right to take possession of the assets. Any income derived from the Acquiring Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to regulated investment companies. In addition, the Acquiring Funds intention to qualify as a regulated
investment company under the Code, may limit the extent to which the Acquiring Fund may exercise its rights by taking possession of such assets, because as a regulated investment company the Acquiring Fund is subject to certain limitations on its
investments and on the nature of its income.
Liquidity of Investments. Certain municipal securities in which the
Acquiring Fund invests may lack an established secondary trading market or are otherwise considered illiquid. Liquidity of a security relates to the ability to easily dispose of the security and the price to be obtained and does not generally relate
to the credit risk or likelihood of receipt of cash at maturity. Illiquid securities may trade at a discount from comparable, more liquid investments.
The financial markets in general, and certain segments of the municipal 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 securities could be sold only at arbitrary prices and with substantial losses.
Periods of such market dislocation may occur again at any time.
Tax-Exempt Status
Risk. In making investments, the Acquiring Fund and the Investment Advisor 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 obligations and payments under tax-exempt derivative securities. Neither the Acquiring Fund nor the Investment Advisor will
independently review the bases for those tax opinions. If any of those tax opinions are ultimately determined to be incorrect or if events occur after the security is acquired that impact the securitys
tax-exempt status, the Acquiring Fund and its shareholders could be subject to substantial tax liabilities. An assertion by the Internal Revenue Service (the IRS) that a portfolio security is not
exempt from U.S. federal income tax (contrary to indications from the issuer) could affect the Acquiring Funds and its shareholders income tax liability for the current or past years and could create liability for information reporting
penalties. In addition, an IRS assertion of taxability may cause the Acquiring Fund to be ineligible to pay exempt-interest dividends or may impair the liquidity and the fair market value of the securities.
Taxability Risk. The Acquiring 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 Acquiring Funds acquisition of the securities. In that event, the IRS may demand that the Acquiring Fund pay U.S. federal
income taxes on the affected interest income, and, if the Acquiring Fund agrees to do so, the Acquiring Funds yield could be adversely affected. In addition, the treatment of dividends previously paid or to be paid by the Acquiring Fund as
exempt interest dividends could be adversely affected, subjecting the Acquiring Funds shareholders to increased U.S. federal income tax liabilities. 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 Acquiring 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 Acquiring Fund.
Alternative Minimum Tax Risk. The Acquiring Fund expects that a portion of the interest or income it produces will
be includable in alternative minimum taxable income. Exempt interest dividends also are likely to
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be subject to state and local income taxes. Distributions of any capital gain or other taxable income will be taxable to shareholders. The Acquiring Fund may not be a suitable investment for
investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing shares of the Acquiring Fund. The suitability of an investment in the Acquiring Fund will depend upon a comparison of the after
tax yield likely to be provided from the Acquiring Fund with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of
each such investors tax position. Special considerations apply to corporate investors.
Nonpayment Risk.
Municipal bonds, like other debt obligations, are subject to the risk of nonpayment. The ability of issuers of municipal securities to make timely payments of interest and principal may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal, state and local governmental units. Such nonpayment would result in a reduction of income to the Acquiring Fund and could result in a reduction in the value of the
municipal security experiencing nonpayment and a potential decrease in the net asset value of the Acquiring Fund.
Fixed
Income Securities Risks. Fixed income securities in which the Acquiring Fund may invest are generally subject to the following risks:
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 Acquiring Fund may be subject to a greater risk of rising interest rates due to the current period of historically low interest rates,
including the Federal Reserves recent lowering of the target for the federal funds rate to a range of 0%-0.25% as part of its efforts to ease the economic effects of the coronavirus pandemic. 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 Acquiring Funds investments will not
affect interest income derived from instruments already owned by the Acquiring Fund, but will be reflected in the Acquiring Funds NAV. The Acquiring Fund may lose money if short-term or long-term interest rates rise sharply in a manner not
anticipated by the Acquiring Funds management. To the extent the Acquiring Fund invests in debt securities that may be prepaid at the option of the obligor (such as mortgage-related securities), the sensitivity of such securities to changes in
interest rates may increase (to the detriment of the Acquiring 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 NAV of the Acquiring 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.
The Acquiring Funds use of
leverage, as described below, will tend to increase the Acquiring Funds interest rate risk. The Acquiring Fund may utilize certain strategies, including taking positions in futures or interest rate swaps, for the purpose of reducing the
interest rate sensitivity of fixed income securities held by the Acquiring Fund and decreasing the Acquiring Funds exposure to interest rate risk. The Acquiring Fund is not required to hedge its exposure to interest rate risk and may choose
not to do so. In addition, there is no assurance that any attempts by the Acquiring Fund to reduce interest rate risk will be successful or that any hedges that the Acquiring Fund may establish will perfectly correlate with movements in interest
rates.
The Acquiring Fund may invest in variable and floating rate debt instruments, which generally are less sensitive to
interest rate changes than longer duration fixed rate instruments, but may decline in value in response to rising interest rates if, for example, the rates at which they pay interest do not rise as much, or as quickly, as market interest rates in
general. Conversely, variable and floating rate instruments generally will not increase in value if interest rates decline. The Acquiring Fund also may invest in inverse floating rate debt securities, which
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may decrease in value if interest rates increase, and which also may exhibit greater price volatility than fixed rate debt obligations with similar credit quality.
Issuer Risk. The value of fixed income securities may decline for a number of reasons which directly relate to the issuer, such as
management performance, financial leverage, reduced demand for the issuers goods and services, historical and prospective earnings of the issuer and the value of the assets of the issuer.
Credit Risk. Credit risk is the risk that one or more fixed income securities in the Acquiring Funds portfolio will decline
in price or fail to pay interest or principal when due because the issuer of the security experiences a decline in its financial status. Credit risk is increased when a portfolio security is downgraded or the perceived creditworthiness of the issuer
deteriorates. To the extent the Acquiring Fund invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund which only invests in investment grade securities. In addition, to the extent the
Acquiring Fund uses credit derivatives, such use will expose it to additional risk in the event that the bonds underlying the derivatives default. The degree of credit risk depends on the issuers financial condition and on the terms of the
securities. If rating agencies lower their ratings of municipal securities in the Acquiring Funds portfolio, the value of those securities could decline, which could jeopardize rating agencies ratings of Acquiring Fund VMTP Shares.
Because a significant source of income for the Acquiring Fund is the interest and principal payments on the municipal securities in which it invests, any default by an issuer of a municipal security could have a negative impact on the Acquiring
Funds ability to pay dividends on common shares or any VMTP Shares then outstanding and could result in the redemption of some or all of any VMTP Shares then outstanding.
Prepayment Risk. During periods of declining interest rates, borrowers may exercise their option to prepay principal earlier than
scheduled. For fixed rate securities, such payments often occur during periods of declining interest rates, forcing the Acquiring Fund to reinvest in lower yielding securities, resulting in a possible decline in the Acquiring Funds income and
distributions to shareholders. This is known as prepayment or call risk. Below investment grade securities frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified
price (typically greater than par) only if certain prescribed conditions are met (call protection). For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Acquiring Fund, prepayment risk
may be enhanced.
Reinvestment Risk. Reinvestment risk is the risk that income from the Acquiring Funds portfolio
will decline if the Acquiring Fund invests the proceeds from matured, traded or called fixed income securities at market interest rates that are below the Acquiring Fund portfolios current earnings rate.
Duration and Maturity Risk. The Investment Advisor may seek to adjust the portfolios duration or maturity based on its
assessment of current and projected market conditions and all factors that the Investment Advisor deems relevant. In comparison to maturity (which is the date on which the issuer of a debt instrument is obligated to repay the principal amount),
duration is a measure of the price volatility of a debt instrument as a result in changes in market rates of interest, based on the weighted average timing of the instruments expected principal and interest payments. Specifically, duration
measures the anticipated percentage change in NAV that is expected for every percentage point change in interest rates. The two have an inverse relationship. Duration can be a useful tool to estimate anticipated price changes to a fixed pool of
income securities associated with changes in interest rates. For example, a duration of five years means that a 1% decrease in interest rates will increase the NAV of the portfolio by approximately 5%; if interest rates increase by 1%, the NAV will
decrease by 5%. However, in a managed portfolio of fixed income securities having differing interest or dividend rates or payment schedules, maturities, redemption provisions, call or prepayment provisions and credit qualities, actual price changes
in response to changes in interest rates may differ significantly from a duration-based estimate at any given time. Actual price movements experienced by a portfolio of fixed income securities will be affected by how interest rates move
(i.e., changes in the relationship of long-term interest rates to short-term interest rates and in the relationship of interest rates for highly rated securities and rates for below investment grade securities), the magnitude of any move in
interest rates, actual and anticipated prepayments of principal through call or
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redemption features, the extension of maturities through restructuring, the sale of securities for portfolio management purposes, the reinvestment of proceeds from prepayments on and from sales
of securities, and credit quality-related considerations whether associated with financing costs to lower credit quality borrowers or otherwise, as well as other factors. Accordingly, while duration maybe a useful tool to estimate potential price
movements in relation to changes in interest rates, investors are cautioned that duration alone will not predict actual changes in the net asset or market value of the Acquiring Funds shares and that actual price movements in the Acquiring
Funds portfolio may differ significantly from duration-based estimates. Duration differs from maturity in that it takes into account a securitys yield, coupon payments and its principal payments in addition to the amount of time until
the security finally matures. As the value of a security changes over time, so will its duration. Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations. In general, a
portfolio of securities with a longer duration can be expected to be more sensitive to interest rate changes than a portfolio with a shorter duration. Any decisions as to the targeted duration or maturity of any particular category of investments or
of the Acquiring Funds portfolio generally will be made based on all pertinent market factors at any given time. The Acquiring Fund may incur costs in seeking to adjust the portfolios average duration or maturity. There can be no
assurances that the Investment Advisors assessment of current and projected market conditions will be correct or that any strategy to adjust the portfolios duration or maturity will be successful at any given time.
Leverage Risk. The use of leverage creates an opportunity for increased common share net investment income dividends, but also
creates risks for the common shareholders. The Acquiring Fund cannot assure you that the use of leverage, if employed, will result in a higher yield on the common shares. Any leveraging strategy the Acquiring Fund employs may not be successful.
Leverage involves risks and special considerations for common shareholders, including:
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the likelihood of greater volatility of NAV, market price and dividend rate of the common shares than a comparable portfolio without leverage;
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the risk that fluctuations in interest rates or dividend rates on any leverage that the Acquiring Fund must pay will reduce the return to the common
shareholders;
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the effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the common shares than if the Acquiring Fund
were not leveraged, which may result in a greater decline in the market price of the common shares;
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when the Acquiring Fund uses financial leverage, the investment advisory fee payable to the Investment Advisor will be higher than if the Acquiring
Fund did not use leverage; and
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leverage may increase operating costs, which may reduce total return.
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Any decline in the NAV of the Acquiring Funds investments will be borne entirely by the common shareholders. Therefore, if the
market value of the Acquiring Funds portfolio declines, leverage will result in a greater decrease in NAV to the common shareholders than if the Acquiring Fund were not leveraged. This greater NAV decrease will also tend to cause a greater
decline in the market price for the common shares. Changes in the future direction of interest rates are very difficult to predict accurately. If the Acquiring Fund were to reduce any outstanding leverage based on a prediction about future changes
to interest rates, and that prediction turned out to be incorrect, the reduction in any outstanding leverage would likely operate to reduce the income and/or total returns to common shareholders relative to the circumstance where the Acquiring Fund
had not reduced any of its outstanding leverage. The Acquiring Fund may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and share price if the prediction were to turn out to be correct, and
determine not to reduce any of its outstanding leverage as described above.
The Acquiring Fund currently utilizes
leverage through the issuance of VMTP Shares (see Information about the Preferred Shares of the Funds) and investments in TOB Residuals (see Tender Option Bond Risk). The use of TOB Residuals may require the Acquiring
Fund to segregate or designate on its books and
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records assets to cover its obligations. While the segregated or earmarked assets may be invested in liquid assets, they may not be used for other operational purposes. Consequently, the use of
leverage may limit the Acquiring Funds flexibility and may require that the Acquiring Fund sell other portfolio investments to pay Fund expenses, to maintain assets in an amount sufficient to cover the Acquiring Funds leveraged exposure
or to meet other obligations at a time when it may be disadvantageous to sell such assets.
Certain types of leverage used by
the Acquiring Fund may result in the Acquiring Fund being subject to covenants relating to asset coverage and portfolio composition requirements. The Acquiring Fund may be subject to certain restrictions on investments imposed by guidelines of one
or more rating agencies, which issue ratings for the VMTP Shares issued by the Acquiring Fund or the governing instrument for the Acquiring Fund VMTP Shares. These guidelines may impose asset coverage or portfolio composition requirements that are
more stringent than those imposed by the 1940 Act. The Investment Advisor does not believe that these covenants or guidelines will impede it from managing the Acquiring Funds portfolio in accordance with the Acquiring Funds investment
objective and policies.
While there are any preferred shares of the Acquiring Fund outstanding, the Acquiring Fund may not
declare any cash dividend or other distribution on its common shares, unless at the time of such declaration, (i) all accrued preferred shares dividends have been paid and (ii) the value of the Acquiring Funds total assets
(determined after deducting the amount of such dividend or other distribution), less all liabilities and indebtedness of the Acquiring Fund, is at least 200% (as required by the 1940 Act) of the liquidation preference of the outstanding preferred
shares (expected to equal the aggregate original purchase price of the outstanding preferred shares plus any accrued and unpaid dividends thereon, whether or not earned or declared on a cumulative basis). This limitation on the Acquiring Funds
ability to make distributions on its common shares could in certain circumstances impair the ability of the Acquiring Fund to maintain its qualification for taxation as a regulated investment company under the Code. The Acquiring Fund may, however,
to the extent possible, purchase or redeem preferred shares from time to time to maintain compliance with such asset coverage requirements and may pay special dividends to the holders of the preferred shares in certain circumstances in connection
with any such impairment of the Acquiring Funds status as a regulated investment company under the Code.
In addition to
the foregoing, the use of leverage treated as indebtedness of the Acquiring Fund for U.S. federal income tax purposes may reduce the amount of Acquiring Fund dividends that are otherwise eligible for the dividends received deduction in the hands of
corporate shareholders.
The Acquiring Fund may utilize leverage through investment derivatives. The use of certain
derivatives will require the Acquiring to segregate assets to cover its obligations. While the segregated assets may be invested in liquid assets, they may not be used for other operational purposes. Consequently, the use of leverage may limit the
Acquiring Funds flexibility and may require that the Acquiring Fund sell other portfolio investments to pay Acquiring Fund expenses, to maintain assets in an amount sufficient to cover the Acquiring Funds leveraged exposure or to meet
other obligations at a time when it may be disadvantageous to sell such assets.
The Acquiring Fund may invest in the
securities of other investment companies. Such investment companies may also be leveraged, and will therefore be subject to the leverage risks described above. This additional leverage may in certain market conditions reduce the NAV of the Acquiring
Funds common shares and the returns to the common shareholders.
Tender Option Bond Risk. The Acquiring Fund
currently leverages its assets through the use of TOB Residuals, which are derivative interests in municipal bonds. The TOB Residuals in which the Acquiring Fund may 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. No independent investigation will be made to confirm the tax-exempt status of the interest or income paid by TOB Residuals held by the Acquiring
Fund. There is no assurance that the Acquiring Funds strategy of using TOB Residuals to leverage its assets will be successful.
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TOB Residuals represent beneficial interests in a special purpose trust formed for the
purpose of holding municipal bonds contributed by one or more funds (a TOB Trust). A TOB Trust typically issues two classes of beneficial interests: short-term floating rate interests (TOB Floaters), which are sold to
third-party investors, and TOB Residuals, which are generally issued to the fund(s) that transferred municipal bonds to the TOB Trust. TOB Floaters may have first priority on the cash flow from the municipal bonds held by the TOB Trust and are
enhanced with a liquidity support arrangement provided by a third-party bank or other financial institution (the TOBs Liquidity Provider) which allows holders to tender their position at par (plus accrued interest). The Acquiring Fund,
as a holder of TOB Residuals, is paid the residual cash flow from the TOB Trust. As result, distributions on TOB Residuals will bear an inverse relationship to short-term municipal bond interest rates. Distributions on the TOB Residuals paid to the
Acquiring 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. The amount of such reduction or increase is a function, in part, of the amount
of TOB Floaters sold by the TOB Trust relative to the amount of the TOB Residuals that it sells. The greater the amount of TOB Floaters sold relative to the TOB Residuals, the more volatile the distributions on the TOB Residuals will be. Short-term
interest rates are at historic lows and may be more likely to rise in the current market environment.
The municipal bonds
transferred to a TOB Trust typically are high grade municipal bonds. In certain cases, when municipal bonds transferred are lower grade municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely
payment of principal and interest on the bonds to the TOB Trust by a credit enhancement provider. The TOB Trust would be responsible for the payment of the credit enhancement fee and the Acquiring Fund, as a TOB Residual holder, would be responsible
for reimbursement of any payments of principal and interest made by the credit enhancement provider.
Any economic leverage
achieved through the Acquiring Funds investment in TOB Residuals will increase the possibility that common share long-term returns will be diminished if the cost of the TOB Floaters issued by a TOB Trust exceeds the return on the securities in
the TOB Trust. If the income and gains earned on municipal securities owned by a TOB Trust that issues TOB Residuals to the Acquiring Fund are greater than the payments due on the TOB Floaters issued by the TOB Trust, the Acquiring Funds
returns will be greater than if it had not invested in the TOB Residuals.
Although the Acquiring Fund generally would unwind
a TOB transaction rather than try to sell a TOB Residual, if it did try to sell a TOB Residual, its ability to do so would depend on the liquidity of the TOB Residual. TOB Residuals have varying degrees of liquidity based, among other things, upon
the liquidity of the underlying securities deposited in the TOB Trust. The market price of TOB Residuals is more volatile than the underlying municipal bonds due to leverage.
The leverage attributable to the Acquiring Funds use of TOB Residuals may be called away on relatively short notice and therefore may be less permanent than more traditional forms of
leverage. The TOB Trust may be collapsed without the consent of the Acquiring Fund upon the occurrence of termination events, as defined in the TOB Trust agreements. Upon the occurrence of a termination event, a TOB Trust would be liquidated with
the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and the TOBs Liquidity Provider. Upon certain termination events, the holders of the TOB Floaters would be paid before the
TOB Residual holders (i.e., the Acquiring Fund) whereas in other termination events, the holders of TOB Floaters and the TOB Residual holders would be paid pro rata.
The Acquiring Fund may invest in a TOB Trust on either a non-recourse or recourse basis. If the Acquiring Fund invests in a TOB Trust on a recourse basis, it will
typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to which the Acquiring Fund is required to reimburse the TOBs Liquidity Provider the balance, if any, of the amount owed under the liquidity facility over the
liquidation proceeds (the Liquidation Shortfall). As a result, if the Acquiring Fund invests in a recourse TOB Trust, the Acquiring Fund will bear the risk of loss with respect to any Liquidation Shortfall.
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The use of TOB Residuals will require the Acquiring Fund to earmark or segregate liquid
assets in an amount equal to any TOB Floaters, plus any accrued but unpaid interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, the Acquiring Fund that are not owned by the Acquiring Fund. The use of TOB Residuals
may also require the Acquiring Fund to earmark or segregate liquid assets in an amount equal to loans provided by the TOBs Liquidity Provider to the TOB Trust to purchase tendered TOB Floaters. While the segregated assets may be invested in liquid
securities, they may not be used for other operational purposes. Consequently, the use of leverage through TOB Residuals may limit the Acquiring Funds flexibility and may require that the Acquiring Fund sell other portfolio investments to pay
the Acquiring Funds expenses, to maintain assets in an amount sufficient to cover the Acquiring Funds leveraged exposure or to meet other obligations at a time when it may be disadvantageous to sell such assets. Future regulatory
requirements or SEC guidance may necessitate more onerous contractual or regulatory requirements, which may increase the costs or reduce the degree of potential economic benefits of TOB Trust transactions or limit the Acquiring Funds ability
to enter into or manage TOB Trust transactions.
The Acquiring Fund structures and sponsors the TOB Trusts in
which it holds TOB Residuals and has certain duties and responsibilities, which may give rise to certain additional risks including, but not limited to, compliance, securities law and operational risks.
The SEC and various federal banking and housing agencies adopted credit risk retention rules for securitizations (the Risk
Retention Rules). The Risk Retention Rules require the sponsor of a TOB Trust to retain at least 5% of the credit risk of the underlying assets supporting the TOB Trusts municipal bonds. The Risk Retention Rules may adversely affect the
Acquiring Funds ability to engage in TOB Trust transactions or increase the costs of such transactions in certain circumstances.
TOB Trusts constitute an important component of the municipal bond market. Any modifications or changes to the rules governing TOB Trusts may adversely impact the municipal market and the Acquiring Fund,
including through reduced demand for and liquidity of municipal bonds and increased financing costs for municipal issuers. The ultimate impact of any potential modifications on the TOB market and the overall municipal market is not yet certain.
Please see The Acquiring Funds InvestmentsLeverageTender Option Bonds for additional
information.
Insurance Risk. With respect to an insured municipal security, insurance guarantees that interest
payments on the municipal security will be made on time and that the principal will be repaid when the security matures. Insurance is expected to protect the Acquiring Fund against losses caused by a municipal security issuers failure to make
interest and principal payments. However, insurance does not protect the Acquiring Fund or its shareholders against losses caused by declines in a municipal securitys value. Also, the Acquiring Fund cannot be certain that any insurance company
will make the payments it guarantees. Certain significant providers of insurance for municipal securities incurred significant losses as a result of exposure to sub-prime mortgages and other lower credit
quality investments that experienced defaults or otherwise suffered extreme credit deterioration during the financial crisis of 2007-2009. These losses have reduced the insurers capital and called into question their continued ability to
perform their obligations under such insurance if they are called upon to do so in the future. While an insured municipal security will typically be deemed to have the rating of its insurer, if the insurer of a municipal security suffers a downgrade
in its credit rating or the market discounts the value of the insurance provided by the insurer, the rating of the underlying municipal security will be more relevant and the value of the municipal security would more closely, if not entirely,
reflect such rating. The Acquiring Fund may lose money on its investment if the insurance company does not make 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.
Yield and Ratings Risk. The yields on debt obligations are dependent on a variety of factors,
including general market conditions, conditions in the particular market for the obligation, the financial condition of the
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issuer, the size of the offering, the maturity of the obligation and the ratings of the issue. The ratings of Moodys, S&P and Fitch, which are described in Appendix D, represent
their respective opinions as to the quality of the obligations which they undertake to rate. Ratings, however, are general and are not absolute standards of quality. Consequently, obligations with the same rating, maturity and interest rate may have
different market prices. Subsequent to its purchase by the Acquiring Fund, a rated security may cease to be rated. The Investment Advisor will consider such an event in determining whether the Acquiring Fund should continue to hold the security.
Ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal
payments, they do not evaluate the market value risk of such obligations. Although these ratings may be an initial criterion for selection of portfolio investments, the Investment Advisor also will independently evaluate these securities and the
ability of the issuers of such securities to pay interest and principal. To the extent that the Acquiring Fund invests in lower grade securities that have not been rated by a rating agency, the Acquiring Funds ability to achieve its investment
objective will be more dependent on the Investment Advisors credit analysis than would be the case when the Acquiring Fund invests in rated securities.
High Yield Securities Risk. Subject to its investment policies, the Acquiring Fund may invest in securities rated, at the time of investment, below investment grade quality such as
those rated Ba or below by Moodys, BB or below by S&P or Fitch, or securities comparably rated by other rating agencies or in unrated securities determined by the Investment Advisor to be of comparable quality. Such securities, sometimes
referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve greater price
volatility than securities in higher rating categories. Often the protection of interest and principal payments with respect to such securities may be very moderate and issuers of such securities face major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments.
Lower grade securities, though high yielding, are characterized by high risk. They may be subject to certain risks with respect to the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated securities. The secondary market for lower grade securities may be less liquid than that of higher rated securities. Adverse conditions could make it difficult at times for the Acquiring Fund to sell certain securities or
could result in lower prices than those used in calculating the Acquiring Funds NAV.
The prices of fixed-income
securities generally are inversely related to interest rate changes; however, the price volatility caused by fluctuating interest rates of securities also is inversely related to the coupons of such securities. Accordingly, below investment grade
securities may be relatively less sensitive to interest rate changes than higher quality securities of comparable maturity because of their higher coupon. The investor receives this higher coupon in return for bearing greater credit risk. The higher
credit risk associated with below investment grade securities potentially can have a greater effect on the value of such securities than may be the case with higher quality issues of comparable maturity.
Lower grade securities may be particularly susceptible to economic downturns. It is likely that an economic recession could severely
disrupt the market for such securities and may have an adverse impact on the value of such securities. In addition, it is likely that any such economic downturn could adversely affect the ability of the issuers of such securities to repay principal
and pay interest thereon and increase the incidence of default for such securities. The ratings of Moodys, S&P, Fitch and other rating agencies represent their opinions as to the quality of the obligations which they undertake to rate.
Ratings are relative and subjective and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of such obligations. Although these ratings may be an initial criterion
for selection of portfolio investments, the Investment Advisor also will independently evaluate these securities and the ability of the issuers of such securities to pay interest and principal. To the extent that the Acquiring Fund invests in lower
grade securities that have not been rated by a rating agency, the Acquiring Funds ability to achieve its investment objective will
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be more dependent on the Investment Advisors credit analysis than would be the case when the Acquiring Fund invests in rated securities.
Unrated Securities Risk. Because the Acquiring Fund may purchase securities that are not rated by any rating organization, the
Investment Advisor may, after assessing their credit quality, internally assign ratings to certain of those securities in categories similar to those of rating organizations. Some unrated securities may not have an active trading market or may be
difficult to value, which means the Acquiring Fund might have difficulty selling them promptly at an acceptable price. To the extent that the Acquiring Fund invests in unrated securities, the Acquiring Funds ability to achieve its investment
objective will be more dependent on the Investment Advisors credit analysis than would be the case when the Acquiring Fund invests in rated securities.
Zero-Coupon Securities Risk. Municipal bonds may include zero-coupon bonds. Zero-coupon securities are bonds that are sold at a discount to par value and do
not pay interest during the life of the security. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity at a rate of interest reflecting the market rate of the security at the
time of issuance. Upon maturity, the holder of a zero-coupon security is entitled to receive the par value of the security.
While interest payments are not made on zero-coupon 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.
The Acquiring Fund accrues income with respect to these securities for U.S. federal income tax and accounting purposes
prior to the receipt of cash payments. Zero-coupon securities may be subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash interest at regular intervals.
Further, to maintain its qualification for pass-through treatment under the federal tax laws, the Acquiring Fund is required
to distribute income to its shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself by borrowing in order to generate the cash to satisfy these
distributions. The required distributions may result in an increase in the Acquiring Funds exposure to zero-coupon securities.
In addition to the above-described risks, there are certain other risks related to investing in zero-coupon securities. During a period of severe market conditions,
the market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, the Acquiring Funds investment exposure to these securities and their risks, including credit risk, will increase during the
time these securities are held in the Acquiring Funds portfolio.
Variable Rate Demand Obligations Risk. Variable
rate demand obligations (VRDOs) 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 Acquiring Fund may lose money.
Indexed and Inverse Securities Risk. Investments in
inverse floaters, residual interest TOBs and similar instruments expose the Acquiring Fund to the same risks as investments in fixed income securities and
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derivatives, as well as other risks, including those associated with leverage and increased volatility. An investment in these securities typically will involve greater risk than an investment in
a fixed rate security. Distributions on inverse floaters, residual interest TOBs and similar instruments will typically bear an inverse relationship to short-term interest rates and typically will be reduced or, potentially, eliminated as interest
rates rise. Inverse floaters, residual interest TOBs and similar instruments will underperform the market for fixed rate securities in a rising interest rate environment. Inverse floaters may be considered to be leveraged to the extent that their
interest rates vary by a magnitude that exceeds the magnitude of the change in a reference rate of interest (typically a short-term interest rate). The leverage inherent in inverse floaters is associated with greater volatility in their market
values. Investments in inverse floaters, residual interest TOBs and similar instruments that have fixed income securities underlying them will expose the Acquiring Fund to the risks associated with those fixed income securities and the values of
those investments may be especially sensitive to changes in prepayment rates on the underlying fixed income securities.
When-Issued, Forward Commitment and Delayed Delivery Transactions Risk. The Acquiring Fund may purchase securities on a
when-issued basis (including on a forward commitment or TBA (to be announced) basis) and may purchase or sell those securities for delayed delivery. When-issued and delayed delivery transactions occur when securities are purchased or
sold by the Acquiring Fund with payment and delivery taking place in the future to secure an advantageous yield or price. Securities purchased on a when-issued or delayed delivery basis may expose the Acquiring Fund to counterparty risk of default
as well as the risk that securities may experience fluctuations in value prior to their actual delivery. The Acquiring Fund will not accrue income with respect to a when-issued or delayed delivery security prior to its stated delivery date.
Purchasing securities on a when-issued or delayed delivery basis can involve the additional risk that the price or yield available in the market when the delivery takes place may not be as favorable as that obtained in the transaction itself.
Repurchase Agreements Risk. Repurchase agreements typically involve the acquisition by the Acquiring Fund of fixed
income securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Acquiring Fund will sell the securities back to the institution at a fixed time in the future. The
Acquiring Fund does not bear the risk of a decline in the value of the underlying security unless the seller defaults under its repurchase obligation. In the event of the bankruptcy or other default of a seller of a repurchase agreement, the
Acquiring Fund could experience both delays in liquidating the underlying securities and losses, including possible decline in the value of the underlying security during the period in which the Acquiring Fund seeks to enforce its rights thereto;
possible lack of access to income on the underlying security during this period; and expenses of enforcing its rights. While repurchase agreements involve certain risks not associated with direct investments in fixed income securities, the Acquiring
Fund follows procedures approved by the Board that are designed to minimize such risks. The value of the collateral underlying the repurchase agreement will be at least equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, the Acquiring Fund generally will seek to liquidate such collateral. However, the exercise of the Acquiring Funds right to liquidate such
collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Acquiring Fund could suffer a loss.
Reverse Repurchase Agreements Risk. Reverse repurchase agreements involve the risks that the interest income earned on the
investment of the proceeds will be less than the interest expense of the Acquiring Fund, that the market value of the securities sold by the Acquiring Fund may decline below the price at which the Acquiring Fund is obligated to repurchase the
securities and that the securities may not be returned to the Acquiring Fund. There is no assurance that reverse repurchase agreements can be successfully employed.
Securities Lending Risk. The Acquiring Fund may lend securities to financial institutions. Securities lending involves exposure to certain risks, including operational risk (i.e., the risk
of losses resulting from problems in the settlement and accounting process), gap risk (i.e., the risk of a mismatch between the return on cash collateral reinvestments and the fees the Acquiring Fund has agreed to pay a borrower),
and credit, legal,
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counterparty and market risk. If a securities lending counterparty were to default, the Acquiring Fund would be subject to the risk of a possible delay in receiving collateral or in recovering
the loaned securities, or to a possible loss of rights in the collateral. In the event a borrower does not return the Acquiring Funds securities as agreed, the Acquiring Fund may experience losses if the proceeds received from liquidating the
collateral do not at least equal the value of the loaned security at the time the collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities. This event could trigger adverse tax consequences for the Acquiring
Fund. The Acquiring Fund could lose money if its short-term investment of the collateral declines in value over the period of the loan. Substitute payments for dividends received by the Acquiring Fund for securities loaned out by the Acquiring Fund
will generally not be considered qualified dividend income. The securities lending agent will take the tax effects on shareholders of this difference into account in connection with the Acquiring Funds securities lending program. Substitute
payments received on tax-exempt securities loaned out will generally not be tax-exempt income.
Restricted and Illiquid Securities Risk. The Acquiring Fund may invest 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 Acquiring Fund may not be able to readily dispose of such investments at prices that approximate those at which the Acquiring Fund could sell such investments if they were more widely-traded and,
as a result of such illiquidity, the Acquiring 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 Acquiring Funds NAV 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.
Restricted securities are securities that may not be
sold to the public without an effective registration statement under the Securities Act, or that may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. For example, Rule 144A under the Securities Act
provides an exemption from the registration requirements of the Securities Act for the resale of certain restricted securities to qualified institutional buyers, such as the Acquiring Fund. However, an insufficient number of qualified institutional
buyers interested in purchasing the Rule 144A-eligible securities that the Acquiring Fund holds could affect adversely the marketability of certain Rule 144A securities, and the Acquiring Fund might be unable to dispose of such securities promptly
or at reasonable prices. When registration is required to sell a security, the Acquiring Fund may be obligated to pay all or part of the registration expenses and considerable time may pass before the Acquiring Fund is permitted to sell a security
under an effective registration statement. If adverse market conditions develop during this period, the Acquiring Fund might obtain a less favorable price than the price that prevailed when the Acquiring Fund decided to sell. The Acquiring Fund may
be unable to sell restricted and other illiquid investments at opportune times or prices.
Investment Companies Risk.
Subject to the limitations set forth in the 1940 Act and the Acquiring Funds governing documents or as otherwise permitted by the SEC, the Acquiring Fund may acquire shares in other affiliated and unaffiliated investment companies, including
exchange-traded funds (ETFs) and business development companies (BDCs). The market value of the shares of other investment companies may differ from their NAV. As an investor in investment companies, including ETFs or BDCs,
the Acquiring 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. As a result, shareholders
will be absorbing duplicate levels of fees with respect to investments in other investment companies, including ETFs or BDCs.
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The securities of other investment companies, including ETFs or BDCs, in which the Acquiring
Fund may invest may be leveraged. As a result, the Acquiring Fund may be indirectly exposed to leverage through an investment in such securities. An investment in securities of other investment companies, including ETFs or BDCs, that use leverage
may expose the Acquiring Fund to higher volatility in the market value of such securities and the possibility that the Acquiring Funds long-term returns on such securities (and, indirectly, the long-term returns of the Acquiring Funds
common shares) will be diminished.
ETFs are generally not actively managed and may be affected by a general decline in market
segments relating to its index. An ETF typically invests in securities included in, or representative of, its index regardless of their investment merits and does not attempt to take defensive positions in declining markets.
Strategic Transactions and Derivatives Risk. The Acquiring Fund may engage in various derivative transactions or portfolio
strategies (Strategic Transactions) for duration management and other risk management purposes, including to attempt to protect against possible changes in the market value of the Acquiring Funds portfolio resulting from trends in
the securities markets and changes in interest rates or to protect the Acquiring Funds unrealized gains in the value of its portfolio securities, to facilitate the sale of portfolio securities for investment purposes or to establish a position
in the securities markets as a temporary substitute for purchasing particular securities or to enhance income or gain. Derivatives are financial contracts or instruments whose value depends on, or is derived from, the value of an underlying asset,
reference rate or index (or relationship between two indices). The Acquiring Fund also may use derivatives to add leverage to the portfolio and/or to hedge against increases in the Acquiring Funds costs associated with any leverage strategy
that it may employ. The use of Strategic Transactions to enhance current income may be particularly speculative.
Strategic
Transactions involve risks. The risks associated with Strategic Transactions include (i) the imperfect correlation between the value of such instruments and the underlying assets, (ii) the possible default of the counterparty to the
transaction, (iii) illiquidity of the derivative instruments, and (iv) high volatility losses caused by unanticipated market movements, which are potentially unlimited. Although both over-the-counter (OTC) and exchange-traded derivatives markets may experience a lack of liquidity, OTC non-standardized derivative transactions are
generally less liquid than exchange-traded instruments. The illiquidity of the derivatives markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators,
government regulation and intervention, and technical and operational or system failures. In addition, daily limits on price fluctuations and speculative position limits on exchanges on which the Acquiring Fund may conduct its transactions in
derivative instruments may prevent prompt liquidation of positions, subjecting the Acquiring Fund to the potential of greater losses. Furthermore, the Acquiring Funds ability to successfully use Strategic Transactions depends on the Investment
Advisors ability to predict pertinent securities prices, interest rates, currency exchange rates and other economic factors, which cannot be assured. The use of Strategic Transactions may result in losses greater than if they had not been
used, may require the Acquiring Fund to sell or purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation the Acquiring Fund can realize on an investment or may cause the
Acquiring Fund to hold a security that it might otherwise sell. Additionally, segregated or earmarked liquid assets, amounts paid by the Acquiring Fund as premiums and cash or other assets held in margin accounts with respect to Strategic
Transactions are not otherwise available to the Acquiring Fund for investment purposes.
Exchange-traded derivatives and OTC
derivative transactions submitted for clearing through a central counterparty are also subject to minimum initial and variation margin requirements set by the relevant clearinghouse, as well as possible SEC-
or Commodity Futures Trading Commission (CFTC) mandated margin requirements. The CFTC and federal banking regulators also have imposed margin requirements on non-cleared OTC derivatives, and the
SEC has proposed (but not yet finalized) such non-cleared margin requirements. As applicable, margin requirements will increase the overall costs for the Acquiring Fund.
Many OTC derivatives are valued on the basis of dealers pricing of these instruments. However, the price at which dealers value a
particular derivative and the price that the same dealers would actually be willing to pay
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for such derivative should the Acquiring Fund wish or be forced to sell such position may be materially different. Such differences can result in an overstatement of the Acquiring Funds NAV
and may materially adversely affect the Acquiring Fund in situations in which the Acquiring Fund is required to sell derivative instruments.
While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be
no assurances that the Acquiring Funds hedging transactions will be effective.
Derivatives may give rise to a form of
leverage and may expose the Acquiring Fund to greater risk and increase its costs. Recent legislation calls for new regulation of the derivatives markets. The extent and impact of the regulation is not yet known and may not be known for some time.
New regulation may make derivatives more costly, may limit the availability of derivatives, or may otherwise adversely affect the value or performance of derivatives.
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.
The Acquiring Funds use of derivative instruments involves risks different from, and possibly
greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of risks such as credit risk, currency risk, leverage risk, liquidity risk, correlation risk, index risk
and volatility as described below:
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Credit Riskthe risk that the counterparty in a derivative transaction will be unable to honor its financial obligation to the Acquiring
Fund, or the risk that the reference entity in a derivative will not be able to honor its financial obligations. In particular, derivatives traded in over-the-counter
(OTC) markets often are not guaranteed by an Exchange (as defined herein) or clearing corporation and often do not require payment of margin, and to the extent that the Acquiring Fund has unrealized gains in such instruments or has
deposited collateral with its counterparties, the Acquiring Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor their obligations.
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Currency Riskthe risk that changes in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of
an investment.
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Leverage Riskthe risk associated with certain types of investments or trading strategies (such as, for example, borrowing money to
increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain transactions in derivatives (such as futures transactions or sales of put options) involve substantial
leverage risk and may expose the Acquiring Fund to potential losses that exceed the amount originally invested by the Acquiring Fund. When the Acquiring Fund engages in such a transaction, the Acquiring Fund will deposit in a segregated account, or
earmark on its books and records, liquid assets with a value at least equal to the Acquiring Funds exposure, on a mark-to-market basis, to the transaction (as
calculated pursuant to requirements of the SEC). Such segregation or earmarking will ensure that the Acquiring Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Acquiring Funds
exposure to loss.
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Liquidity Riskthe risk that certain securities may be difficult or impossible to sell at the time that the Acquiring Fund would like or at
the price that the Acquiring Fund as seller believes the security is currently worth. There can be no assurances that, at any specific time, either a liquid secondary market will exist for a derivative or the Acquiring Fund will otherwise be able to
sell such instrument at an acceptable price. It may, therefore, not be possible to close a position in a derivative without incurring substantial losses, if at
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all. The absence of liquidity may also make it more difficult for the Acquiring Fund to ascertain a market value for such instruments. Although both OTC and exchange-traded derivatives markets
may experience a lack of liquidity, certain derivatives traded in OTC markets, including indexed securities, swaps and OTC options, involve substantial illiquidity risk. The illiquidity of the derivatives markets may be due to various factors,
including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and technical and operational or system failures. In addition, the liquidity of a secondary
market in an exchange-traded derivative contract may be adversely affected by daily price fluctuation limits established by the exchanges which limit the amount of fluctuation in an exchange-traded contract price during a single trading
day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open positions. Prices have in the past moved beyond the daily limit on a number of consecutive
trading days. If it is not possible to close an open derivative position entered into by the Acquiring Fund, the Acquiring Fund would continue to be required to make daily cash payments of variation margin in the event of adverse price movements. In
such a situation, if the Acquiring Fund has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so.
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Correlation Riskthe risk that changes in the value of a derivative will not match the changes in the value of the portfolio holdings that
are being hedged or of the particular market or security to which the Acquiring Fund seeks exposure through the use of the derivative. There are a number of factors which may prevent a derivative instrument from achieving the desired correlation (or
inverse correlation) with an underlying asset, rate or index, such as the impact of fees, expenses and transaction costs, the timing of pricing, and disruptions or illiquidity in the markets for such derivative instrument.
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Index Riskif the derivative is linked to the performance of an index, it will be subject to the risks associated with changes in that
index. If the index changes, the Acquiring Fund could receive lower interest payments or experience a reduction in the value of the derivative to below the price that the Acquiring Fund paid for such derivative. Certain indexed securities, including
inverse securities (which move in an opposite direction to the index), may create leverage, to the extent that they increase or decrease in value at a rate that is a multiple of the changes in the applicable index.
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Volatility Riskthe risk that the Acquiring Funds use of derivatives may reduce income or gain and/or increase volatility. Volatility
is defined as the characteristic of a security, an index or a market to fluctuate significantly in price over a defined time period. The Acquiring Fund could suffer losses related to its derivative positions as a result of unanticipated market
movements, which losses are potentially unlimited.
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When a derivative is used as a hedge against a position
that the Acquiring Fund holds, any loss generated by the derivative generally should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains.
Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurances that the Acquiring Funds hedging transactions will be effective. The Acquiring Fund could also suffer losses
related to its derivative positions as a result of unanticipated market movements, which losses are potentially unlimited. The Investment Advisor may not be able to predict correctly the direction of securities prices, interest rates and other
economic factors, which could cause the Acquiring Funds derivatives positions to lose value. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a
liquid secondary market for derivatives and the resulting inability of the Acquiring Fund to sell or otherwise close a derivatives position could expose the Acquiring Fund to losses and could make derivatives more difficult for the Acquiring Fund to
value accurately.
When engaging in a hedging transaction, the Acquiring Fund may determine not to seek to establish a perfect
correlation between the hedging instruments utilized and the portfolio holdings being hedged. Such an imperfect correlation may prevent the Acquiring Fund from achieving the intended hedge or expose the Acquiring Fund to a risk of loss. The
Acquiring Fund may also determine not to hedge against a particular risk
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because it does not regard the probability of the risk occurring to be sufficiently high as to justify the cost of the hedge or because it does not foresee the occurrence of the risk. It may not
be possible for the Acquiring Fund to hedge against a change or event at attractive prices or at a price sufficient to protect the assets of the Acquiring Fund from the decline in value of the portfolio positions anticipated as a result of such
change. The Acquiring Fund may also be restricted in its ability to effectively manage the portion of its assets that are segregated or earmarked to cover its obligations. In addition, it may not be possible to hedge at all against certain risks.
If the Acquiring Fund invests in a derivative instrument it could lose more than the principal amount invested. Moreover,
derivatives raise certain tax, legal, regulatory and accounting issues that may not be presented by investments in securities, and there is some risk that certain issues could be resolved in a manner that could adversely impact the performance of
the Acquiring Fund.
The Acquiring Fund is not required to use derivatives or other portfolio strategies to seek to increase
return or to seek to hedge its portfolio and may choose not to do so. Also, suitable derivative transactions may not be available in all circumstances and there can be no assurances that the Acquiring Fund will engage in these transactions to reduce
exposure to other risks when that would be beneficial. Although the Investment Advisor seeks to use derivatives to further the Acquiring Funds investment objective, there is no assurance that the use of derivatives will achieve this result.
Options Risk. There are several risks associated with transactions in options on securities and indexes. For example,
there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objective. In addition, a liquid secondary market for
particular options, whether traded OTC or on a recognized securities exchange (e.g., NYSE), separate trading boards of a securities exchange or through a market system that provides contemporaneous transaction pricing information (an
exchange) may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an exchange; the facilities of an
exchange or the Office of the Comptroller of the Currency (OCC) may not at all times be adequate to handle current trading volume; or one or more exchanges could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued
by the OCC as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
Futures
Transactions and Options Risk. The primary risks associated with the use of futures contracts and options are (a) the imperfect correlation between the change in market value of the instruments held by the Acquiring Fund and the price of
the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are
potentially unlimited; (d) the Investment Advisors inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty
will default in the performance of its obligations.
Investment in futures contracts involves the risk of imperfect
correlation between movements in the price of the futures contract and the price of the security being hedged. The hedge will not be fully effective when there is imperfect correlation between the movements in the prices of two financial
instruments. For example, if the price of the futures contract moves more or less than the price of the hedged security, the Acquiring Fund will experience either a loss or gain on the futures contract which is not completely offset by movements in
the price of the hedged securities. To compensate for imperfect correlations, the Acquiring Fund may purchase or sell futures contracts in a greater dollar amount than the hedged securities if the volatility of the hedged securities is historically
greater than the volatility of the futures contracts. Conversely, the Acquiring Fund may purchase or
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sell fewer futures contracts if the volatility of the price of the hedged securities is historically lower than that of the futures contracts.
The particular securities comprising the index underlying a securities index financial futures contract may vary from the securities held
by the Acquiring Fund. As a result, the Acquiring Funds ability to hedge effectively all or a portion of the value of its securities through the use of such financial futures contracts will depend in part on the degree to which price movements
in the index underlying the financial futures contract correlate with the price movements of the securities held by the Acquiring Fund. The correlation may be affected by disparities in the average maturity, ratings, geographical mix or structure of
the Acquiring Funds investments as compared to those comprising the securities index and general economic or political factors. In addition, the correlation between movements in the value of the securities index may be subject to change over
time as additions to and deletions from the securities index alter its structure. The correlation between futures contracts on U.S. Government securities and the securities held by the Acquiring Fund may be adversely affected by similar factors and
the risk of imperfect correlation between movements in the prices of such futures contracts and the prices of securities held by the Acquiring Fund may be greater. The trading of futures contracts also is subject to certain market risks, such as
inadequate trading activity, which could at times make it difficult or impossible to liquidate existing positions.
The
Acquiring Fund may liquidate futures contracts it enters into through offsetting transactions on the applicable contract market. There can be no assurances, however, that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close out a futures position. In the event of adverse price movements, the Acquiring Fund would continue to be required to make daily cash payments of variation margin. In such situations, if the
Acquiring Fund has insufficient cash, it may be required to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. The inability to close out futures positions also could have an
adverse impact on the Acquiring Funds ability to hedge effectively its investments in securities. The liquidity of a secondary market in a futures contract may be adversely affected by daily price fluctuation limits established by
commodity exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days. The Acquiring Fund will enter into a futures position only if, in the judgement of the Investment Advisor, there
appears to be an actively traded secondary market for such futures contracts.
The successful use of transactions in futures
and related options also depends on the ability of the Investment Advisor to forecast correctly the direction and extent of interest rate movements within a given time frame. To the extent interest rates remain stable during the period in which a
futures contract or option is held by the Acquiring Fund or such rates move in a direction opposite to that anticipated, the Acquiring Fund may realize a loss on the Strategic Transaction which is not fully or partially offset by an increase in the
value of portfolio securities. As a result, the Acquiring Funds total return for such period may be less than if it had not engaged in the Strategic Transaction.
Because of low initial margin deposits made upon the opening of a futures position, futures transactions involve substantial leverage. As a result, relatively small movements in the price of the futures
contracts can result in substantial unrealized gains or losses. There is also the risk of loss by the Acquiring Fund of margin deposits in the event of bankruptcy of a broker with which the Acquiring Fund has an open position in a financial futures
contract. Because the Acquiring Fund will engage in the purchase and sale of futures contracts for hedging purposes or to seek to enhance the Acquiring Funds return, any losses incurred in connection therewith may, if the strategy is
successful, be offset in whole or in part by increases in the value of securities held by the Acquiring Fund or decreases in the price of securities the Acquiring Fund intends to acquire.
The amount of risk the Acquiring Fund assumes when it purchases an option on a futures contract is the premium paid for the option plus
related transaction costs. In addition to the correlation risks discussed above,
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the purchase of an option on a futures contract also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option
purchased.
Counterparty Risk. The Acquiring Fund will be subject to credit risk with respect to the counterparties to
the derivative contracts purchased by the Acquiring Fund. Because derivative transactions in which the Acquiring Fund may engage may involve instruments that are not traded on an exchange or cleared through a central counterparty but are instead
traded between counterparties based on contractual relationships, the Acquiring Fund is subject to the risk that a counterparty will not perform its obligations under the related contracts. If a counterparty becomes bankrupt or otherwise fails to
perform its obligations due to financial difficulties, the Acquiring Fund may experience significant delays in obtaining any recovery in bankruptcy or other reorganization proceedings. The Acquiring Fund may obtain only a limited recovery, or may
obtain no recovery, in such circumstances. Although the Acquiring Fund intends to enter into transactions only with counterparties that the Investment Advisor believes to be creditworthy, there can be no assurances that, as a result, a counterparty
will not default and that the Acquiring Fund will not sustain a loss on a transaction. In the event of the counterpartys bankruptcy or insolvency, the Acquiring Funds collateral may be subject to the conflicting claims of the
counterpartys creditors, and the Acquiring Fund may be exposed to the risk of a court treating the Acquiring Fund as a general unsecured creditor of the counterparty, rather than as the owner of the collateral.
The counterparty risk for cleared derivatives is generally lower than for uncleared OTC derivative transactions since generally a
clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties performance under the contract as each party to a trade looks only to the clearing organization for
performance of financial obligations under the derivative contract. However, there can be no assurances that a clearing organization, or its members, will satisfy its obligations to the Acquiring Fund, or that the Acquiring Fund would be able to
recover the full amount of assets deposited on its behalf with the clearing organization in the event of the default by the clearing organization or the Acquiring Funds clearing broker. In addition, cleared derivative transactions benefit from
daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Uncleared OTC derivative transactions generally do
not benefit from such protections. This exposes the Acquiring Fund to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona
fide) or because of a credit or liquidity problem, thus causing the Acquiring Fund to suffer a loss. Such counterparty risk is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where
the Acquiring Fund has concentrated its transactions with a single or small group of counterparties.
In addition, the
Acquiring Fund is subject to the risk that issuers of the instruments in which it invests and trades may default on their obligations under those instruments, and that certain events may occur that have an immediate and significant adverse effect on
the value of those instruments. There can be no assurances that an issuer of an instrument in which the Acquiring Fund invests will not default, or that an event that has an immediate and significant adverse effect on the value of an instrument will
not occur, and that the Acquiring Fund will not sustain a loss on a transaction as a result.
Swaps Risk. Swaps are a
type of derivative. Swap agreements involve the risk that the party with which the Acquiring Fund has entered into the swap will default on its obligation to pay the Acquiring Fund and the risk that the Acquiring Fund will not be able to meet its
obligations to pay the other party to the agreement. In order to seek to hedge the value of the Acquiring Funds portfolio, to hedge against increases in the Acquiring Funds cost associated with interest payments on any outstanding
borrowings or to seek to increase the Acquiring Funds return, the Acquiring Fund may enter into swaps, including interest rate swap, total return swap and/or credit default swap transactions. In interest rate swap transactions, there is a risk
that yields will move in the direction opposite of the direction anticipated by the Acquiring Fund, which would cause the Acquiring Fund to make payments to its counterparty in the transaction that could adversely affect Acquiring Fund performance.
In addition to the risks applicable to swaps generally (including counterparty risk, high volatility, liquidity risk and credit risk), credit default swap transactions involve special risks because they are difficult to value, are highly
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susceptible to liquidity and credit risk, and generally pay a return to the party that has paid the premium only in the event of an actual default by the issuer of the underlying obligation (as
opposed to a credit downgrade or other indication of financial difficulty).
Historically, swap transactions have been
individually negotiated non-standardized transactions entered into in OTC markets and have not been subject to the same type of government regulation as exchange-traded instruments. However, since the global
financial crisis, the OTC derivatives markets have recently become subject to comprehensive statutes and regulations. In particular, in the United States, the Dodd-Frank Act requires that certain derivatives with U.S. persons must be executed on a
regulated market and a substantial portion of OTC derivatives must be submitted for clearing to regulated clearinghouses. As a result, swap transactions entered into by the Acquiring Fund may become subject to various requirements applicable to
swaps under the Dodd-Frank Act, including clearing, exchange-execution, reporting and recordkeeping requirements, which may make it more difficult and costly for the Acquiring Fund to enter into swap transactions and may also render certain
strategies in which the Acquiring Fund might otherwise engage impossible or so costly that they will no longer be economical to implement. Furthermore, the number of counterparties that may be willing to enter into swap transactions with the
Acquiring Fund may also be limited if the swap transactions with the Acquiring Fund are subject to the swap regulation under the Dodd-Frank Act.
Credit default and total return swap agreements may effectively add leverage to the Acquiring Funds portfolio because, in addition to its Managed Assets, the Acquiring Fund would be subject to
investment exposure on the notional amount of the swap. Total return swap agreements are subject to the risk that a counterparty will default on its payment obligations to the Acquiring Fund thereunder. The Acquiring Fund is not required to enter
into swap transactions for hedging purposes or to enhance income or gain and may choose not to do so. In addition, the swaps market is subject to a changing regulatory environment. It is possible that regulatory or other developments in the swaps
market could adversely affect the Acquiring Funds ability to successfully use swaps.
Over-the-Counter Trading Risk. The derivative
instruments that may be purchased or sold by the Acquiring Fund may include instruments not traded on an exchange. The risk of nonperformance by the counterparty to an instrument may be greater than, and the ease with which the Acquiring Fund can
dispose of or enter into closing transactions with respect to an instrument may be less than, the risk associated with an exchange traded instrument. In addition, significant disparities may exist between bid and asked prices
for derivative instruments that are not traded on an exchange. Derivative instruments not traded on exchanges also are not subject to the same type of government regulation as exchange traded instruments, and many of the protections afforded to
participants in a regulated environment may not be available in connection with the transactions. Because derivatives traded in OTC markets generally are not guaranteed by an exchange or clearing corporation, to the extent that the Acquiring Fund
has unrealized gains in such instruments or has deposited collateral with its counterparties, the Acquiring Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor its obligations.
Certain derivatives traded in OTC markets, including indexed securities, swaps and OTC options, involve substantial liquidity risk. The
absence of liquidity may make it difficult or impossible for the Acquiring Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more difficult for the Acquiring Fund to ascertain a market value for
such instruments. The Acquiring Fund will, therefore, acquire illiquid OTC instruments (i) if the agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be terminated or sold, or
(ii) for which the Investment Advisor anticipates the Acquiring Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is available, in which case that dealers quotation may
be used. Because derivatives traded in OTC markets are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that the Acquiring Fund has unrealized gains in such instruments or has
deposited collateral with its counterparties the Acquiring Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor its obligations. The Acquiring Fund will attempt to minimize these risks by
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engaging in transactions in derivatives traded in OTC markets only with financial institutions that have substantial capital or that have provided the Acquiring Fund with a third-party guaranty
or other credit enhancement.
Dodd-Frank Act Risk. Title VII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the Dodd-Frank Act) (the Derivatives Title) imposed a substantially new regulatory structure on derivatives markets, with particular emphasis on swaps (which were subject to oversight by the CFTC) and
security-based swaps (which were subject to oversight by the SEC). The regulatory framework covers a broad range of swap market participants, including banks, non-banks, credit unions, insurance companies,
broker-dealers and investment advisers. Prudential regulators were granted authority to regulate margining of swaps and security-based swaps of banks and bank-related entities.
Although the CFTC and the prudential regulators have adopted and have begun implementing required regulations, the SEC rules were not
finalized until December 2019 and firms have until October 2021 to come into compliance.
Current regulations for swaps
require the mandatory central clearing and mandatory exchange trading of particular types of interest rate swaps and index credit default swaps (together, Covered Swaps). The Fund is required to clear its Covered Swaps through a clearing
broker, which requires, among other things, posting initial margin and variation margin to the Funds clearing broker in order to enter into and maintain positions in Covered Swaps.
Covered Swaps generally are required to be executed through a swap execution facility (SEF), which can involve additional
transaction fees.
Additionally, under the Dodd-Frank Act, swaps (and both swaps and security-based swaps entered into with
banks) are subject to margin requirements and swap dealers are required to collect margin from the Fund and post variation margin to 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 (as well as security-based swaps in addition to OTC swaps where the dealer is a bank or subsidiary of a bank holding company) will
be phased-in through September 2021. The CFTC has not yet adopted capital requirements for swap dealers. As uncleared capital requirements for swap dealers and uncleared capital and margin requirements for
security-based swaps are phased in and implemented, such requirements may make certain types of trades and/or trading strategies more costly. There may be market dislocations due to uncertainty during the implementation period of any new regulation
and the Investment Advisor cannot know how the derivatives market will adjust to the CFTCs new capital regulations and to the new SEC regulations governing security-based swaps.
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 qualified financial contracts, including many derivatives contracts as well as repurchase agreements and securities lending agreements, terms that delay or restrict the rights of
counterparties to terminate such contracts, foreclose upon collateral, exercise other default rights or restrict transfers of affiliate credit enhancements (such as guarantees) in the event that the bank-regulated counterparty and/or its affiliates
are subject to certain types of resolution or insolvency proceedings.
Legal and Regulatory Risk. At any time after the
date hereof, legislation or additional regulations may be enacted that could negatively affect the assets of the Acquiring Fund. Changing approaches to regulation may have a negative impact on the securities in which the Acquiring Fund invests.
Legislation or regulation may also change the way in which the Acquiring Fund itself is regulated. There can be no assurance that future legislation, regulation or deregulation will not have a material adverse effect on the Acquiring Fund or will
not impair the
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ability of the Acquiring Fund to achieve its investment objective. In addition, as new rules and regulations resulting from the passage of the Dodd-Frank Act are implemented and new international
capital and liquidity requirements are introduced under the Basel III Accords, the market may not react the way the Investment Advisor expects. Whether the Acquiring Fund achieves its investment objective may depend on, among other things, whether
the Investment Advisor correctly forecasts market reactions to this and other legislation. In the event the Investment Advisor incorrectly forecasts market reaction, the Acquiring Fund may not achieve its investment objective.
Regulation as a Commodity Pool. The CFTC subjects advisers to registered investment companies to regulation by the
CFTC if a fund that is advised by the investment adviser either (i) invests, directly or indirectly, more than a prescribed level of its liquidation value in CFTC-regulated futures, options and swaps (CFTC Derivatives), or
(ii) markets itself as providing investment exposure to such instruments. To the extent the Acquiring Fund uses CFTC Derivatives, it intends to do so below such prescribed levels and will not market itself as a commodity pool or a
vehicle for trading such instruments. Accordingly, the Investment Advisor has claimed an exclusion from the definition of the term commodity pool operator under the Commodity Exchange Act (CEA) pursuant to Rule 4.5 under the
CEA. The Investment Advisor is not, therefore, subject to registration or regulation as a commodity pool operator under the CEA in respect of the Acquiring Fund.
Failure of Futures Commission Merchants and Clearing Organizations. The Acquiring Fund is required to deposit funds to margin open positions in cleared derivative instruments (both futures and
swaps) with a clearing broker registered as a futures commission merchant (FCM). The CEA requires an FCM to segregate all funds received from customers with respect to any orders for the purchase or sale of U.S. domestic
futures contracts and cleared swaps from the FCMs proprietary assets. Similarly, the CEA requires each FCM to hold in a separate secure account all funds received from customers with respect to any orders for the purchase or sale of foreign
futures contracts and segregate any such funds from the funds received with respect to domestic futures contracts. However, all funds and other property received by an FCM from its customers are held by an FCM on a commingled basis in an omnibus
account and amounts in excess of assets posted to the clearing organization may be invested by an FCM in certain instruments permitted under the applicable regulation. There is a risk that assets deposited by the Acquiring Fund with any FCM as
margin for futures contracts or commodity options may, in certain circumstances, be used to satisfy losses of other clients of the Acquiring Funds FCM. In addition, the assets of the Acquiring Fund posted as margin against both swaps and
futures contracts may not be fully protected in the event of the FCMs bankruptcy.
Legal, Tax and Regulatory
Risks. Legal, tax and regulatory changes could occur that may have material adverse effects on the Acquiring Fund. For example, the regulatory and tax environment for derivative instruments in which the Acquiring Fund may participate is
evolving, and such changes in the regulation or taxation of derivative instruments may have material adverse effects on the value of derivative instruments held by the Acquiring Fund and the ability of the Acquiring Fund to pursue its investment
strategies.
To qualify for the favorable U.S. federal income tax treatment generally accorded to RICs, the Acquiring Fund
must, among other things, derive in each taxable year at least 90% of its gross income from certain prescribed sources and distribute for each taxable year at least 90% of its investment company taxable income (generally, ordinary income
plus the excess, if any, of net short-term capital gain over net long-term capital loss) and at least 90% of its net tax-exempt interest income, if any. If for any taxable year the Acquiring Fund does not
qualify as a RIC, all of its taxable income for that year (including its net capital gain) would be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions would be taxable as
ordinary dividends to the extent of the Acquiring Funds current and accumulated earnings and profits.
The current
presidential administration has called for, and in certain instances has begun to implement, significant changes to U.S. fiscal, tax, trade, healthcare, immigration, foreign, and government regulatory policy. In this regard, there is significant
uncertainty with respect to legislation, regulation and government policy at the federal level, as well as the state and local levels. Recent events have created a climate of heightened uncertainty
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and introduced new and difficult-to-quantify macroeconomic and political risks with potentially far-reaching implications. There has been a corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the
extent the U.S. Congress or the current presidential administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate
taxes, healthcare, the U.S. regulatory environment, inflation and other areas. Some particular areas identified as subject to potential change, amendment or repeal include the Dodd-Frank Act, including the Volcker Rule and various swaps and
derivatives regulations, credit risk retention requirements and the authorities of the Federal Reserve, the Financial Stability Oversight Council and the SEC. Although the Acquiring Fund cannot predict the impact, if any, of these changes to the
Acquiring Funds business, they could adversely affect the Acquiring Funds business, financial condition, operating results and cash flows. Until the Acquiring Fund knows what policy changes are made and how those changes impact the
Acquiring Funds business and the business of the Acquiring Funds competitors over the long-term, the Acquiring Fund will not know if, overall, the Acquiring Fund will benefit from them or be negatively affected by them.
The risks and uncertainties associated with these policy proposals are heightened by the 2018 U.S. federal election, which has resulted
in different political parties controlling the U.S. House of Representatives, on the one hand, and the U.S. Senate and the Executive Branch, on the other hand. Additional risks arising from the differences in expressed policy preferences among the
various constituencies in these branches of the U.S. government has led in the past, and may lead in the future, to short-term or prolonged policy impasses, which could, and has, resulted in shutdowns of the U.S. federal government. U.S. federal
government shutdowns, especially prolonged shutdowns, could have a significant adverse impact on the economy in general and could impair the ability of issuers to raise capital in the securities markets. Any of these effects could have an adverse
impact on companies in the Acquiring Funds portfolio and consequently on the value of their securities and the Acquiring Funds NAV.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. The Acquiring Fund cannot
predict how any changes in the tax laws might affect its investors or the Acquiring Fund itself. New legislation, U.S. Treasury regulations, administrative interpretations or court decisions, with or without retroactive application, could
significantly and negatively affect the Acquiring Funds ability to qualify as a RIC or the U.S. federal income tax consequences to its investors and itself of such qualification, or could have other adverse consequences. You are urged to
consult with your tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in the Acquiring Funds shares.
1940 Act Regulation. The Acquiring Fund is a registered closed-end management investment
company and as such is subject to regulations under the 1940 Act. Generally speaking, any contract or provision thereof that is made, or where performance involves a violation of the 1940 Act or any rule or regulation thereunder is unenforceable by
either party unless a court finds otherwise.
Legislation Risk. At any time after the date of this Proxy Statement,
legislation may be enacted that could negatively affect the assets of the Acquiring Fund. Legislation or regulation may change the way in which the Acquiring Fund itself is regulated. The Investment Advisor cannot predict the effects of any new
governmental regulation that may be implemented and there can be no assurance that any new governmental regulation will not adversely affect the Acquiring Funds ability to achieve its investment objective.
LIBOR Risk. The Acquiring Fund may be exposed to financial instruments that are tied to the London Interbank Offered Rate
(LIBOR) to determine payment obligations, financing terms, hedging strategies or investment value. The Acquiring Funds investments may pay interest at floating rates based on LIBOR or may be subject to interest caps or floors based
on LIBOR. The Acquiring Fund may also obtain financing at floating rates based on LIBOR. Derivative instruments utilized by the Acquiring Fund may also reference LIBOR.
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In 2017, the head of the United Kingdoms Financial Conduct Authority announced a
desire to phase out the use of LIBOR by the end of 2021, and it is expected that LIBOR will cease to be published after that time. The Acquiring Fund may have investments linked to other interbank offered rates, such as the Euro Overnight Index
Average (EONIA), which may also cease to be published. Various financial industry groups have begun planning for the transition away from LIBOR, but there are challenges to converting certain securities and transactions to a new
reference rate (e.g., the Secured Overnight Financing Rate (SOFR), which is intended to replace the U.S. dollar LIBOR).
Neither the effect of the LIBOR transition process nor its ultimate success can yet be known. The transition process might lead to increased volatility and illiquidity in markets for, and reduce the
effectiveness of new hedges placed against, instruments whose terms currently include LIBOR. While some existing LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting
methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies to replicate LIBOR. Not all existing LIBOR-based instruments may have alternative rate-setting provisions and there remains
uncertainty regarding the willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments. In addition, a liquid market for newly issued instruments that use a reference rate other than LIBOR still may
be developing. There may also be challenges for the Acquiring Fund to enter into hedging transactions against such newly issued instruments until a market for such hedging transactions develops. All of the aforementioned may adversely affect the
Acquiring Funds performance or NAV.
Risks Associated with Recent Market Events. Stresses associated with the
2008 financial crisis in the United States and global economies peaked approximately a decade ago, but periods of unusually high volatility in the financial markets and restrictive credit conditions, sometimes limited to a particular sector or a
geography, continue to recur. Some countries, including the United States, have adopted and/or are considering the adoption of more protectionist trade policies, a move away from the tighter financial industry regulations that followed the financial
crisis, and/or substantially reducing corporate taxes. The exact shape of these policies is still being considered, but the equity and debt markets may react strongly to expectations of change, which could increase volatility, especially if the
markets expectations are not borne out. A rise in protectionist trade policies, and the possibility of changes to some international trade agreements, could affect the economies of many nations in ways that cannot necessarily be foreseen at
the present time. In addition, geopolitical and other risks, including environmental and public health, may add to instability in world economies and markets generally. Economies and financial markets throughout the world are becoming increasingly
interconnected. As a result, whether or not the Fund invests in securities of issuers located in or with significant exposure to countries experiencing economic, political and/or financial difficulties, the value and liquidity of the Funds
investments may be negatively affected by such events.
An outbreak of respiratory disease caused by a novel coronavirus was
first detected in China in December 2019 and has now developed into a global pandemic. The pandemic has resulted in closing borders, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations, disruptions to
supply chains and customer activity, as well as general concern and uncertainty. The impact of this pandemic, and other pandemics and epidemics that may arise in the future, could affect the economies of many nations, individual companies and the
market in general in ways that cannot necessarily be foreseen at the present time. In addition, the impact of infectious diseases in developing or emerging market countries may be greater due to less established health care systems. Health crises
caused by the novel coronavirus pandemic may exacerbate other pre-existing political, social and economic risks in certain countries. The impact of the pandemic may last for an extended period of time.
Market Disruption and Geopolitical Risk. The occurrence of events similar to those in recent years, such as the
aftermath of the war in Iraq, instability in Afghanistan, Pakistan, Egypt, Libya, Syria, Russia, Ukraine and the Middle East, new and ongoing epidemics and pandemics of infectious diseases and other global health events, natural/environmental
disasters, terrorist attacks in the United States and around the world, social and political
70
discord, debt crises (such as the Greek crisis), sovereign debt downgrades, increasingly strained relations between the United States and a number of foreign countries, including traditional
allies, such as certain European countries, and historical adversaries, such as North Korea, Iran, China and Russia, and the international community generally, new and continued political unrest in various countries, such as Venezuela and Spain, the
exit or potential exit of one or more countries from the European Union (the EU) or the European Monetary Union (the EMU), continued changes in the balance of political power among and within the branches of the U.S.
government, among others, may result in market volatility, may have long-term effects on the U.S. and worldwide financial markets, and may cause further economic uncertainties in the United States and worldwide. The coronavirus pandemic has led to
illiquidity and volatility in the municipal bond markets and may lead to downgrades in the credit quality of certain municipal issuers.
China and the United States have each recently imposed tariffs on the other countrys products. These actions may trigger a significant reduction in international trade, the oversupply of certain
manufactured goods, substantial price reductions of goods and possible failure of individual companies and/or large segments of Chinas export industry, which could have a negative impact on the Acquiring Funds performance. U.S. companies
that source material and goods from China and those that make large amounts of sales in China would be particularly vulnerable to an escalation of trade tensions. Uncertainty regarding the outcome of the trade tensions and the potential for a trade
war could cause the U.S. dollar to decline against safe haven currencies, such as the Japanese yen and the euro. Events such as these and their consequences are difficult to predict and it is unclear whether further tariffs may be imposed or other
escalating actions may be taken in the future.
The decision made in the British referendum of June 23, 2016 to leave the
EU, an event widely referred to as Brexit, has led to volatility in the financial markets of the United Kingdom and more broadly across Europe and may also lead to weakening in consumer, corporate and financial confidence in such
markets. The formal notification to the European Council required under Article 50 of the Treaty on EU was made on March 29, 2017, following which the terms of exit were negotiated. Pursuant to an agreement between the United Kingdom and the
EU, the United Kingdom left the EU on January 31, 2020, subject to a transition period ending December 31, 2020. The longer term economic, legal, political and social framework to be put in place between the United Kingdom and the EU are
unclear at this stage and are likely to lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. In particular, the decision made in Brexit may
lead to a call for similar referendums in other European jurisdictions which may cause increased economic volatility in the European and global markets. This mid- to long-term uncertainty may have an adverse
effect on the economy generally and on the ability of the Acquiring Fund to execute its strategies and to receive attractive returns. In particular, currency volatility may mean that the returns of the Acquiring Fund and its investments are
adversely affected by market movements and may make it more difficult, or more expensive, for the Acquiring Fund to execute prudent currency hedging policies. Potential decline in the value of the British Pound and/or the Euro against other
currencies, along with the potential downgrading of the United Kingdoms sovereign credit rating, may also have an impact on the performance of portfolio companies or investments located in the United Kingdom or Europe. In light of the above,
no definitive assessment can currently be made regarding the impact that Brexit will have on the Acquiring Fund, its investments or its organization more generally.
The occurrence of any of these above events could have a significant adverse impact on the value and risk profile of the Acquiring Funds portfolio. The Acquiring Fund does not know how long the
securities markets may be affected by similar events and cannot predict the effects of similar events in the future on the U.S. economy and securities markets. There can be no assurance that similar events and other market disruptions will not have
other material and adverse implications.
Regulation and Government Intervention Risk. The U.S. Government and the
Federal Reserve, as well as certain foreign governments, recently have taken unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced extreme volatility, such as
implementing stimulus packages, providing liquidity in fixed-income, commercial paper and other markets, and providing tax
71
breaks, among other actions. The reduction or withdrawal of Federal Reserve or other U.S. or non-U.S. governmental support could negatively affect
financial markets generally and reduce the value and liquidity of certain securities. Additionally, with the cessation of certain market support activities, the Acquiring Fund may face a heightened level of interest rate risk as a result of a rise
or increased volatility in interest rates.
Federal, state, and other governments, their regulatory agencies or
self-regulatory organizations may take actions that affect the regulation of the issuers in which the Acquiring Fund invests. Legislation or regulation may also change the way in which the Acquiring Fund is regulated. Such legislation or regulation
could limit or preclude the Acquiring Funds ability to achieve its investment objective.
In the aftermath of the global
financial crisis, there appears to be a renewed popular, political and judicial focus on finance related consumer protection. Financial institution practices are also subject to greater scrutiny and criticism generally. In the case of transactions
between financial institutions and the general public, there may be a greater tendency toward strict interpretation of terms and legal rights in favor of the consuming public, particularly where there is a real or perceived disparity in risk
allocation and/or where consumers are perceived as not having had an opportunity to exercise informed consent to the transaction. In the event of conflicting interests between retail investors holding common shares of a closed-end investment company such as the Acquiring Fund and a large financial institution, a court may similarly seek to strictly interpret terms and legal rights in favor of retail investors. The Acquiring Fund
may be affected by governmental action in ways that are not foreseeable, and there is a possibility that such actions could have a significant adverse effect on the Acquiring Fund and its ability to achieve its investment objective.
Potential Conflicts of Interest of the Investment Advisor and Others. The investment activities of BlackRock, Inc.
(BlackRock), the ultimate parent company of the Investment Advisor, and its affiliates (including BlackRock and its subsidiaries (collectively, the Affiliates)), and their respective directors, officers or employees,
in the management of, or their interest in, their own accounts and other accounts they manage, may present conflicts of interest that could disadvantage the Acquiring Fund and its shareholders. BlackRock and its Affiliates provide investment
management services to other funds and discretionary managed accounts that may follow investment programs similar to that of the Acquiring Fund. Subject to the requirements of the 1940 Act, BlackRock and its Affiliates intend to engage in such
activities and may receive compensation from third parties for their services. Neither BlackRock nor any Affiliate is under any obligation to share any investment opportunity, idea or strategy with the Acquiring Fund. As a result, BlackRock and its
Affiliates may compete with the Acquiring Fund for appropriate investment opportunities. The results of the Acquiring Funds investment activities, therefore, may differ from those of an Affiliate and of other accounts managed by BlackRock or
an Affiliate and it is possible that the Acquiring Fund could sustain losses during periods in which one or more Affiliates and other accounts achieve profits on their trading for proprietary or other accounts. BlackRock has adopted policies and
procedures designed to address potential conflicts of interests.
Market and Selection Risk. Market risk is the
possibility that the market values of securities owned by the Acquiring Fund will decline. There is a risk that equity and/or bond markets will go down in value, including the possibility that such markets will go down sharply and unpredictably.
Stock markets are volatile, and the price of equity securities fluctuates based on changes in a companys financial
condition and overall market and economic conditions. An adverse event, such as an unfavorable earnings report, may depress the value of a particular common stock held by the Acquiring Fund. Also, the price of common stocks is sensitive to general
movements in the stock market and a drop in the stock market may depress the price of common stocks to which the Acquiring Fund has exposure. Common stock prices fluctuate for several reasons, including changes in investors perceptions of the
financial condition of an issuer or the general condition of the relevant stock market, or when political or economic events affecting the issuers occur.
The prices of fixed income securities tend to fall as interest rates rise, and such declines tend to be greater among fixed income securities with longer maturities. Market risk is often greater among
certain types of fixed
72
income securities, such as zero-coupon bonds that do not make regular interest payments but are instead bought at a discount to their face values and paid
in full upon maturity. As interest rates change, these securities often fluctuate more in price than securities that make regular interest payments and therefore subject the Acquiring Fund to greater market risk than a fund that does not own these
types of securities.
When-issued and delayed delivery transactions are subject to changes in market conditions from the time
of the commitment until settlement, which may adversely affect the prices or yields of the securities being purchased. The greater the Acquiring Funds outstanding commitments for these securities, the greater the Acquiring Funds exposure
to market price fluctuations.
Selection risk is the risk that the securities that the Acquiring Funds management
selects will underperform the equity and/or bond market, the market relevant indices or other funds with similar investment objectives and investment strategies.
Defensive Investing Risk. For defensive purposes, the Acquiring Fund may allocate assets into cash or short-term fixed income securities. In doing so, the Acquiring Fund may succeed in avoiding
losses but may otherwise fail to achieve its investment objective. Further, the value of short-term fixed income securities may be affected by changing interest rates and by changes in credit ratings of the investments. If the Acquiring Fund holds
cash uninvested it will be subject to the credit risk of the depository institution holding the cash.
Decision-Making
Authority Risk. Investors have no authority to make decisions or to exercise business discretion on behalf of the Acquiring Fund, except as set forth in the Acquiring Funds governing documents. The authority for all such decisions is
generally delegated to the Board, which in turn, has delegated the day-to-day management of the Acquiring Funds investment activities to the Investment Advisor,
subject to oversight by the Board.
Management Risk. The Acquiring Fund is subject to management risk because it is an
actively managed investment portfolio. The Investment Advisor and the individual portfolio managers will apply investment techniques and risk analyses in making investment decisions for the Acquiring Fund, but there can be no guarantee that these
will produce the desired results. The Acquiring Fund may be subject to a relatively high level of management risk because the Acquiring Fund may invest in derivative instruments, which may be highly specialized instruments that require investment
techniques and risk analyses different from those associated with equities and bonds.
Valuation Risk. The Acquiring
Fund is subject to valuation risk, which is the risk that one or more of the securities in which the Acquiring Fund invests are valued at prices that the Acquiring Fund is unable to obtain upon sale due to factors such as incomplete data, market
instability or human error. The Investment Advisor may use an independent pricing service or prices provided by dealers to value securities at their market value. Because the secondary markets for certain investments may be limited, such instruments
may be difficult to value. When market quotations are not available, the Investment Advisor may price such investments pursuant to a number of methodologies, such as computer-based analytical modeling or individual security evaluations. These
methodologies generate approximations of market values, and there may be significant professional disagreement about the best methodology for a particular type of financial instrument or different methodologies that might be used under different
circumstances. In the absence of an actual market transaction, reliance on such methodologies is essential, but may introduce significant variances in the ultimate valuation of the Acquiring Funds investments. Technological issues and/or
errors by pricing services or other third-party service providers may also impact the Acquiring Funds ability to value its investments and the calculation of the Acquiring Funds NAV.
When market quotations are not readily available or are deemed to be inaccurate or unreliable, the Acquiring Fund values its investments
at fair value as determined in good faith pursuant to policies and procedures approved by the Board. Fair value is defined as the amount for which assets could be sold in an orderly disposition over a reasonable period of time, taking into account
the nature of the asset. Fair value pricing
73
may require determinations that are inherently subjective and inexact about the value of a security or other asset. As a result, there can be no assurance that fair value priced assets will not
result in future adjustments to the prices of securities or other assets, or that fair value pricing will reflect a price that the Acquiring Fund is able to obtain upon sale, and it is possible that the fair value determined for a security or other
asset will be materially different from quoted or published prices, from the prices used by others for the same security or other asset and/or from the value that actually could be or is realized upon the sale of that security or other asset. For
example, the Acquiring Funds NAV could be adversely affected if the Acquiring Funds determinations regarding the fair value of the Acquiring Funds investments were materially higher than the values that the Acquiring Fund
ultimately realizes upon the disposal of such investments. Where market quotations are not readily available, valuation may require more research than for more liquid investments. In addition, elements of judgment may play a
greater role in valuation in such cases than for investments with a more active secondary market because there is less reliable objective data available. The Acquiring Fund prices its shares daily and therefore all assets, including assets valued at
fair value, are valued daily.
Reliance on the Investment Advisor Risk. The Acquiring Fund is dependent upon services
and resources provided by the Investment Advisor, and therefore the Investment Advisors parent, BlackRock. The Investment Advisor is not required to devote its full time to the business of the Acquiring Fund and there is no guarantee or
requirement that any investment professional or other employee of the Investment Advisor will allocate a substantial portion of his or her time to the Acquiring Fund. The loss of one or more individuals involved with the Investment Advisor could
have a material adverse effect on the performance or the continued operation of the Acquiring Fund.
Reliance on Service
Providers Risk. The Acquiring Fund must rely upon the performance of service providers to perform certain functions, which may include functions that are integral to the Acquiring Funds operations and financial performance. Failure by any
service provider to carry out its obligations to the Acquiring Fund in accordance with the terms of its appointment, to exercise due care and skill or to perform its obligations to the Acquiring Fund at all as a result of insolvency, bankruptcy or
other causes could have a material adverse effect on the Acquiring Funds performance and returns to common shareholders. The termination of the Acquiring Funds relationship with any service provider, or any delay in appointing a
replacement for such service provider, could materially disrupt the business of the Acquiring Fund and could have a material adverse effect on the Acquiring Funds performance and returns to common shareholders.
Information Technology Systems Risk. The Acquiring Fund is dependent on the Investment Advisor for certain management services as
well as back-office functions. The Investment Advisor depends on information technology systems in order to assess investment opportunities, strategies and markets and to monitor and control risks for the Acquiring Fund. It is possible that a
failure of some kind which causes disruptions to these information technology systems could materially limit the Investment Advisors ability to adequately assess and adjust investments, formulate strategies and provide adequate risk control.
Any such information technology-related difficulty could harm the performance of the Acquiring Fund. Further, failure of the back-office functions of the Investment Advisor to process trades in a timely fashion could prejudice the investment
performance of the Acquiring Fund.
Cyber Security Risk. With the increased use of technologies such as the Internet to
conduct business, the Acquiring Fund is susceptible to operational, information security and related risks. In general, cyber incidents can result from deliberate attacks or unintentional events. Cyber-attacks include, but are not limited to,
gaining unauthorized access to digital systems (e.g., through hacking or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption.
Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on websites (i.e.,
efforts to make network services unavailable to intended users). Cyber security failures by or breaches of the Investment Advisor and other service providers (including, but not limited to, fund accountants, custodians, transfer agents and
administrators), and the issuers of securities in which the Acquiring Fund invests, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with the Acquiring Funds ability
to calculate its NAV, impediments to trading, the inability of shareholders to transact business, violations of applicable privacy and other laws, regulatory fines,
74
penalties, reputational damage, reimbursement or other compensation costs, or additional compliance costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents
in the future. While the Acquiring Fund has established business continuity plans in the event of, and risk management systems to prevent, such cyber-attacks, there are inherent limitations in such plans and systems including the possibility that
certain risks have not been identified. Furthermore, the Acquiring Fund cannot control the cyber security plans and systems put in place by service providers to the Acquiring Fund and issuers in which the Acquiring Fund invests. As a result, the
Acquiring Fund or its shareholders could be negatively impacted.
Misconduct of Employees and of Service Providers
Risk. Misconduct or misrepresentations by employees of the Investment Advisor or the Acquiring Funds service providers could cause significant losses to the Acquiring Fund. Employee misconduct may include binding the Acquiring Fund to
transactions that exceed authorized limits or present unacceptable risks and unauthorized trading activities, concealing unsuccessful trading activities (which, in any case, may result in unknown and unmanaged risks or losses) or making
misrepresentations regarding any of the foregoing. Losses could also result from actions by the Acquiring Funds service providers, including, without limitation, failing to recognize trades and misappropriating assets. In addition, employees
and service providers may improperly use or disclose confidential information, which could result in litigation or serious financial harm, including limiting the Acquiring Funds business prospects or future marketing activities. Despite the
Investment Advisors due diligence efforts, misconduct and intentional misrepresentations may be undetected or not fully comprehended, thereby potentially undermining the Investment Advisors due diligence efforts. As a result, no
assurances can be given that the due diligence performed by the Investment Advisor will identify or prevent any such misconduct.
Inflation Risk. Inflation risk is the risk that the value of assets or income from investment will be worth less in the future, as inflation decreases the value of money. As inflation increases,
the real value of the common shares and distributions on those shares can decline. In addition, during any periods of rising inflation, interest rates on any borrowings by the Acquiring Fund would likely increase, which would tend to further reduce
returns to the common shareholders.
Deflation Risk. Deflation risk is the risk that prices throughout the economy
decline over time, which may have an adverse effect on the market valuation of companies, their assets and their revenues. In addition, deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more likely,
which may result in a decline in the value of the Acquiring Funds portfolio.
Portfolio Turnover Risk. The
Acquiring Funds annual portfolio turnover rate may vary greatly from year to year, as well as within a given year. Portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Acquiring Fund. A
higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne by the Acquiring Fund. High portfolio turnover may result in an increased realization of net short-term capital
gains by the Acquiring Fund which, when distributed to common shareholders, will be taxable as ordinary income. Additionally, in a declining market, portfolio turnover may create realized capital losses.
Anti-Takeover Provisions Risk. The Agreement and Declaration of Trust and Bylaws of the Acquiring Fund include provisions that
could limit the ability of other entities or persons to acquire control of the Acquiring Fund or convert the Acquiring Fund to open-end status or to change the composition of the Board.
75
A DESCRIPTION OF THE FUNDS
BSD, BBF and the Acquiring Fund are each formed as a Delaware statutory trust pursuant to an Agreement and Declaration of Trust governed
by the laws of the State of Delaware. MFT is organized as a Massachusetts business trust pursuant to its Declaration of Trust governed by the laws of the Commonwealth of Massachusetts. Each Fund is a diversified,
closed-end management investment company registered under the 1940 Act. Each Funds principal office is located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and each Funds telephone number
is (800) 882-0052.
BSD was formed as a Delaware statutory trust pursuant to an
Agreement and Declaration of Trust governed by the laws of the State of Delaware on June 17, 1999, and commenced operations on August 24, 1999.
MFT was organized as Massachusetts business trust pursuant to an Agreement and Declaration of Trust governed by the Commonwealth of Massachusetts on August 24, 1992, and commenced operations on
October 30, 1992.
BBF was formed as a Delaware statutory trust pursuant to an Agreement and Declaration of Trust
governed by the laws of the State of Delaware on March 30, 2001, and commenced operations on July 27, 2001.
The
Acquiring Fund was formed as a Delaware statutory trust pursuant to an Agreement and Declaration of Trust governed by the laws of the State of Delaware on June 21, 2002, and commenced operations on July 30, 2002.
The Acquiring Fund common shares are listed on the NYSE as BLE. BSDs common shares are listed on the NYSE as
BSD. MFTs common shares are listed on the NYSE as MFT. BBFs common shares are listed on the NYSE as BBF.
The Acquiring Fund has an August 31 fiscal year end. BSD has an April 30 fiscal year end. MFT and BBF have a July 31 fiscal year end.
Each of BSD, MFT and the Acquiring Fund has VMTP Shares outstanding and BBF has VRDP Shares outstanding. Each Funds preferred
shares are not listed on a national stock exchange and have not been registered under the Securities Act, or any state securities laws, and unless so registered, may not be offered, sold, assigned, transferred, pledged, encumbered or otherwise
disposed of except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. Please see Information about the Preferred Shares of the
Funds for additional information.
The Board of Trustees and Officers
The Board of Trustees (the Board) of each Fund currently consists of ten individuals (each, a Board Member), eight
of whom are not interested persons of each Fund as defined in the 1940 Act (the Independent Board Members). The registered investment companies advised by the Investment Advisor or its affiliates (the BlackRock-Advised
Funds) are organized into one complex of closed-end funds and open-end non-index fixed-income funds (the BlackRock
Fixed-Income Complex), one complex of open-end equity, multi-asset, index and money market funds (the BlackRock Multi-Asset Complex) and one complex of exchange-traded funds (each, a
BlackRock Fund Complex). Each Fund is included in the BlackRock Fixed-Income Complex. The Board Members also oversee as Board members the operations of the other closed-end registered investment
companies included in the BlackRock Fixed-Income Complex.
Certain biographical and other information relating to the Board
Members and officers of each Fund is set forth below, including their year of birth, their principal occupation for at least the last five years, the length of time served, the total number of investment companies overseen in the BlackRock Fund
Complexes and any public directorships or trusteeships.
76
Please refer to the below table which identifies the Board Members and sets forth certain
biographical information about the Board Members for each Fund.
|
|
|
|
|
|
|
|
|
Name and Year of
Birth(1)
|
|
Position(s)
Held
(Length of
Service) (3)
|
|
Principal Occupation(s) During Past Five
Years
|
|
Number
of
BlackRock-
Advised
Registered
Investment
Companies
(RICs)
Consisting
of
Investment
Portfolios
(Portfolios)
Overseen(4)
|
|
Other Public
Company or
Investment
Company
Directorships
Held During
Past Five
Years(5)
|
|
|
|
|
Independent Board
Members(2)
|
|
|
|
|
|
|
|
|
|
|
|
Richard E. Cavanagh
1946
|
|
Co-Chair of the Board and Board Member (Since 2007)
|
|
Director, The Guardian Life Insurance Company of America since 1998; Board Chair, Volunteers of America
(a not-for-profit organization) from 2015 to 2018 (board member since 2009); Director, Arch Chemicals (chemical and allied products) from 1999 to 2011;
Trustee, Educational Testing Service from 1997 to 2009 and Chairman thereof from 2005 to 2009; Senior Advisor, The Fremont Group since 2008 and Director thereof since 1996; Faculty Member/Adjunct Lecturer, Harvard University since 2007 and Executive
Dean from 1987 to 1995; President and Chief Executive Officer, The Conference Board, Inc. (global business research organization) from 1995 to 2007.
|
|
86 RICs consisting of 110 Portfolios
|
|
None
|
|
|
|
|
|
Karen P. Robards
1950
|
|
Co-Chair of the Board and Board Member (Since 2007)
|
|
Principal of Robards & Company, LLC (consulting and private investing) since 1987; Co-founder and Director of the Cooke
Center for Learning and Development (a not-for-profit organization) since 1987; Director of Enable Injections, LLC (medical devices) since 2019; Investment Banker at
Morgan Stanley from 1976 to 1987.
|
|
86 RICs consisting of 110 Portfolios
|
|
Greenhill &
Co., Inc.;
AtriCure,
Inc.
(medical
devices)
from 2000
until 2017
|
77
|
|
|
|
|
|
|
|
|
Name and Year of
Birth(1)
|
|
Position(s)
Held
(Length of
Service) (3)
|
|
Principal Occupation(s) During Past Five
Years
|
|
Number
of
BlackRock-
Advised
Registered
Investment
Companies
(RICs)
Consisting
of
Investment
Portfolios
(Portfolios)
Overseen(4)
|
|
Other Public
Company
or
Investment
Company
Directorships
Held During
Past Five
Years(5)
|
|
|
|
|
|
Michael J. Castellano
1946
|
|
Board Member (Since 2011)
|
|
Chief Financial Officer of Lazard Group LLC from 2001 to 2011; Chief Financial Officer of Lazard Ltd from 2004 to 2011; Director, Support Our Aging
Religious (non-profit) from 2009 to June 2015 and from 2017 to September 2020; Director, National Advisory Board of Church Management at Villanova University since 2010; Trustee, Domestic Church
Media Foundation since 2012; Director, CircleBlack Inc. (financial technology company) from 2015 to July 2020.
|
|
86 RICs consisting of 110 Portfolios
|
|
None
|
|
|
|
|
|
Cynthia L. Egan
1955
|
|
Board Member (Since 2016)
|
|
Advisor, U.S. Department of the Treasury from 2014 to 2015; President, Retirement Plan Services, for T. Rowe Price Group, Inc. from 2007 to 2012; executive positions within Fidelity
Investments from 1989 to 2007.
|
|
86 RICs consisting of 110 Portfolios
|
|
Unum (insurance); The Hanover Insurance Group (insurance); Envestnet (investment platform) from 2013 until 2016
|
|
|
|
|
|
Frank J. Fabozzi
1948
|
|
Board Member (Since 2007)
|
|
Editor of The Journal of Portfolio Management since 1986; Professor of Finance, EDHEC Business School (France) since 2011; Visiting Professor, Princeton University for the 2013 to
2014 academic year and Spring 2017 semester; Professor in the Practice of Finance, Yale University School of Management from 1994 to 2011 and currently a Teaching Fellow in Yales Executive Programs; Board Member, BlackRock Equity-Liquidity
Funds from 2014 to 2016; affiliated professor Karlsruhe Institute of Technology from 2008 to 2011; Visiting Professor Rutgers University for the Spring 2019 semester; Visiting Professor, New York University for the 2019 academic year.
|
|
87 RICs consisting of 111 Portfolios
|
|
None
|
78
|
|
|
|
|
|
|
|
|
Name and Year of
Birth(1)
|
|
Position(s)
Held
(Length of
Service) (3)
|
|
Principal Occupation(s) During Past Five
Years
|
|
Number
of
BlackRock-
Advised
Registered
Investment
Companies
(RICs)
Consisting
of
Investment
Portfolios
(Portfolios)
Overseen(4)
|
|
Other Public
Company
or
Investment
Company
Directorships
Held During
Past Five
Years(5)
|
|
|
|
|
|
R. Glenn Hubbard
1958
|
|
Board Member (Since 2007)
|
|
Dean, Columbia Business School from 2004 to 2019; Faculty member, Columbia Business School since 1988.
|
|
86 RICs consisting of 110 Portfolios
|
|
ADP (data and information services); Metropolitan Life Insurance Company (insurance); KKR Financial Corporation (finance) from
2004 until 2014
|
|
|
|
|
|
W. Carl Kester
1951
|
|
Board Member (Since 2007)
|
|
George Fisher Baker Jr. Professor of Business Administration, Harvard Business School since 2008; Deputy Dean for Academic Affairs from 2006 to 2010; Chairman of the Finance Unit,
from 2005 to 2006; Senior Associate Dean and Chairman of the MBA Program from 1999 to 2005; Member of the faculty of Harvard Business School since 1981.
|
|
87 RICs consisting of 111 Portfolios
|
|
None
|
|
|
|
|
|
Catherine A. Lynch
1961
|
|
Board Member (Since 2016)
|
|
Chief Executive Officer, Chief Investment Officer and various other positions, National Railroad Retirement Investment Trust from 2003 to 2016; Associate Vice President for Treasury
Management, The George Washington University from 1999 to 2003; Assistant Treasurer, Episcopal Church of America from 1995 to 1999.
|
|
87 RICs consisting of 111 Portfolios
|
|
None
|
79
|
|
|
|
|
|
|
|
|
Name and Year of
Birth(1)
|
|
Position(s)
Held
(Length of
Service) (3)
|
|
Principal Occupation(s) During Past Five
Years
|
|
Number
of
BlackRock-
Advised
Registered
Investment
Companies
(RICs)
Consisting
of
Investment
Portfolios
(Portfolios)
Overseen(4)
|
|
Other Public
Company
or
Investment
Company
Directorships
Held During
Past Five
Years(5)
|
Interested Board
Members(5)
|
|
|
|
|
|
|
|
|
|
|
|
Robert Fairbairn
1965
|
|
Board Member (Since 2018)
|
|
Vice Chairman of BlackRock, Inc. since 2019; Member of BlackRocks Global Executive and Global Operating
Committees; Co-Chair of BlackRocks Human Capital Committee; Senior Managing Director of BlackRock, Inc. from 2010 to 2019; oversaw BlackRocks Strategic Partner Program and Strategic
Product Management Group from 2012 to 2019; Member of the Board of Managers of BlackRock Investments, LLC from 2011 to 2018; Global Head of BlackRocks Retail and iShares® businesses from 2012 to 2016.
|
|
119 RICs consisting of 266 Portfolios
|
|
None
|
|
|
|
|
|
John M. Perlowski 1964
|
|
Board Member (Since 2015), President and Chief Executive Officer (Since 2010)
|
|
Managing Director of BlackRock, Inc. since 2009; Head of BlackRock Global Accounting and Product Services since 2009; Advisory Director of Family Resource Network (charitable
foundation) since 2009.
|
|
120 RICs consisting of 267 Portfolios
|
|
None
|
(1)
|
The address of each Board Member is c/o BlackRock, Inc., 55 East 52nd Street, New York, NY 10055.
|
(2)
|
Each Independent Board Member holds office until his or her successor is elected and qualifies, or until his or her earlier death, resignation,
retirement or removal, or until December 31 of the year in which he or she turns 75. Board Members who are interested persons, as defined in the 1940 Act, serve until their successor is elected and qualifies or until their earlier
death, resignation, retirement or removal as provided by each Funds bylaws or statute, or until December 31 of the year in which they turn 72. The Board may determine to extend the terms of Independent Board Members on a case-by-case basis, as appropriate.
|
(3)
|
Date shown is the earliest date a person has served for the Funds covered by this Proxy Statement. Following the combination of Merrill Lynch
Investment Managers, L.P. (MLIM) and BlackRock, Inc. in September 2006, the various legacy MLIM and legacy BlackRock fund boards were realigned and consolidated into three new fund boards in 2007. Certain Independent Board Members first
became members of the boards of other legacy MLIM or legacy BlackRock funds as follows: Richard E. Cavanagh, 1994; Frank J. Fabozzi, 1988; R. Glenn Hubbard, 2004; W. Carl Kester, 1995; and Karen P. Robards, 1998. Certain other Independent
Board Members became members of the boards of the closed-end funds in the BlackRock Fixed-Income Complex as follows: Michael J. Castellano, 2011; Cynthia L. Egan, 2016; and Catherine A. Lynch, 2016.
|
(4)
|
Dr. Fabozzi, Dr. Kester, Ms. Lynch and Mr. Perlowski are also trustees of the BlackRock Credit Strategies Fund.
|
(5)
|
Mr. Fairbairn and Mr. Perlowski are both interested persons, as defined in the 1940 Act, of each Fund based on their positions
with BlackRock, Inc. and its affiliates. Mr. Fairbairn and Mr. Perlowski are also board members of the BlackRock Multi-Asset Complex.
|
80
Information Pertaining to the Officers
Certain biographical and other information relating to the officers of the Funds who are not Board Members is set forth below, including
their address and year of birth, principal occupations for at least the last five years and length of time served. With the exception of the Chief Compliance Officer (CCO), executive officers receive no compensation from the Funds. The
Acquiring Fund compensates the CCO for his services as its CCO.
Each executive officer is an interested person of
the Funds (as defined in the 1940 Act) by virtue of that individuals position with BlackRock or its affiliates described in the table below.
|
|
|
|
|
Name, Address(1),(2) and
Year of Birth
|
|
Position(s) Held (Length
of Service)
|
|
Principal Occupations(s)
During Past Five
Years
|
|
|
|
Jonathan Diorio
1980
|
|
Vice President
(Since
2015)
|
|
Managing Director of BlackRock since 2015; Director of BlackRock, Inc. from 2011 to 2015.
|
|
|
|
Neal J. Andrews
1966
|
|
Chief Financial Officer
(Since 2007)
|
|
Chief Financial Officer of the iShares®
exchange traded funds from 2019 to 2020; Managing Director of BlackRock, Inc. since 2006
|
|
|
|
Jay M. Fife
1970
|
|
Treasurer
(Since
2007)
|
|
Managing Director of BlackRock, Inc. since 2007.
|
|
|
|
Charles Park
1967
|
|
Chief Compliance Officer
(Since 2014)
|
|
Anti-Money Laundering Compliance Officer for certain BlackRock-advised Funds from 2014 to 2015; Chief Compliance Officer of BlackRock Advisors, LLC and the BlackRock-advised Funds
in the BlackRock Multi-Asset Complex and the BlackRock Fixed-Income Complex since 2014; Principal of and Chief Compliance Officer for iShares® Delaware Trust Sponsor LLC since 2012 and BlackRock Fund Advisors (BFA) since 2006; Chief Compliance Officer for the
BFA-advised iShares® exchange traded funds since 2006; Chief Compliance
Officer for BlackRock Asset Management International Inc. since 2012.
|
|
|
|
Janey Ahn
1975
|
|
Secretary
(Since
2012)
|
|
Managing Director of BlackRock, Inc. since 2018; Director of BlackRock, Inc. from 2009 to 2017.
|
(1)
|
The address of each executive officer is c/o BlackRock, Inc., 55 East 52nd Street, New York, NY 10055.
|
(2)
|
Officers of the Funds service at the pleasure of the Board.
|
The Investment Advisor
BlackRock Advisors, LLC
serves as the investment adviser for each Fund and is expected to continue to serve as investment adviser for the Combined Fund. The Investment Advisor is responsible for the management of each Funds portfolio and provides the necessary
personnel, facilities, equipment and certain other services necessary to the operations of each Fund.
Each Fund entered into
an Investment Management Agreement with the Investment Advisor to provide investment advisory services. For such services, BSD currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.60% of
its average weekly managed assets. BBF currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.57% of its average weekly managed assets. The Acquiring Fund currently pays the Investment
Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average weekly managed assets. Managed assets means the total assets of the relevant Fund (including any assets attributable to money borrowed)
minus the sum of its accrued liabilities (other than money borrowed for investment purposes, including liabilities represented by tender option bond (TOB) leverage and the liquidation preference of the
81
Funds VMTP Shares or VRDP Shares, as applicable). MFT currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.50% of its average
daily net assets. For purposes of calculating these fees, net assets mean the total assets of MFT minus the sum of its accrued liabilities (which does not include liabilities represented by tender option bond trusts (TOB
Trusts) and the liquidation preference of any outstanding preferred shares). It is understood that the liquidation preference of any outstanding preferred shares (other than accumulated dividends) and TOB Trusts is not considered
a liability in determining MFTs NAV.
Each Fund and the Investment Advisor have entered into the Fee Waiver Agreement,
pursuant to which the Investment Advisor has contractually agreed to waive the management fee with respect to any portion of each Funds assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the
Investment Advisor or its affiliates that have a contractual fee, through June 30, 2022. In addition, effective December 1, 2019, pursuant to the Fee Waiver Agreement, the Investment Advisor has contractually agreed to waive its management
fees by the amount of investment advisory fees each Fund pays to the Investment Advisor indirectly through its investment in money market funds advised by the Investment Advisor or its affiliates, through June 30, 2022. The Fee Waiver Agreement
may be continued from year to year thereafter, provided that such continuance is specifically approved by the Investment Advisor and each Fund (including by a majority of each Funds Independent Board Members). Neither the Investment Advisor
nor the Funds are obligated to extend the Fee Waiver Agreement. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by each Fund (upon the vote of a majority of the Independent Board Members or a majority
of the outstanding voting securities of each Fund), upon 90 days written notice by each Fund to the Investment Advisor.
If the Reorganizations are consummated, the annual contractual investment management fee rate of the Acquiring Fund will be the annual contractual investment management fee rate of the Combined Fund,
which will be 0.55% of the average weekly managed assets of the Combined Fund. The Combined Fund will have a lower annual contractual investment management fee rate than each of BSD and BBF, a higher annual contractual investment management
fee rate than MFT and the same annual contractual investment management fee rate as the Acquiring Fund.
Based on a
pro forma Broadridge peer expense universe for the Combined Fund, the estimated total annual fund expense ratio (excluding investment-related expenses and taxes) is expected to be in the third quartile and contractual investment management
fee rate and actual investment management fee rate over total assets are each expected to be in the first quartile.
The level
of expense savings (or increases) will vary depending on the combination of the Funds in the Reorganizations, and furthermore, there can be no assurance that future expenses will not increase or that any expense savings for any Fund will be realized
as a result of any Reorganization.
A discussion regarding the basis for the approval of the Investment Management Agreement
by the Board of each Fund is provided in such Funds Form N-CSR for BSDs semi-annual fiscal period ended October 31, 2019, for MFTs and BBFs fiscal year ended July 31, 2020 and
for the Acquiring Funds fiscal year ended August 31, 2020 available at www.sec.gov or by visiting www.blackrock.com.
The Investment Advisor is located at 100 Bellevue Parkway, Wilmington, Delaware 19809 and is a wholly owned subsidiary of BlackRock. BlackRock is one of the worlds largest publicly-traded investment
management firms. As of September 30, 2020, BlackRocks assets under management were approximately $7.808 trillion. BlackRock has over 25 years of experience managing closed-end products and, as of
September 30, 2020, advised a registered closed-end family of 70 exchange-listed active funds with approximately $52 billion in assets.
BlackRock is a global leader in investment management, risk management and advisory services for
institutional and retail clients. BlackRock helps clients meet their goals and overcome challenges with a range of products that include separate accounts, mutual funds, iShares® (exchange-traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services
82
to a broad base of institutional investors through BlackRock
Solutions®. Headquartered in New York City, as of September 30, 2020, the firm had
approximately 16,000 employees in more than 39 countries and a major presence in key global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa.
Portfolio Management
Each of BSD, MFT and BBF is managed by a team of investment professionals led by Theodore R. Jaeckel, Jr., CFA and Michael Perilli. Messrs. Jaeckel and Perilli are each BSDs, MFTs and
BBFs portfolio managers and are responsible for the day-to-day management of each Funds portfolio and the selection of its investments. Messrs. Jaeckel and
Perilli have been members of BSDs, MFTs and BBFs Funds portfolio management team since 2006 and 2016, respectively.
The Acquiring Fund is managed by a team of investment professionals lead by Theodore R. Jaeckel, Jr., CFA and Walter OConnor, CFA. Messrs. Jaeckel and OConnor are the Acquiring Funds
portfolio managers and are responsible for the day-to-day management of the Acquiring Funds portfolio and the selection of its investments. Messrs. Jaeckel and
OConnor have been members of the Acquiring Funds portfolio management team since 2006.
The biography of each
portfolio manager of the Funds are set forth below:
|
|
|
Portfolio Manager
|
|
Biography
|
Michael Perilli, CFA
|
|
Vice President of BlackRock since 2014; Associate of BlackRock from 2008 to 2014.
|
|
|
Theodore R. Jaeckel, Jr., CFA
|
|
Managing Director of BlackRock since 2006; Managing Director of Merrill Lynch Investment Managers, L.P. (MLIM) from 2005 to 2006;
Director of MLIM from 1997 to 2005.
|
|
|
Walter OConnor, CFA
|
|
Managing Director of BlackRock since 2006; Managing Director of MLIM from 2003 to 2006; Director of MLIM from 1998 to 2003.
|
Following the Reorganizations, it is expected that the Combined Fund will be managed by a team of
investment professionals lead by Theodore R. Jaeckel, Jr., CFA and Michael Perilli.
Other Service Providers
The professional service providers for the Funds are or will be as follows:
|
|
|
Service
|
|
Service Providers to the Funds
|
Accounting Agent
|
|
State Street Bank and Trust Company
|
Custodian
|
|
State Street Bank and Trust Company
|
Transfer Agent, Dividend Disbursing Agent and Registrar
|
|
Computershare Trust Company, N.A.
|
Redemption and Paying Agent to BSD, MFT and Acquiring Fund VMTP Shares; Tender and Paying Agent to BBF VRDP Shares
|
|
The Bank of New York Mellon
|
Liquidity Provider to BBF VRDP Shares
|
|
Bank of America, N.A.
|
Remarketing Agent to BBF VRDP Shares
|
|
BofA Securities, Inc.
|
Independent Registered Public Accounting Firm
|
|
Deloitte & Touche LLP
|
Fund Counsel
|
|
Willkie Farr & Gallagher LLP
|
Counsel to the Independent Board Members
|
|
Debevoise & Plimpton LLP
|
83
It is not anticipated that the Reorganizations will result in any change in the
organizations providing services to the Acquiring Fund as set forth above. As a result of the Reorganizations, the service providers to the Acquiring Fund are anticipated to be the service providers to the Combined Fund.
Accounting Agent
State Street Bank and Trust Company provides certain administration and accounting services to the Funds pursuant to an Administration and Fund Accounting Services Agreement (the Administration
Agreement). Pursuant to the Administration Agreement, State Street Bank and Trust Company provides the Funds with, among other things, customary fund accounting services, including computing each Funds NAV and maintaining books, records
and other documents relating to each Funds financial and portfolio transactions, and customary fund administration services, including assisting the Funds with regulatory filings, tax compliance and other oversight activities. For these and
other services it provides to the Funds, State Street Bank and Trust Company is paid a monthly fee from the Funds at an annual rate ranging from 0.0075% to 0.015% of each Funds Managed Assets, along with an annual fixed fee ranging from $0 to
$10,000 for the services it provides to the Funds.
Custody of Assets
The custodian of the assets of each Fund is State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. The
custodian is responsible for, among other things, receipt of and disbursement of funds from each Funds accounts, establishment of segregated accounts as necessary, and transfer, exchange and delivery of Fund portfolio securities.
Transfer Agent, Dividend Disbursing Agent and Registrar
Computershare Trust Company, N.A., 150 Royall Street, Canton, Massachusetts 02021, serves as each Funds transfer agent with respect
to such Funds common shares.
VMTP Shares Redemption and Paying Agent; VRDP Shares Tender and Paying Agent
The Bank of New York Mellon, One Wall Street, New York, New York 10286, acts as the tender agent, transfer agent and
registrar, dividend disbursing agent and paying agent and/or redemption price disbursing agent with respect to the Acquiring Fund, BSD and BFT VMTP Shares and the BBF VRDP Shares, as applicable, and will serve in such capacity with respect to the
BBF VMTP Shares to be issued in connection with the VRDP Refinancing and the VMTP Shares of the Combined Fund.
BBF VRDP Shares Liquidity Provider
Bank of America, N.A. New York, New York 10036, serves as the liquidity provider for the BBF VRDP Shares.
BBF VRDP Shares Remarketing Agent
BofA Securities
Inc. New York, New York 10036, serves as the remarketing agent for the BBF VRDP Shares.
84
THE ACQUIRING FUNDS INVESTMENTS
Investment Objective and Policies
The Acquiring Funds investment objective is to provide current income exempt from regular federal income taxes. As a fundamental policy, under normal market conditions, the Acquiring Fund will
invest at least 80% of its Managed Assets in Municipal Bonds, the interest of which is exempt from regular federal income tax (except that the interest may be subject to the alternative minimum tax). The Acquiring Fund cannot
change its investment objectives or the foregoing fundamental policy without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the 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. See Description of VMTP SharesVoting Rights for additional information with respect to the
voting rights of holders of VMTP Shares.
The Acquiring Funds investment policies provide that, under normal market
conditions, the Acquiring Fund will invest at least 80% of its Managed Assets in investment grade quality Municipal Bonds. Investment grade quality means that such bonds are rated, at the time of investment, within the four highest grades (Baa or
BBB or better by Moodys, S&P or Fitch) or are unrated but judged to be of comparable quality by the Investment Advisor. Municipal Bonds rated Baa by Moodys are investment grade, but Moodys considers Municipal Bonds rated Baa to
have speculative characteristics. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity for issuers of Municipal Bonds that are rated BBB or Baa (or that have equivalent ratings) to make principal and
interest payments than is the case for issues of higher grade Municipal Bonds. In the case of short-term notes, the investment grade rating categories are SP-1+ through
SP-2 for S&P, MIG-1 through MIG-3 for 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 Investment Advisor
takes into account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancement.
The Acquiring Fund may invest up to 20% of its Managed Assets in Municipal Bonds that are rated, at the time of investment, Ba/BB or B by
Moodys, S&P or Fitch or that are unrated but judged to be of comparable quality by the Investment Advisor. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as junk bonds. Bonds of below
investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities, sometimes referred to as high yield or
junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating
categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuers ability to pay interest and any required redemption or principal payments
and are susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing
credit quality policies apply only at the time a security is purchased, and the Acquiring 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 Investment Advisor may consider such factors as the Investment Advisors 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
85
by other rating agencies. Appendix D contains a general description of Moodys, S&Ps and Fitchs ratings of municipal bonds. In the event that the Acquiring Fund
disposes of a portfolio security subsequent to its being downgraded, the Acquiring Fund may experience a greater risk of loss than if such security had been sold prior to such downgrade.
The Acquiring Fund may also invest in securities of other open- or closed-end investment
companies that invest primarily in Municipal Bonds of the types in which the Acquiring Fund may invest directly and in tax-exempt preferred shares that pay dividends that are exempt from regular federal income
tax. See Other Investment Companies, and Tax-Exempt Preferred Shares. In addition, the Acquiring Fund may purchase Municipal Bonds that are additionally secured by
insurance, bank credit agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for
insurance and the higher market price paid for insured obligations may reduce the Acquiring 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
Acquiring Fund may purchase insured bonds and may purchase insurance for bonds in its portfolio.
The Acquiring Fund may
invest in certain tax exempt securities classified as private activity bonds (or industrial development bonds, under pre-1986 law) (in general, bonds that benefit
non-governmental entities) that may subject certain investors in the Acquiring Fund to an alternative minimum tax. See Certain U.S. Federal Income Tax Considerations. The percentage of the
Acquiring Funds total assets invested in private activity bonds will vary from time to time. The Acquiring Fund has not established any limit on the percentage of its portfolio that may be invested in Municipal Bonds subject to the alternative
minimum tax provisions of federal tax law, and the Acquiring Fund expects that a portion of the income it produces will be includable in alternative minimum taxable income. VMTP Shares therefore would not ordinarily be a suitable investment for
investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing VMTP Shares. The suitability of an investment in VMTP Shares will depend upon a comparison of the
after-tax yield likely to be provided from the Acquiring Fund with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from
comparable fully taxable investments, in light of each such investors tax position. Special considerations may apply to corporate investors.
The average maturity of the Acquiring Funds portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. The Acquiring
Funds portfolio at any given time may include both long- term and intermediate-term Municipal Bonds.
The Acquiring
Funds stated expectation is that it will invest in Municipal Bonds that, in the Investment Advisors opinion, are underrated or undervalued. Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Investment
Advisor, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Investment Advisor, are worth more than the value assigned to them in the marketplace. The Investment Advisor 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 Investment Advisor may purchase those bonds for the Acquiring
Funds portfolio because they represent a market sector or issuer that the Investment Advisor 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 Acquiring Funds investment in underrated or undervalued Municipal
Bonds will be based on the Investment Advisors 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 Acquiring Fund will generally result in capital gain distributions subject to federal capital gains taxation.
86
The Acquiring Fund ordinarily does not intend to realize significant investment income not
exempt from federal income tax. From time to time, the Acquiring 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 Acquiring Fund.
Description of Municipal Bonds
Set forth below is a detailed description of the Municipal Bonds in which the Acquiring Fund invests. Information with respect to ratings
assigned to tax-exempt obligations that the Acquiring Fund may purchase is set forth in Appendix D. Obligations are included within the term Municipal Bonds if the interest paid
thereon is excluded from gross income for federal income tax purposes in the opinion of bond counsel to the issuer.
Municipal
Bonds include debt obligations issued to obtain funds for various public purposes, including the construction of a wide range of public facilities, refunding of outstanding obligations and obtaining funds for general operating expenses and loans to
other public institutions and facilities. In addition, certain types of PABs are issued by or on behalf of public authorities to finance various privately owned or operated facilities, including among other things, airports, public ports, mass
commuting facilities, multi-family housing projects, as well as facilities for water supply, gas, electricity, sewage or solid waste disposal and other specialized facilities. Other types of PABs, the proceeds of which are used for the construction,
equipment or improvement of privately operated industrial or commercial facilities, may constitute Municipal Bonds. The interest on Municipal Bonds may bear a fixed rate or be payable at a variable or floating rate. The two principal classifications
of Municipal Bonds are general obligation bonds and revenue bonds, which latter category includes PABs and, for bonds issued on or before August 15, 1986, industrial development bonds. Municipal Bonds typically are
issued to finance public projects, such as roads or public buildings, to pay general operating expenses or to refinance outstanding debt. Municipal Bonds may also be issued for private activities, such as housing, medical and educational facility
construction, or for privately owned industrial development and pollution control projects. General obligation bonds are backed by the full faith and credit, or taxing authority, of the issuer and may be repaid from any revenue source. Revenue bonds
may be repaid only from the revenues of a specific facility or source. Municipal Bonds may be issued on a long-term basis to provide permanent financing. The repayment of such debt may be secured generally by a pledge of the full faith and credit
taxing power of the issuer, a limited or special tax, or any other revenue source, including project revenues, which may include tolls, fees and other user charges, lease payments and mortgage payments. Municipal Bonds may also be issued to finance
projects on a short-term interim basis, anticipating repayment with the proceeds of the later issuance of long-term debt.
The
Municipal Bonds in which the Acquiring Fund invests pay interest or income that, in the opinion of bond counsel to the issuer, is exempt from regular Federal income tax. The Investment Advisor does not conduct its own analysis of the tax status of
the interest paid by Municipal Bonds held by the Acquiring Fund, but will rely on the opinion of counsel to the issuer of each such instrument. The Acquiring Fund may also invest in Municipal Bonds issued by United States Territories (such as Puerto
Rico or Guam) that are exempt from regular Federal income tax. In addition to the types of Municipal Bonds described in this Proxy Statement, the Acquiring Fund may invest in other securities that pay interest or income that is, or make other
distributions that are, exempt from regular Federal income tax and/or state and local personal taxes, regardless of the technical structure of the issuer of the instrument. The Acquiring Fund treats all of such
tax-exempt securities as Municipal Bonds.
The yields on Municipal Bonds are dependent
on a variety of factors, including prevailing interest rates and the condition of the general money market and the Municipal Bond market, the size of a particular offering, the maturity of the obligation and the rating of the issue. The market value
of Municipal Bonds will vary with changes in interest rate levels and as a result of changing evaluations of the ability of bond issuers to meet interest and principal payments.
87
The Acquiring Fund has not established any limit on the percentage of its portfolio that may
be invested in PABs. The Acquiring Fund may not be a suitable investment for investors who are already subject to the federal alternative minimum tax or who would become subject to the federal alternative minimum tax as a result of an investment in
the Acquiring Funds common shares.
General Obligation Bonds. General obligation bonds are typically secured by
the issuers pledge of its faith, credit and taxing power for the repayment of principal and the payment of interest. The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws, and an
entitys creditworthiness will depend on many factors, including potential erosion of its tax base due to population declines, natural disasters, declines in the states industrial base or inability to attract new industries, economic
limits on the ability to tax without eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on federal or state aid, access to capital markets or other
factors beyond the states or entitys control. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the issuers maintenance
of its tax base.
Revenue Bonds. Revenue or special obligation bonds are typically payable only from the revenues
derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue sources such as payments from the user of the facility being financed. Accordingly, the timely payment
of interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source. Revenue bonds issued by state or local agencies to
finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal securities generally, including that the underlying properties may not generate
sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the properties, may pay
interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not generate income to pay
interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.
Municipal Notes. Municipal notes are shorter term municipal debt obligations. They may provide interim financing in anticipation of tax collection, bond sales or revenue receipts. If there is a
shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid, and the Acquiring Fund may lose money.
Municipal Commercial Paper. Municipal commercial paper is generally unsecured and issued to meet short-term financing needs. The lack of security presents some risk of loss to the Acquiring Fund
since, in the event of an issuers bankruptcy, unsecured creditors are repaid only after the secured creditors out of the assets, if any, that remain.
PABs. The Acquiring Fund may purchase Municipal Bonds classified as PABs. Interest received on certain PABs is treated as an item of tax preference for purposes of the federal
alternative minimum tax and may impact the overall tax liability of certain investors in the Acquiring Fund. PABs, formerly referred to as industrial development bonds, are issued by, or on behalf of, states, municipalities or public authorities to
obtain funds to provide privately operated housing facilities, airport, mass transit or port facilities, sewage disposal, solid waste disposal or hazardous waste treatment or disposal facilities and certain local facilities for water supply, gas or
electricity. Other types of PABs, the proceeds of which are used for the construction, equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute Municipal Bonds, although the federal tax laws may
place substantial limitations on the size of such issues. Such bonds are secured primarily by revenues derived from loan repayments or lease payments due from the entity which may or may not be guaranteed by a parent company or otherwise secured.
PABs generally are not secured by a pledge of the taxing power of the issuer of such bonds. Therefore, an investor should be aware that repayment of such bonds
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generally depends on the revenues of a private entity and be aware of the risks that such an investment may entail. The continued ability of an entity to generate sufficient revenues for the
payment of principal and interest on such bonds will be affected by many factors including the size of the entity, capital structure, demand for its products or services, competition, general economic conditions, government regulation and the
entitys dependence on revenues for the operation of the particular facility being financed.
Moral Obligation
Bonds. Municipal Bonds may also include moral obligation bonds, which are normally issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds
becomes a moral commitment but not a legal obligation of the state or municipality in question.
Municipal Lease
Obligations. Also included within the general category of Municipal Bonds are certificates of participation (COPs) issued by government authorities or entities to finance the acquisition or construction of equipment, land and/or
facilities. COPs represent participations in a lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called lease obligations) relating to such equipment, land or facilities. Municipal leases,
like other municipal debt obligations, are subject to the risk of non-payment. Although lease obligations do not constitute general obligations of the issuer for which the issuers unlimited taxing power
is pledged, a lease obligation is frequently backed by the issuers covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain lease obligations contain
non-appropriation clauses which provide that the issuer has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly
basis. Although non-appropriation lease obligations are secured by the leased property, disposition of the property in the event of foreclosure might prove difficult and the value of the property
may be insufficient to issue lease obligations. Certain investments in lease obligations may be illiquid.
The ability of
issuers of municipal leases to make timely lease payments may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated among federal, state and local governmental units. Such non-payment would result in a reduction of income to the Acquiring Fund, and could result in a reduction in the value of the municipal lease experiencing non-payment and a
potential decrease in the NAV of the Acquiring Fund. Issuers of municipal lease obligations might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, the Acquiring Fund could experience delays and limitations
with respect to the collection of principal and interest on such municipal leases and the Acquiring Fund may not, in all circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in the event of a
default in lease payments, the Acquiring Fund might take possession of and manage the assets securing the issuers obligations on such securities, which may increase the Acquiring Funds operating expenses and adversely affect the NAV of
the Acquiring Fund. When the lease contains a non-appropriation clause, however, the failure to pay would not be a default and the Acquiring Fund would not have the right to take possession of the assets. Any
income derived from the Acquiring Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to regulated
investment companies. In addition, the Acquiring Funds intention to qualify as a regulated investment company under the Internal Revenue Code of 1986, may limit the extent to which the Acquiring Fund may exercise its rights by taking
possession of such assets, because as a regulated investment company the Acquiring Fund is subject to certain limitations on its investments and on the nature of its income.
Zero-Coupon Bonds. Municipal Bonds may include zero-coupon bonds. Zero-coupon bonds are securities that are sold at a discount to par value and do not pay
interest during the life of the security. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity at a rate of interest reflecting the market rate of the security at the time of
issuance. Upon maturity, the holder of a zero-coupon bond is entitled to receive the par value of the security.
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
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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.
The Acquiring Fund accrues income with respect to these securities for U.S. federal income tax and accounting purposes prior to the
receipt of cash payments. Zero-coupon bonds may be subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash interest at regular intervals.
Further, to maintain its qualification for pass-through treatment under the federal tax laws, the Acquiring Fund is required to
distribute income to its shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself by borrowing in order to generate the cash to satisfy these
distributions. The required distributions may result in an increase in the Acquiring Funds exposure to zero-coupon bonds.
In addition to the above-described risks, there are certain other risks related to investing in zero-coupon bonds. During a period of severe market conditions, the
market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, the Acquiring Funds investment exposure to these securities and their risks, including credit risk, will increase during the
time these securities are held in the Acquiring Funds portfolio.
Pre-Refunded Municipal Securities. The principal of, and interest on, pre-refunded municipal securities are no longer paid from the original revenue source for the securities. Instead, the source of such payments is typically an escrow fund consisting of U.S. Government securities.
The assets in the escrow fund are derived from the proceeds of refunding bonds issued by the same issuer as the pre-refunded municipal securities. Issuers of municipal securities use this advance refunding
technique to obtain more favorable terms with respect to securities that are not yet subject to call or redemption by the issuer. For example, advance refunding enables an issuer to refinance debt at lower market interest rates, restructure debt to
improve cash flow or eliminate restrictive covenants in the indenture or other governing instrument for the pre-refunded municipal securities.
However, except for a change in the revenue source from which principal and interest payments are made, the pre-refunded municipal securities remain outstanding on their original terms until they mature or are redeemed by the issuer.
Special Taxing Districts. Special taxing districts are organized to plan and finance infrastructure developments to induce residential, commercial and industrial growth and redevelopment. The bond
financing methods such as tax increment finance, tax assessment, special services district and Mello-Roos bonds (a type of municipal security established by the Mello-Roos Community Facilities Act of 1982), are generally payable solely from taxes or
other revenues attributable to the specific projects financed by the bonds without recourse to the credit or taxing power of related or overlapping municipalities. They often are exposed to real estate development-related risks and can have more
taxpayer concentration risk than general tax-supported bonds, such as general obligation bonds. Further, the fees, special taxes, or tax allocations and other revenues that are established to secure such
financings are generally limited as to the rate or amount that may be levied or assessed and are not subject to increase pursuant to rate covenants or municipal or corporate guarantees. The bonds could default if development failed to progress as
anticipated or if larger taxpayers failed to pay the assessments, fees and taxes as provided in the financing plans of the districts.
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Indexed and Inverse Floating Rate Securities. The Acquiring Fund may invest in
Municipal Bonds (and Non-Municipal Tax-Exempt Securities) that yield a return based on a particular index of value or interest rates. For example, the Acquiring Fund may
invest in Municipal Bonds that pay interest based on an index of Municipal Bond interest rates. The principal amount payable upon maturity of certain Municipal Bonds also may be based on the value of the index. To the extent the Acquiring Fund
invests in these types of Municipal Bonds, the Acquiring Funds return on such Municipal Bonds will be subject to risk with respect to the value of the particular index. Interest and principal payable on the Municipal Bonds may also be based on
relative changes among particular indices. Also, the Acquiring Fund may invest in so-called inverse floating rate bonds or residual interest bonds on which the interest rates vary
inversely with a short-term floating rate (which may be reset periodically by a Dutch auction, a remarketing agent, or by reference to a short-term tax-exempt interest rate index). The Acquiring Fund may
purchase synthetically created inverse floating rate bonds evidenced by custodial or trust receipts. Generally, income on inverse floating rate bonds will decrease when short-term interest rates increase, and will increase when short-term interest
rates decrease. Such securities have the effect of providing a degree of investment leverage, since they may increase or decrease in value in response to changes, as an illustration, in market interest rates at a rate which is a multiple (typically
two) of the rate at which fixed rate long-term tax-exempt securities increase or decrease in response to such changes. As a result, the market values of such securities will generally be more volatile than the
market values of fixed rate tax-exempt securities. To seek to limit the volatility of these securities, the Acquiring Fund may purchase inverse floating rate bonds with shorter-term maturities or limitations
on the extent to which the interest rate may vary. Certain investments in such obligations may be illiquid. See The Acquiring Funds InvestmentsLeverageTender Option Bond Transactions.
When-Issued Securities, Delayed Delivery Securities and Forward Commitments. The Acquiring Fund may purchase or sell securities
that it is entitled to receive on a when-issued basis. The Acquiring Fund may also purchase or sell securities on a delayed delivery basis. The Acquiring Fund may also purchase or sell securities through a forward commitment. These transactions
involve the purchase or sale of securities by the Acquiring Fund at an established price with payment and delivery taking place in the future. The purchase will be recorded on the date the Acquiring Fund enters into the commitment and the value of
the securities will thereafter be reflected in the Acquiring Funds NAV. The Acquiring Fund has not established any limit on the percentage of its assets that may be committed in connection with these transactions. At the time the Acquiring
Fund enters into a transaction on a when-issued basis, it will segregate or designate on its books and records cash or liquid assets with a value not less than the value of the when-issued securities.
There can be no assurance that a security purchased on a when-issued basis will be issued or that a security purchased or sold through a
forward commitment will be delivered. A default by a counterparty may result in the Acquiring Fund missing the opportunity of obtaining a price considered to be advantageous. The value of securities in these transactions on the delivery date may be
more or less than the Acquiring Funds purchase price. The Acquiring Fund may bear the risk of a decline in the value of the security in these transactions and may not benefit from an appreciation in the value of the security during the
commitment period.
If deemed advisable as a matter of investment strategy, the Acquiring Fund may dispose of or renegotiate a
commitment after it has been entered into, and may sell securities it has committed to purchase before those securities are delivered to the Acquiring Fund on the settlement date. In these cases the Acquiring Fund may realize a taxable capital gain
or loss.
When the Acquiring Fund engages in when-issued, delayed delivery or forward commitment transactions, it relies on
the other party to consummate the trade. Failure of such party to do so may result in the Acquiring Funds incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase securities, and any subsequent fluctuations in their market value,
is taken into account when determining the market value of the Acquiring Fund starting on the day the Acquiring Fund agrees to purchase the securities. The Acquiring Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
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Yields. Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the Municipal Bond market, the size of a particular offering, the financial condition of the issuer, the maturity of the obligation and the rating of the issue. The ability of the Acquiring Fund to
achieve its investment objective is also dependent on the continuing ability of the issuers of the securities in which the Acquiring Fund invests to meet their obligations for the payment of interest and principal when due. There are variations in
the risks involved in holding Municipal Bonds, both within a particular classification and between classifications, depending on numerous factors. Furthermore, the rights of owners of Municipal Bonds and the obligations of the issuer of such
Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar laws and court decisions affecting the rights of creditors generally and to general equitable principles, which may limit the enforcement of certain remedies.
High Yield or Junk Bonds. The Acquiring Fund may invest up to 20% of its Managed Assets in
Municipal Bonds that are rated, at the time of investment, Ba/BB or B by Moodys, S&P or Fitch or that are unrated but judged to be of comparable quality by the Investment Advisor. Information with respect to ratings assigned to tax-exempt obligations that the Acquiring Fund may purchase is set forth in Appendix D. Municipal Bonds of below investment grade quality (Ba/BB or below) are commonly known as
junk bonds. Securities rated below investment grade are judged to have speculative characteristics with respect to their interest and principal payments. Such securities may face major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments.
Other Investment Companies
The Acquiring Fund may invest up to 10% of its total assets in securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds
of the types in which the Acquiring Fund may invest directly, subject to the Eligible Assets requirements of the Statement of Preferences which limit the Acquiring Funds investment in such securities to 5% of its Managed Assets at the time of
investment. The Acquiring Fund generally expects to invest in other investment companies either during periods when it has large amounts of uninvested cash or during periods when there is a shortage of attractive, high-yielding Municipal Bonds
available in the market. As a shareholder in an investment company, the Acquiring Fund will bear its ratable share of that investment companys expenses, and would remain subject to payment of the Acquiring Funds advisory and other fees
and expenses with respect to assets so invested. The Investment Advisor will take expenses into account when evaluating the investment merits of an investment in an investment company relative to available municipal bond investments. In addition,
the securities of other investment companies may be leveraged and will therefore be subject to leverage risks. The net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more
than the yield generated by unleveraged shares. Investment companies may have investment policies that differ from those of the Acquiring Fund. In addition, to the extent that the Acquiring Fund invests in other investment companies, the Acquiring
Fund will be dependent upon the investment and research abilities of persons other than the Investment Advisor. The Acquiring Fund treats its investments in such open- or closed-end investment companies as
investments in Municipal Bonds.
Tax-Exempt Preferred Shares
The Acquiring Fund may invest up to 15% of its total assets in preferred interests of other investment funds that pay dividends that are
exempt from regular federal income tax, subject to the Eligible Assets requirements of the Statement of Preferences which limit the Acquiring Funds investment in such securities to 5% of its Managed Assets at the time of investment. A portion
of such dividends may be capital gain distributions subject to federal capital gains tax. Such funds in turn invest in Municipal Bonds and other assets that pay interest or make distributions that are exempt from regular federal income tax, such as
revenue bonds issued by state or local agencies to fund the development of low-income, multi-family housing. Investment in such tax-exempt preferred shares involves many
of the same issues as investing in other open- or closed-end investment companies as discussed above. These investments also have additional risks, including liquidity risk, the absence
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of regulation governing investment practices, capital structure and leverage, affiliated transactions and other matters, and concentration of investments in particular issuers or industries.
Revenue bonds issued by state or local agencies to finance the development of low-income, multi-family housing involve special risks in addition to those associated with Municipal Bonds generally, including
that the underlying properties may not generate sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of others
with an interest in the properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until
completed and rented, do not generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds. The Acquiring Fund will treat
investments in tax-exempt preferred shares as investments in Municipal Bonds.
Temporary
Investments
During temporary defensive periods (e.g., times when, in the Investment Advisors opinion,
temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt bond market adversely affect the price at which long-term or intermediate-term Municipal Bonds are available), and in
order to keep cash on hand fully invested, the Acquiring Fund may invest up to 100% of its total assets in liquid, short-term investments including high quality, short-term securities which may be either
tax-exempt or taxable and securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the type in which the Acquiring Fund
may invest directly. The Acquiring Fund intends to invest in taxable short-term investments only in the event that suitable tax-exempt temporary investments are not available at reasonable prices and yields.
The Acquiring Funds stated expectation is that it will invest only in taxable temporary investments which are U.S. government securities or securities rated within the highest grade by Moodys, S&P or Fitch, and which mature within
one year from the date of purchase or carry a variable or floating rate of interest (such short-term obligations being referred to herein as Temporary Investments). Temporary Investments of the Acquiring Fund may include certificates of
deposit issued by U.S. banks with assets of at least $1 billion, commercial paper or corporate notes, bonds or debentures with a remaining maturity of one year or less, or repurchase agreements. See Repurchase Agreements. To the
extent the Acquiring Fund invests in Temporary Investments, the Acquiring Fund will 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:
(1) 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. U.S. Government securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and
the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the discretionary authority of the U.S.
Government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. Government, its agencies and instrumentalities do not guarantee the market value of their
securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds
deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus
interest to the bearer of the certificate on the date specified thereon. Certificates of deposit purchased by the Acquiring Fund may not be fully insured by the Federal Deposit Insurance Corporation.
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(3) Repurchase agreements, which involve purchases of debt securities. At the time the
Acquiring Fund purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures
a predetermined yield for the Acquiring Fund during its holding period, since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for the Acquiring Fund to invest
temporarily available cash. The Acquiring Fund may enter into repurchase agreements only with respect to obligations of the U.S. Government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which the
Acquiring Fund may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Acquiring Fund is limited to the ability of the seller to pay the agreed-upon sum on the repurchase
date; in the event of default, the repurchase agreement provides that the Acquiring Fund is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, and if the seller defaults under a
repurchase agreement when the value of the underlying collateral is less than the repurchase price, the Acquiring Fund could incur a loss of both principal and interest. The Investment Advisor monitors the value of the collateral at the time the
action is entered into and at all times during the term of the repurchase agreement. The Investment Advisor does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to
the Acquiring Fund. If the seller were to be subject to a federal bankruptcy proceeding, the ability of the Acquiring Fund to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes are direct lending arrangements between the Acquiring Fund and a corporation. There is no secondary market for such notes. However, they are redeemable by the Acquiring Fund at
any time. The Investment Advisor will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its financial
obligations, because the Acquiring Funds liquidity might be impaired if the corporation were unable to pay principal and interest on demand. The Acquiring Funds stated expectation is that its investments in commercial paper will be
limited to commercial paper rated in the highest categories by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
Tax-exempt temporary investments include various obligations issued by state and local
governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such Municipal Bonds maturing in three years or less from the date of
issuance) and municipal commercial paper. Short-term tax-exempt fixed income securities include, without limitation, the following:
Bond Anticipation Notes (BANs) 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. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuers access to the long-term municipal bond market and the likelihood that the proceeds of
such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are
issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuers
capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies could adversely affect the issuers ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or governmental bodies with the expectation that future revenues
from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of government, could
adversely affect an issuers ability to meet its obligations on
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outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal and interest
on RANs.
Construction Loan Notes are issued to provide construction financing for specific projects. Frequently, these notes
are redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government
bodies and agencies to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may have risks similar
to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper
(municipal paper) represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to
the extent the funds are available therefrom. Maturities on municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of municipal paper.
Certain Municipal Bonds may carry variable or floating rates of interest whereby the rate of interest is not fixed but varies with
changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market indices.
While the various types of notes described above as a group represent the major portion of the tax-exempt note market, other types of notes are available in the
marketplace and the Acquiring Fund may invest in such other types of notes to the extent permitted under its investment objective, policies and limitations. Such notes may be issued for different purposes and may be secured differently from those
mentioned above.
Strategic Transactions and Other Management Techniques
The Acquiring Fund may use a variety of other investment management techniques and instruments. The Acquiring 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 (collectively, Strategic Transactions). These Strategic Transactions may be used for duration management and other risk management to attempt to protect against possible changes in the market value
of the Acquiring Funds portfolio resulting from trends in the debt securities markets and changes in interest rates, to protect the Acquiring 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. There is no particular strategy that requires use of one technique
rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The Strategic Transactions are described below. The ability of the Acquiring Fund to use them
successfully will depend on the Investment Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Inasmuch as any obligations of the Acquiring Fund that arise
from the use of Strategic Transactions will be covered by segregated liquid high grade assets or offsetting transactions, the Acquiring Fund and the Investment Advisor believes such obligations do not constitute senior securities and, accordingly,
will not treat them as being subject to its borrowing restrictions. Certain provisions of the Internal Revenue Code of 1986 may restrict or affect the ability of the Acquiring Fund to engage in Strategic Transactions. In addition, the use of certain
Strategic Transactions may give rise to taxable income and have certain other consequences.
Interest Rate
Transactions. The Acquiring Fund may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. The Acquiring Fund expects to enter into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio as a duration management technique or to protect against any increase in the price of securities the Acquiring Fund anticipates purchasing at a later date.
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The Acquiring Fund will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. The Acquiring Fund
may not sell interest rate caps or floors that it does not own. Interest rate swaps involve the exchange by the Acquiring Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments with respect to a notional amount of principal. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest rate floor.
The Acquiring Fund may enter into
interest rate swaps, caps and floors on either an asset-based or liability-based basis, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with the Acquiring Fund receiving or paying,
as the case may be, only the net amount of the two payments on the payment dates. The Acquiring Fund will accrue the net amount of the excess, if any, of the Acquiring Funds obligations over its entitlements with respect to each interest rate
swap on a daily basis and will segregate with a custodian an amount of cash or liquid high grade securities having an aggregate net asset value at all times at least equal to the accrued excess. The Acquiring Fund may not enter into any interest
rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in the highest rating category of at least one nationally recognized statistical rating organization at the time of
entering into such transaction. If there is a default by the other party to such a transaction, the Acquiring Fund will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in
recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. Caps and floors are more recent innovations for which standardized documentation has not yet
been developed and, accordingly, they are less liquid than swaps.
Credit Default Swap Agreements. The Acquiring Fund
may enter into credit default swap agreements for hedging purposes or to seek to increase its return. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by the Acquiring Fund. The
protection buyer in a credit default contract may be obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on a reference obligation
has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the
swap, or the seller may be required to deliver the related net cash amount (the difference between the market value of the reference obligation and its par value), if the swap is cash settled. The Acquiring Fund may be either the buyer or seller in
the transaction. If the Acquiring Fund is a buyer and no credit event occurs, the Acquiring Fund may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the
full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, the Acquiring Fund generally receives an upfront payment or a fixed
rate of income throughout the term of the swap, which typically is between six (6) months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the
swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As the seller, the Acquiring Fund would effectively add leverage to its portfolio because, in addition to its
total net assets, the Acquiring Fund would be subject to investment exposure on the notional amount of the swap.
Credit
default swap agreements involve greater risks than if the Acquiring Fund had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit
risks. The Acquiring Fund expects to enter into credit default swap agreements only with counterparties who are rated investment grade quality by at least one nationally recognized statistical rating organization at the time of entering into such
transaction or whose creditworthiness is believed by the Investment Advisor to be equivalent to such rating. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination
date. If a credit event were to
96
occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the
buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event occurs, the seller may be required to pay the buyer the full
notional value of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations. The Acquiring Funds obligations under a credit default swap agreement will be accrued daily (offset against any amounts
owing to the Acquiring Fund). The Acquiring Fund will at all times segregate with its custodian in connection with each such transaction liquid securities or cash with a value at least equal to the Acquiring Funds exposure (any accrued but
unpaid net amounts owed by the Acquiring Fund to any counterparty), on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation
will ensure that the Acquiring Fund has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of the Acquiring Funds portfolio. Such segregation will not limit the Acquiring
Funds exposure to loss.
Futures Contracts and Options on Futures Contracts. The Acquiring Fund may also enter
into contracts for the purchase or sale for future delivery (futures contracts) of debt securities, aggregates of debt securities or indices or prices thereof, other financial indices and U.S. government debt securities or options on the
above. The Acquiring Fund will ordinarily engage in such transactions only for bona fide hedging, risk management (including duration management) and other portfolio management purposes. However, the Acquiring Fund is also permitted to enter into
such transactions for non-hedging purposes to enhance income or gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such
time more than 5% of the Acquiring Funds net assets would be posted as initial margin and premiums with respect to such non-hedging transactions.
Calls on Securities Indices and Futures Contracts. The Acquiring Fund may sell or purchase call options (calls) on
Municipal Bonds and indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets. A call gives the purchaser of the option the right to buy, and obligates the seller to sell, the underlying security, futures contract or index
at the exercise price at any time or at a specified time during the option period. All such calls sold by the Acquiring Fund must be covered as long as the call is outstanding (i.e., the Acquiring Fund must own the securities or
futures contract subject to the call or other securities acceptable for applicable escrow requirements). A call sold by the Acquiring Fund exposes the Acquiring Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security, index or futures contract and may require the Acquiring Fund to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives the Acquiring Fund the
right to buy a security, futures contract or index at a fixed price. Calls on futures on Municipal Bonds must also be covered by deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy the
Acquiring Funds obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. The
Acquiring Fund may purchase put options (puts) that relate to Municipal Bonds (whether or not it holds such securities in its portfolio), indices or futures contracts. The Acquiring Fund may also sell puts on Municipal Bonds, indices or
futures contracts on such securities if the Acquiring Funds contingent obligations on such puts are secured by segregated assets consisting of cash or liquid high grade debt securities having a value not less than the exercise price. The
Acquiring Fund may not sell puts if, as a result, more than 50% of the Acquiring Funds assets would be required to cover its potential obligations under its hedging and other investment transactions. In selling puts, there is a risk that the
Acquiring Fund may be required to buy the underlying security at a price higher than the current market price.
Municipal
Market Data Rate Locks. The Acquiring Fund may purchase and sell Municipal Market Data Rate Locks (MMD Rate Locks). An MMD Rate Lock permits the Acquiring Fund to lock in a specified municipal interest rate for a portion of its
portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any increase in the price of securities to be purchased at a later date. The Acquiring Fund will
ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. An MMD Rate Lock is a
97
contract between the Acquiring Fund and an MMD Rate Lock provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal
Market Data AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if the Acquiring Fund buys an MMD Rate Lock and the Municipal Market Data AAA General Obligation Scale is below the
specified level on the expiration date, the counterparty to the contract will make a payment to the Acquiring Fund equal to the specified level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data
AAA General Obligation Scale is above the specified level on the expiration date, the Acquiring Fund will make a payment to the counterparty equal to the actual level minus the specified level multiplied by the notional amount of the contract. In
entering into MMD Rate Locks, there is a risk that municipal yields will move in the direction opposite of the direction anticipated by the Acquiring Fund. The Acquiring Fund may not enter into MMD Rate Locks if, as a result, more than 50% of its
total assets would be required to cover its potential obligations under its hedging and other investment transactions.
Short Sales
The Acquiring Fund may make short sales of Municipal Bonds. A short sale is a transaction in which the Acquiring Fund
sells a security it does not own in anticipation that the market price of that security will decline. The Acquiring Fund may make short sales to hedge positions, for duration and risk management, in order to maintain portfolio flexibility or to
enhance income or gain.
When the Acquiring Fund makes a short sale, it must borrow the security sold short and deliver it to
the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Acquiring Fund may have to pay a fee to borrow particular securities and is often obligated to pay over
any payments received on such borrowed securities.
The Acquiring Funds obligation to replace the borrowed security are
required to be secured by collateral deposited with the broker-dealer, usually cash, U.S. government securities or other liquid securities. The Acquiring Fund will also be required to segregate similar collateral with its custodian to the extent, if
any, necessary so that the aggregate collateral value is at all times at least equal to the current market value of the security sold short. Depending on arrangements made with the broker-dealer from which it borrowed the security regarding payment
over of any payments received by the Acquiring Fund on such security, the Acquiring Fund may not receive any payments (including interest) on its collateral deposited with such broker-dealer.
If the price of the security sold short increases between the time of the short sale and the time the Acquiring Fund replaces the
borrowed security, the Acquiring Fund will incur a loss; conversely, if the price declines, the Acquiring Fund will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Although the Acquiring
Funds gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
The Acquiring Fund may not make a short sale if, after giving effect to such sale, the market value of all securities sold short exceeds
25% of the value of its total assets or the Acquiring Funds aggregate short sales of a particular class of securities exceeds 25% of the outstanding securities of that class. The Acquiring Fund may also make short sales against the
box without respect to such limitations. In this type of short sale, at the time of the sale, the Acquiring Fund owns or has the immediate and unconditional right to acquire at no additional cost the identical security.
VRDOs
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued
interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily
to up to one year) to some prevailing market rate for similar investments, such
98
adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments typically are based upon the
SIFMA or some other appropriate interest rate adjustment index. The Acquiring 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.
VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities.
Restricted and Illiquid Securities
Certain of the Acquiring Funds investments may be illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or lack an established secondary trading market. The
sale of restricted and illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in
the over-the-counter markets. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale.
Repurchase Agreements
As temporary investments, the Acquiring Fund may invest in repurchase agreements. A repurchase agreement is a contractual agreement
whereby the seller of securities agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during the Acquiring Funds holding period.
Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. The Acquiring Fund may only enter into repurchase agreements with registered securities dealers or domestic
banks that, in the opinion of the Investment Advisor, present minimal credit risk. The risk to the Acquiring Fund is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of
the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default,
the collateral may be sold but the Acquiring Fund might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security, realization upon the collateral by the Acquiring Fund may be delayed or limited. The Investment Advisor will monitor the value of the collateral at the time the transaction is
entered into and at all times subsequent during the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the
repurchase price, the Investment Advisor will demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest.
Reverse Repurchase Agreements
The Acquiring Fund may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the
sale of securities held by the Acquiring Fund with an agreement by the Acquiring Fund to repurchase the securities at an agreed upon price, date and interest payment. At the time the Acquiring Fund enters into a reverse repurchase agreement, it may
establish and maintain a segregated account with the custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If the Acquiring Fund establishes and maintains such a segregated account, a
reverse repurchase agreement will not be considered a borrowing by the Acquiring Fund; however, under certain circumstances in which the Acquiring Fund does not establish and maintain such a segregated account, such reverse repurchase agreement will
be considered a borrowing for the purpose of the Acquiring Funds limitation on borrowings. The use by the Acquiring Fund of reverse repurchase agreements involves many of the same risks of leverage since the proceeds derived from such reverse
repurchase agreements may be invested in additional securities. Reverse repurchase agreements involve the risk that the market value of the securities acquired in connection with the reverse repurchase agreement may decline below
99
the price of the securities the Acquiring Fund has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in
lieu of sale by the Acquiring Fund in connection with the reverse repurchase agreement may decline in price.
If the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Acquiring Funds obligation to repurchase the
securities, and the Acquiring Funds use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, the Acquiring Fund would bear the risk of loss to the extent that the proceeds of the
reverse repurchase agreement are less than the value of the securities subject to such agreement.
Borrowings
The Acquiring Fund reserves the right to borrow funds to the extent permitted as described under the below caption Investment
Restrictions. The proceeds of borrowings may be used for any valid purpose including, without limitation, liquidity, investments and repurchases of shares of the Acquiring Fund. Borrowing is a form of leverage and, in that respect, entails
risks comparable to those associated with the issuance of Preferred Shares.
Lending of Securities
The Acquiring Fund may lend portfolio securities to certain borrowers determined to be creditworthy by the Investment Advisor, including
to borrowers affiliated with the Investment Advisor. The borrowers provide collateral that is maintained in an amount at least equal to the current market value of the securities loaned. No securities loan will be made on behalf of the Acquiring
Fund if, as a result, the aggregate value of all securities loans of the Acquiring Fund exceeds one-third of the value of the Acquiring Funds total assets (including the value of the collateral
received). The Acquiring Fund may terminate a loan at any time and obtain the return of the securities loaned. The Acquiring Fund receives the value of any interest or cash or non-cash distributions
paid on the loaned securities.
With respect to loans that are collateralized by cash, the borrower may be entitled to receive
a fee based on the amount of cash collateral. The Acquiring Fund is compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to the borrower. In the case of collateral other than cash, the
Acquiring Fund is compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities. Any cash collateral received by the Acquiring Fund for such loans, and uninvested cash, may be invested, among other
things, in a private investment company managed by an affiliate of the Investment Advisor or in registered money market funds advised by the Investment Advisor or its affiliates; such investments are subject to investment risk.
The Acquiring Fund conducts its securities lending pursuant to an exemptive order from the SEC permitting it to lend portfolio securities
to borrowers affiliated with the Acquiring Fund and to retain an affiliate of the Acquiring Fund as lending agent. To the extent that the Acquiring Fund engages in securities lending, BlackRock Investment Management, LLC (BIM), an
affiliate of the Investment Advisor, acts as securities lending agent for the Acquiring Fund, subject to the overall supervision of the Investment Advisor. BIM administers the lending program in accordance with guidelines approved by the Board.
Pursuant to the current securities lending agreement, BIM may lend securities only when the difference between the borrower rebate rate and the risk free rate exceeds a certain level (such securities, the specials only securities).
To the extent that the Acquiring Fund engages in securities lending, the Acquiring Fund retains a portion of securities
lending income and remits a remaining portion to BIM as compensation for its services as securities lending agent.
Securities
lending income is equal to the total of income earned from the reinvestment of cash collateral (and excludes collateral investment expenses as defined below), and any fees or other payments to and from
100
borrowers of securities. As securities lending agent, BIM bears all operational costs directly related to securities lending. The Acquiring Fund is responsible for expenses in connection with the
investment of cash collateral received for securities on loan in a private investment company managed by an affiliate of the Investment Advisor (the collateral investment expenses), however, BIM has agreed to cap the collateral
investment expenses the Acquiring Fund bears to an annual rate of 0.04% of the daily net assets of such private investment company. In addition, in accordance with the exemptive order, the investment adviser to the private investment company will
not charge any advisory fees with respect to shares purchased by the Acquiring Fund. Such shares also will not be subject to a sales load, redemption fee, distribution fee or service fee.
Pursuant to the current securities lending agreement, the Acquiring Fund retains 82% of securities lending income (which excludes
collateral investment expenses).
In addition, commencing the business day following the date that the aggregate securities
lending income earned across the BlackRock Fixed-Income Complex in a calendar year exceeds the breakpoint dollar threshold applicable in the given year set forth in the securities lending agreement, the Acquiring Fund, pursuant to the current
securities lending agreement, will receive for the remainder of that calendar year securities lending income in an amount equal to 85% of securities lending income (which excludes collateral investment expenses).
Leverage
The Acquiring Fund currently leverages its assets through the use of preferred shares and tender option bonds. The Acquiring Fund currently does not intend to borrow money or issue debt securities.
Although it has no present intention to do so, the Acquiring Fund reserves the right to borrow money from banks or other financial institutions, or issue debt securities, in the future if it believes that market conditions would be conducive to the
successful implementation of a leveraging strategy through borrowing money or issuing debt securities or preferred shares. Any such leveraging will not be fully achieved until the proceeds resulting from the use of leverage have been invested in
accordance with the Acquiring Funds investment objective and policies.
The use of leverage can create risks. When
leverage is employed, the NAV and market price of the common shares and the yield to holders of common shares will be more volatile than if leverage were not used. Changes in the value of the Acquiring Funds portfolio, including securities
bought with the proceeds of leverage, will be borne entirely by the holders of common shares. If there is a net decrease or increase in the value of the Acquiring Funds investment portfolio, leverage will decrease or increase, as the case may
be, the NAV per common share to a greater extent than if the Acquiring Fund did not utilize leverage. A reduction in the Acquiring Funds NAV may cause a reduction in the market price of its shares. During periods in which the Acquiring Fund is
using leverage, the fee paid to the Investment Advisor for advisory services will be higher than if the Acquiring Fund did not use leverage, because the fees paid will be calculated on the basis of the Acquiring Funds managed assets, which
includes the proceeds from leverage. Any leveraging strategy the Acquiring Fund employs may not be successful. See RisksLeverage Risk. The Acquiring Fund currently leverages its assets through tender option bonds transactions. See
RisksTender Option Bond Risk for details about the risks associated with the Acquiring Funds use of TOB Residuals.
Certain types of leverage the Acquiring Fund may use may result in the Acquiring Fund being subject to covenants relating to asset coverage and portfolio composition requirements. The Acquiring Fund may
be subject to certain restrictions on investments imposed by one or more lenders or by guidelines of one or more rating agencies, which may issue ratings for any short-term debt securities or preferred shares issued by the Acquiring Fund. The terms
of any borrowings or rating agency guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940 Act. The Investment Advisor does not believe that these covenants or guidelines will
impede it from managing the Acquiring Funds portfolio in accordance with its investment objective and policies if the Acquiring Fund were to utilize leverage.
Under the 1940 Act, the Acquiring Fund is not permitted to issue senior securities if, immediately after the issuance of such senior securities, the Acquiring Fund would have an asset coverage ratio (as
defined in the 1940
101
Act) of less than 300% with respect to senior securities representing indebtedness (i.e., for every dollar of indebtedness outstanding, the Acquiring Fund is required to have at least
three dollars of assets) or less than 200% with respect to senior securities representing preferred shares (i.e., for every dollar of preferred shares outstanding, the Acquiring Fund is required to have at least two dollars of assets). The
1940 Act also provides that the Acquiring Fund may not declare distributions or purchase its stock (including through tender offers) if, immediately after doing so, it will have an asset coverage ratio of less than 300% or 200%, as applicable. Under
the 1940 Act, certain short-term borrowings (such as for cash management purposes) are not subject to these limitations if (i) repaid within 60 days, (ii) not extended or renewed and (iii) not in excess of 5% of the total assets of
the Acquiring Fund.
Effects of Leverage
Assuming that leverage will represent approximately 39.2% of the Combined Funds total managed assets and that the Combined Fund will bear expenses relating to that leverage at an average annual rate
of 1.01%, the income generated by the Combined Funds portfolio (net of estimated expenses) must exceed 0.40% in order to cover the expenses specifically related to the Combined Funds estimated use of leverage. Of course, these
numbers are merely estimates used for illustration. Actual leverage expenses will vary frequently and may be significantly higher or lower than the rate estimated above.
The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on Common Share total return, assuming investment portfolio total returns
(comprised of income and changes in the value of securities held in the Combined Funds portfolio) of (10)%, (5)%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the
investment portfolio returns experienced or expected to be experienced by the Combined Fund. The table further reflects the use of leverage representing 39.2% of the Combined Funds total managed assets and the Combined Funds currently
projected annual leverage expenses of 1.01%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Portfolio Total Return (net of expenses)
|
|
|
(10
|
)%
|
|
|
(5
|
)%
|
|
|
0
|
%
|
|
|
5
|
%
|
|
|
10
|
%
|
Common Share Total Return
|
|
|
(17.10
|
)%
|
|
|
(8.88
|
)%
|
|
|
(0.65
|
)%
|
|
|
7.57
|
%
|
|
|
15.80
|
%
|
Common Share total return is composed of two elements: the Common Share dividends paid by the
Combined Fund (the amount of which is largely determined by the net investment income of the Combined Fund) and gains or losses on the value of the securities the Combined Fund owns. As required by SEC rules, the table assumes that the Combined Fund
is more likely to suffer capital losses than to enjoy capital appreciation. For example, a total return of 0% assumes that the tax-exempt interest the Combined Fund receives on its municipal bonds investments
is entirely offset by losses in the value of those securities.
Preferred Shares
The Acquiring Fund has leveraged its portfolio by issuing VMTP Shares. Under the 1940 Act, the Acquiring Fund is not permitted to issue
preferred shares if, immediately after such issuance, the liquidation value of the Acquiring Funds outstanding preferred shares exceeds 50% of its assets (including the proceeds from the issuance) less liabilities other than borrowings
(i.e., the value of the Acquiring Funds assets must be at least 200% of the liquidation value of its outstanding preferred shares). In addition, the Acquiring Fund would not be permitted to declare any cash dividend or other
distribution on its common shares unless, at the time of such declaration, the value of the Acquiring Funds assets less liabilities other than borrowings is at least 200% of such liquidation value. Please see Information about the
Preferred Shares of the Funds for a description of the Acquiring Funds VMTP Shares.
For tax purposes, the
Acquiring Fund is currently required to allocate tax-exempt interest income, net capital gain and other taxable income, if any, between its common shares and preferred shares outstanding in proportion to total
dividends paid to each class for the year in which or with respect to which tax-exempt income,
102
the net capital gain or other taxable income is paid. If net capital gain or other taxable income is allocated to preferred shares, instead of solely
tax-exempt income, the Acquiring Fund will likely have to pay higher total dividends to preferred shareholders or make special payments to preferred shareholders to compensate them for the increased tax
liability. This would reduce the total amount of dividends paid to the common shareholders, but would increase the portion of the dividend that is tax-exempt. If the increase in dividend payments or the
special payments to preferred shareholders are not entirely offset by a reduction in the tax liability of, and an increase in the tax-exempt dividends received by, the common shareholders, the advantage of the
Acquiring Funds leveraged structure to common shareholders will be reduced.
Tender Option Bonds
The Acquiring Fund currently leverages its assets through the use of TOB Residuals, which are derivative interests in municipal bonds. The
TOB Residuals in which the Acquiring 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. No independent investigation will be made to confirm
the tax-exempt status of the interest or income paid by TOB Residuals held by the Acquiring Fund. Although volatile, TOB Residuals typically offer the potential for yields exceeding the yields available on
fixed rate municipal bonds with comparable credit quality.
TOB Residuals represent beneficial interests in a TOB Trust formed
for the purpose of holding municipal bonds contributed by one or more funds. A TOB Trust typically issues two classes of beneficial interests: TOB Floaters, which are sold to third-party investors, and TOB Residuals, which are generally issued to
the fund(s) that transferred municipal bonds to the TOB Trust. The Fund may invest in both TOB Floaters and TOB Residuals. TOB Floaters may have first priority on the cash flow from the municipal bonds held by the TOB Trust and are enhanced with a
liquidity support arrangement from a third-party TOBs Liquidity Provider (defined below) which allows holders to tender their position at par (plus accrued interest). The Acquiring Fund, as a holder of TOB Residuals, is paid the residual cash flow
from the TOB Trust. The Acquiring Fund contributes municipal bonds to the TOB Trust and is paid the cash received by the TOB Trust from the sale of the TOB Floaters, less certain transaction costs, and typically will invest the cash to purchase
additional municipal bonds or other investments permitted by its investment policies. If the Acquiring Fund ever purchases all or a portion of the TOB Floaters sold by the TOB Trust, it may surrender those TOB Floaters together with a proportionate
amount of TOB Residuals to the TOB Trust in exchange for a proportionate amount of the municipal bonds owned by the TOB Trust.
Other registered investment companies advised by the Investor Advisor or its affiliates (BlackRock-advised Funds) may
contribute municipal bonds to a TOB Trust into which the Acquiring Fund has contributed municipal bonds. If multiple BlackRock-advised Funds participate in the same TOB Trust, the economic rights and obligations under the TOB Residual will generally
be shared among the funds ratably in proportion to their participation in the TOB Trust.
The municipal bonds transferred to a
TOB Trust typically are high grade municipal bonds. In certain cases, when municipal bonds transferred are lower grade municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely payment of principal
and interest on the bonds to the TOB Trust by a credit enhancement provider. The TOB Trust would be responsible for the payment of the credit enhancement fee and the Acquiring Fund, as a TOB Residual holder, would be responsible for reimbursement of
any payments of principal and interest made by the credit enhancement provider.
The TOB Residuals held by the Acquiring Fund
generally provide the Acquiring Fund with the right to cause the holders of a proportional share of the TOB Floaters to tender their notes to the TOB Trust at par plus accrued interest. Thereafter, the Acquiring Fund may withdraw a corresponding
share of the municipal bonds from the TOB Trust. As a result, a tender option bond transaction, in effect, creates exposure for the Acquiring Fund to the entire return of the municipal bonds in the TOB Trust, with a net cash investment by the
Acquiring Fund that is less than the value of the municipal bonds in the TOB Trust. This multiplies the positive or negative impact of the municipal bonds return within the Acquiring Fund (thereby creating leverage). The leverage
103
within a TOB Trust depends on the value of the municipal bonds deposited in the TOB Trust relative to the value of the TOB Floaters it issues.
The Acquiring Fund may invest in highly leveraged TOB Residuals. A TOB Residual generally is considered highly leveraged if the principal
amount of the TOB Floaters issued by the related TOB Trust exceeds 75% of the principal amount of the municipal bonds owned by the TOB Trust.
The leverage attributable to the Acquiring Funds use of TOB Residuals may be called away on relatively short notice and therefore may be less permanent than more traditional forms of
leverage. The TOB Trust may be collapsed without the consent of the Acquiring Fund upon the occurrence of termination events, as defined in the TOB Trust agreements. Upon the occurrence of a termination event, a TOB Trust would be liquidated with
the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and the TOBs Liquidity Provider. Upon certain termination events, the holders of the TOB Floaters would be paid before the
TOB Residual holders (i.e., the Acquiring Fund) whereas in other termination events, the holders of TOB Floaters and the TOB Residual holders would be paid pro rata.
TOB Trusts are typically supported by a liquidity facility provided by a TOBs Liquidity Provider that allows the holders of the TOB Floaters to tender their TOB Floaters in exchange for payment of par
plus accrued interest on any business day (subject to the non-occurrence of a termination event). The tendered TOB Floaters are remarketed by a remarketing agent. In the event of a failed remarketing, the TOB
Trust may draw upon a loan from the TOBs Liquidity Provider to purchase the tendered TOB Floaters. Any loans made by the TOBs Liquidity Provider will be secured by the purchased TOB Floaters held by the TOB Trust and will be subject to an increased
interest rate based on number of days the loan is outstanding.
The Acquiring Fund may invest in a TOB Trust on either a non-recourse or recourse basis. When the Acquiring Fund invests in TOB Trusts on a non-recourse basis, and the TOBs Liquidity Provider is required to make a payment under the
liquidity facility, the TOBs Liquidity Provider will typically liquidate all or a portion of the municipal bonds held in the TOB Trust and then fund the balance, if any, of the Liquidation Shortfall. If the Acquiring Fund invests in a TOB Trust on a
recourse basis, it will typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to which the Acquiring Fund is required to reimburse the TOBs Liquidity Provider the amount of any Liquidation Shortfall. As a result,
if the Acquiring Fund invests in a recourse TOB Trust, the Acquiring Fund will bear the risk of loss with respect to any Liquidation Shortfall. If multiple BlackRock-advised Funds participate in any such TOB Trust, these losses will be shared
ratably, in proportion to their participation in the TOB Trust.
Under accounting rules, Municipal Bonds of the Acquiring Fund
that are deposited into a TOB Trust are investments of the Acquiring Fund and are presented on the Acquiring Funds Schedule of Investments and outstanding TOB Floaters issued by a TOB Trust are presented as liabilities in the Acquiring
Funds Statement of Assets and Liabilities. Interest income from the underlying Municipal Bonds is recorded by the Acquiring Fund on an accrual basis. Interest expense incurred on the TOB Floaters and other expenses related to remarketing,
administration, trustee and other services to a TOB Trust are reported as expenses of the Acquiring Fund. In addition, under accounting rules, loans made to a TOB Trust sponsored by the Acquiring Fund may be presented as loans of the Acquiring Fund
in the Acquiring Funds financial statements even if there is no recourse to the Acquiring Funds assets.
For TOB
Floaters, generally, the interest rate earned will be based upon the market rates for municipal bonds with maturities or remarketing provisions that are comparable in duration to the periodic interval of the tender option. Since the tender option
feature has a shorter term than the final maturity or first call date of the underlying municipal bonds deposited in the TOB Trust, the holder of the TOB Floaters relies upon the terms of the agreement with the financial institution furnishing the
liquidity facility as well as the credit strength of that institution. The perceived reliability and creditworthiness, of many major financial institutions, some of which sponsor and/or provide liquidity support to TOB Trusts increases the risk
associated with TOB Floaters. This in turn may reduce the desirability of TOB Floaters as investments, which could impair the viability or availability of TOB Trusts.
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The use of TOB Residuals will require the Acquiring Fund to earmark or segregate liquid
assets in an amount equal to any TOB Floaters, plus any accrued but unpaid interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, the Acquiring Fund that are not owned by the Acquiring Fund. The use of TOB Residuals
may also require the Acquiring Fund to earmark or segregate liquid assets in an amount equal to loans provided by the TOBs Liquidity Provider to the TOB Trust to purchase tendered TOB Floaters. The Acquiring Fund reserves the right to modify its
asset segregation policies in the future to the extent that such changes are in accordance with applicable regulations or interpretations. Future regulatory requirements or SEC guidance may necessitate more onerous contractual or regulatory
requirements, which may increase the costs or reduce the degree of potential economic benefits of TOB Trust transactions or limit the Acquiring Funds ability to enter into or manage TOB Trust transactions.
See Risk Factors and Special ConsiderationsGeneral Risks of Investing in the Acquiring FundTender Option Bond
Risk for a description of the risks involved with a TOB issuer.
Credit Facility
The Acquiring Fund is permitted to leverage its portfolio by entering into one or more credit facilities. If the Acquiring Fund enters
into a credit facility, the Acquiring Fund may be required to prepay outstanding amounts or incur a penalty rate of interest upon the occurrence of certain events of default. The Acquiring Fund would also likely have to indemnify the lenders under
the credit facility against liabilities they may incur in connection therewith. In addition, the Acquiring Fund expects that any credit facility would contain covenants that, among other things, likely would limit the Acquiring Funds ability
to pay distributions in certain circumstances, incur additional debt, change certain of its investment policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required
by the 1940 Act. The Acquiring Fund may be required to pledge its assets and to maintain a portion of its assets in cash or high-grade securities as a reserve against interest or principal payments and expenses. The Acquiring Fund expects that any
credit facility would have customary covenant, negative covenant and default provisions. There can be no assurance that the Acquiring Fund will enter into an agreement for a credit facility, or one on terms and conditions representative of the
foregoing, or that additional material terms will not apply. In addition, if entered into, a credit facility may in the future be replaced or refinanced by one or more credit facilities having substantially different terms or by the issuance of
preferred shares.
Derivatives
The Acquiring Fund may enter into derivative transactions that have economic leverage embedded in them. Derivative transactions that the Acquiring Fund may enter into and the risks associated with them
are described elsewhere in this Proxy Statement and are also referred to as Strategic Transactions. The Acquiring Fund cannot assure you that investments in derivative transactions that have economic leverage embedded in them will result
in a higher return on its common shares.
To the extent the terms of such transactions obligate the Acquiring Fund to make
payments, the Acquiring Fund may earmark or segregate cash or liquid assets in an amount at least equal to the current value of the amount then payable by the Acquiring Fund under the terms of such transactions or otherwise cover such transactions
in accordance with applicable interpretations of the staff of the SEC. If the current value of the amount then payable by the Acquiring Fund under the terms of such transactions is represented by the notional amounts of such investments, the
Acquiring Fund would segregate or earmark cash or liquid assets having a market value at least equal to such notional amounts, and if the current value of the amount then payable by the Acquiring Fund under the terms of such transactions is
represented by the market value of the Acquiring Funds current obligations, the Acquiring Fund would segregate or earmark cash or liquid assets having a market value at least equal to such current obligations. To the extent the terms of such
transactions obligate the Acquiring Fund to deliver particular securities to extinguish the Acquiring Funds obligations under such transactions the Acquiring Fund may cover its obligations under such transactions by either
(i) owning the securities or collateral underlying such transactions or (ii) having an absolute and immediate right to acquire such securities or
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collateral without additional cash consideration (or, if additional cash consideration is required, having earmarked or segregated an appropriate amount of cash or liquid assets). Such
earmarking, segregation or cover is intended to provide the Acquiring Fund with available assets to satisfy its obligations under such transactions. As a result of such earmarking, segregation or cover, the Acquiring Funds obligations under
such transactions will not be considered senior securities representing indebtedness for purposes of the 1940 Act, or considered borrowings subject to the Acquiring Funds limitations on borrowings discussed above, but may create leverage for
the Acquiring Fund. To the extent that the Acquiring Funds obligations under such transactions are not so earmarked, segregated or covered, such obligations may be considered senior securities representing indebtedness under the
1940 Act and therefore subject to the 300% asset coverage requirement.
These earmarking, segregation or cover requirements
can result in the Acquiring Fund maintaining securities positions it would otherwise liquidate, segregating or earmarking assets at a time when it might be disadvantageous to do so or otherwise restrict portfolio management.
Temporary Borrowings
The Acquiring 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 Acquiring Fund securities.
Investment Restrictions
Each Fund has adopted certain investment restrictions that are fundamental,
meaning such investment restrictions cannot be changed without approval by holders of a majority of the Funds outstanding voting securities as defined in the 1940 Act. As defined in the 1940 Act, this phrase means the vote of (1)
67% or more of the voting securities present at a meeting, if the holders of more than 50% of the outstanding voting securities are present or represented by proxy, or (2) more than 50% of the outstanding voting securities, whichever is less.
Each Fund has also adopted certain non-fundamental investment restrictions. The investment restrictions of the Funds are similar, although there are some differences, and are set forth in Appendix B to
this Proxy Statement.
Each Fund is currently classified as a diversified fund under the 1940 Act. This means that each Fund
may not purchase securities of an issuer (other than (i) obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities and (ii) securities of other investment companies) if, with respect to 75% of its total
assets, (a) more than 5% of the Funds total assets would be invested in securities of that issuer or (b) the Fund would hold more than 10% of the outstanding voting securities of that issuer. With respect to the remaining 25% of its
total assets, each Fund can invest more than 5% of its assets in one issuer. Under the 1940 Act, a fund cannot change its classification from diversified to non-diversified without shareholder
approval.
To the extent that a Fund assumes large positions in the securities of a small number of issuers, its yield may
fluctuate to a greater extent than that of a diversified company as a result of changes in the financial condition or in the markets assessment of the issuers.
Each Funds VMTP Shares or VRDP Shares, as applicable, are assigned long-term ratings by Moodys and Fitch. In order to maintain the required ratings, each Fund is required to comply with
certain investment quality, diversification and other guidelines established by Moodys and Fitch. Such guidelines may be more restrictive than the restrictions set forth above. Each Fund does not anticipate that such guidelines would have a
material adverse effect on its ability to achieve its investment objective. Moodys and Fitch receive fees in connection with their ratings issuances. Each Fund is also subject to certain covenants and requirements under the terms of the VMTP
Shares or VRDP Shares, as applicable and related documents, including the terms of the liquidity facility supporting the VMTP Shares or VRDP Shares. Such requirements may be more restrictive than the restrictions set forth above. Each Fund does not
anticipate that such requirements would have a material adverse effect on its ability to achieve its investment objective. Please see Information about the Preferred Shares of the Funds for additional information.
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THE TARGET FUNDS INVESTMENT OBJECTIVES AND POLICIES
BSDs Investment Objective and Policies
BSDs investment objectives are:
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to provide current income exempt from regular federal income tax; and
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to invest in Municipal Bonds that over time will perform better than the broader municipal bond market.
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As a matter of fundamental policy, under normal conditions, BSD will invest at least 80% of its Managed Assets in investments the income
from which is exempt from federal income tax. BSD cannot change its investment objectives or the foregoing fundamental policy without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares,
including the 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. See Description of VMTP SharesVoting
Rights for additional information with respect to the voting rights of holders of VMTP Shares.
BSDs investment
policies provide that it will invest at least 80% of its total assets in investment grade quality securities. Investment grade quality means that such securities are rated, at the time of investment, within the four highest grades (Baa or BBB or
better by Moodys, S&P or Fitch) or are unrated but judged to be of comparable quality by the Investment Advisor. Municipal Bonds rated Baa by Moodys are investment grade, but Moodys considers Municipal Bonds rated Baa to have
speculative characteristics. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity for issuers of Municipal Bonds that are rated BBB or Baa (or that have equivalent ratings) to make principal and
interest payments than is the case for issues of higher grade Municipal Bonds. In the case of short-term notes, the investment grade rating categories are SP-1+ through
SP-2 for S&P, MIG-1 through MIG-3 for 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 Investment Advisor
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.
BSD may invest up to 20% of its total assets in securities that are rated, at the time of investment, Ba/BB or B by Moodys, S&P
or Fitch or that are unrated but judged to be of comparable quality by the Investment Advisor. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay
interest and repay principal. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than securities in higher rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with
respect to the issuers ability to pay interest and any required redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing credit quality policies apply only at the time a security is purchased, and BSD 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 Investment Advisor may consider such factors as the
Investment Advisors assessment of the credit quality of the issuer of
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the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. Appendix D contains a general description of
Moodys, S&Ps and Fitchs ratings of municipal bonds. In the event that BSD disposes of a portfolio security subsequent to its being downgraded, BSD may experience a greater risk of loss than if such security had been sold prior
to such downgrade.
BSD may also invest in securities of other open- or closed-end
investment companies that invest primarily in Municipal Bonds of the types in which BSD may invest directly and in tax-exempt preferred shares that pay dividends that are exempt from regular federal income
tax. See Other Investment Companies, and Tax-Exempt Preferred Shares. In addition, BSD may purchase Municipal Bonds that are additionally secured by insurance, bank credit
agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for insurance and the
higher market price paid for insured obligations may reduce BSDs income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. BSD may purchase insured bonds and may
purchase insurance for bonds in its portfolio.
BSD 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 BSD to an alternative minimum tax. See Certain U.S. Federal Income Tax Considerations. The percentage of BSDs total assets invested in PABs will vary from time to time. BSD 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 BSD expects that a portion of the income it produces will be includable in alternative minimum
taxable income. VMTP Shares therefore would not ordinarily be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing VMTP Shares. The suitability of an
investment in VMTP Shares will depend upon a comparison of the after-tax yield likely to be provided from BSD with that from comparable tax-exempt investments not
subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position. Special considerations may apply to corporate investors.
The average maturity of BSDs portfolio securities varies from time to time based upon an assessment of economic and market
conditions by the Investment Advisor. BSDs portfolio at any given time may include both long- term and intermediate-term Municipal Bonds.
BSDs stated expectation is that it will invest in Municipal Bonds that, in the Investment Advisors opinion, are underrated or undervalued. Underrated Municipal Bonds are those whose ratings do
not, in the opinion of the Investment Advisor, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Investment Advisor, are worth more than the value assigned to them in the marketplace. The
Investment Advisor 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 Investment Advisor may
purchase those bonds for BSDs portfolio because they represent a market sector or issuer that the Investment Advisor 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. BSDs investment in underrated or undervalued Municipal
Bonds will be based on the Investment Advisors 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 BSD will generally result in capital gain distributions subject to federal capital gains taxation.
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BSD ordinarily does not intend to realize significant investment income not exempt from
federal income tax. From time to time, BSD 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 BSD.
Description of Municipal Bonds
Please see The Acquiring Funds InvestmentsDescription of Municipal Bonds for additional information regarding the types of Municipal Bonds in which BSD invests.
When-Issued, Delayed Delivery Securities and Forward Commitment Securities
BSD may purchase Municipal Bonds on a when-issued basis and may purchase or sell Municipal Bonds on a forward
commitment basis or on a delayed delivery basis. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the
securities take place at a later date. When-issued and forward commitment securities may be sold prior to the settlement date, but BSD will enter into when-issued and forward commitment securities only with the intention of actually receiving or
delivering the securities, as the case may be. If BSD disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it can incur a gain or loss. At the
time BSD entered into a transaction on a when-issued or forward commitment basis, it will segregate with its custodian cash or other liquid high grade debt securities with a value not less than the value of the when-issued or forward commitment
securities. The value of these assets will be monitored daily to ensure that their marked to market value will at all times equal or exceed the corresponding obligations of BSD. There is always a risk that the securities may not be delivered and
that BSD may incur a loss. Settlements in the ordinary course are not treated by BSD as when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
Other Investment Companies
BSD may invest up to 10% of its total assets in securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the types
in which BSD may invest directly, subject to the Eligible Assets requirements of the Statement of Preferences which limit BSDs investment in such securities to 5% of its Managed Assets at the time of investment. BSD generally expects to invest
in other investment companies either during periods when it has large amounts of uninvested cash or during periods when there is a shortage of attractive, high-yielding Municipal Bonds available in the market. As a shareholder in an investment
company, BSD will bear its ratable share of that investment companys expenses, and would remain subject to payment of BSDs advisory and other fees and expenses with respect to assets so invested. The Investment Advisor will take expenses
into account when evaluating the investment merits of an investment in an investment company relative to available Municipal Bond investments. In addition, the securities of other investment companies may be leveraged and will therefore be subject
to leverage risks. The net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares. Investment companies may have investment
policies that differ from those of BSD. In addition, to the extent that BSD invests in other investment companies, BSD will be dependent upon the investment and research abilities of persons other than the Investment Advisor. BSD treats its
investments in such open- or closed-end investment companies as investments in Municipal Bonds.
Tax-Exempt Preferred Shares
BSD may invest up to 15% of its total assets in preferred
interests of other investment funds that pay dividends that are exempt from regular federal income tax, subject to the Eligible Assets requirements of the Statement of Preferences which limit BSDs investment in such securities to 5% of its
Managed Assets at the time of investment. A portion of such dividends may be capital gain distributions subject to federal capital gains
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tax. Such funds in turn invest in Municipal Bonds and other assets that pay interest or make distributions that are exempt from regular federal income tax, such as revenue bonds issued by state
or local agencies to fund the development of low-income, multi-family housing. Investment in such tax-exempt preferred shares involves many of the same issues as
investing in other open- or closed-end investment companies as discussed above. These investments also have additional risks, including liquidity risk, the absence of regulation governing investment practices,
capital structure and leverage, affiliated transactions and other matters, and concentration of investments in particular issuers or industries. Revenue bonds issued by state or local agencies to finance the development of low-income, multi-family housing involve special risks in addition to those associated with Municipal Bonds generally, including that the underlying properties may not generate sufficient income to pay expenses and
interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the properties, may pay interest that changes based in part on the
financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not generate income to pay interest. Increases in interest rates
payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds. BSD will treat investments in tax-exempt preferred shares as investments in Municipal
Bonds.
Temporary Investments
During temporary defensive periods (e.g., times when, in the Investment Advisors opinion, temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt bond market adversely affect the price at which long-term or intermediate-term Municipal Bonds are available), and in order to keep cash on hand fully invested, BSD may invest up to 100% of its total
assets in liquid, short-term investments including high quality, short-term securities which may be either tax-exempt or taxable and securities of other open- or
closed-end investment companies that invest primarily in Municipal Bonds of the type in which BSD may invest directly. BSD intends to invest in taxable short-term investments only in the event that suitable tax-exempt temporary investments are not available at reasonable prices and yields. BSDs stated expectation is that it will invest only in taxable temporary investments which are U.S. government securities or
securities rated within the highest grade by Moodys, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable or floating rate of interest (such short-term obligations being referred to herein as
Temporary Investments). Temporary Investments of BSD may include certificates of deposit issued by U.S. banks with assets of at least $1 billion, commercial paper or corporate notes, bonds or debentures with a remaining maturity of
one year or less, or repurchase agreements. See Repurchase Agreements. To the extent BSD invests in Temporary Investments, BSD will 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:
(1) 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. U.S. Government securities include securities issued by (a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home
Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S.
Government provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. Government, its agencies and instrumentalities
do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
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(2) Certificates of deposit issued against funds deposited in a bank or a savings and loan
association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate
on the date specified thereon. Certificates of deposit purchased by BSD may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time BSD purchases securities pursuant to a repurchase agreement, it simultaneously agrees to resell and redeliver such
securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for BSD during its holding period, since the resale price is always greater than the purchase price and
reflects an agreed-upon market rate. Such actions afford an opportunity for BSD to invest temporarily available cash. BSD may enter into repurchase agreements only with respect to obligations of the U.S. Government, its agencies or
instrumentalities; certificates of deposit; or bankers acceptances in which BSD may invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to BSD is limited to the ability of
the seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that BSD is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered
into, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, BSD could incur a loss of both principal and interest. The Investment Advisor monitors the value of the
collateral at the time the action is entered into and at all times during the term of the repurchase agreement. The Investment Advisor does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon
repurchase price to be paid to BSD. If the seller were to be subject to a federal bankruptcy proceeding, the ability of BSD to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes are direct lending arrangements between BSD and a corporation. There is no secondary market for such notes. However, they are redeemable by BSD at any time. The Investment Advisor
will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its financial obligations, because BSDs
liquidity might be impaired if the corporation were unable to pay principal and interest on demand. BSDs stated expectation is that its investments in commercial paper will be limited to commercial paper rated in the highest categories by a
major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
Tax-exempt temporary investments include various obligations issued by state and local
governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such Municipal Bonds maturing in three years or less from the date of
issuance) and municipal commercial paper. Short-term tax-exempt fixed income securities include, without limitation, the following:
Bond Anticipation Notes (BANs) 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. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuers access to the long-term municipal bond market and the likelihood that the proceeds of
such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are
issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuers
capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies could adversely affect the issuers ability to meet its obligations on outstanding TANs.
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Revenue Anticipation Notes (RANs) are issued by governments or governmental
bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated
revenues from another level of government, could adversely affect an issuers ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could
affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide
construction financing for specific projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to
meet short-term working capital or capital-project needs. These notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (municipal paper) represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and
their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to the extent the funds are available therefrom. Maturities on municipal paper generally will be shorter than the maturities of TANs,
BANs or RANs. There is a limited secondary market for issues of municipal paper.
Certain Municipal Bonds may carry variable
or floating rates of interest whereby the rate of interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market indices.
While the various types of notes described above as a group represent the major portion of the
tax-exempt note market, other types of notes are available in the marketplace and BSD may invest in such other types of notes to the extent permitted under its investment objective, policies and limitations.
Such notes may be issued for different purposes and may be secured differently from those mentioned above.
Strategic Transactions and
Other Management Techniques
BSD may use a variety of other investment management techniques and instruments. BSD 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 (collectively, Strategic Transactions). These Strategic Transactions may be used for duration management and other risk management to attempt to protect against possible changes in
the market value of BSDs portfolio resulting from trends in the debt securities markets and changes in interest rates, to protect BSDs 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. There is no particular strategy that requires use of one technique rather than
another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The Strategic Transactions are described below. The ability of BSD to use them successfully will depend on
the Investment Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Inasmuch as any obligations of BSD that arise from the use of Strategic Transactions will
be covered by segregated liquid high grade assets or offsetting transactions, BSD and the Investment Advisor believe such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing
restrictions. Certain provisions of the Internal Revenue Code of 1986 may restrict or affect the ability of BSD to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to taxable income and have
certain other consequences.
Interest Rate Transactions. BSD may enter into interest rate swaps and the purchase or
sale of interest rate caps and floors. BSD expects to enter into these transactions primarily to preserve a return or spread on a
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particular investment or portion of its portfolio as a duration management technique or to protect against any increase in the price of securities BSD anticipates purchasing at a later date. BSD
will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. BSD may not sell interest rate caps or floors that it does not own. Interest rate swaps
involve the exchange by BSD with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor.
BSD may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted out, with BSD receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. BSD will accrue the net amount of the excess, if
any, of BSDs obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate with a custodian an amount of cash or liquid high grade securities having an aggregate net asset value at all times at
least equal to the accrued excess. BSD may not enter into any interest rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in the highest rating category of at least
one nationally recognized statistical rating organization at the time of entering into such transaction. If there is a default by the other party to such a transaction, BSD will have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. Caps and floors are more recent
innovations for which standardized documentation has not yet been developed and, accordingly, they are less liquid than swaps.
Credit Default Swap Agreements. BSD may enter into credit default swap agreements for hedging purposes or to seek to increase its
return. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by BSD. The protection buyer in a credit default contract may be obligated to pay the protection
seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par
value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount (the difference between
the market value of the reference obligation and its par value), if the swap is cash settled. BSD may be either the buyer or seller in the transaction. If BSD is a buyer and no credit event occurs, BSD may recover nothing if the swap is held through
its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have
significantly decreased. As a seller, BSD generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six (6) months and three years, provided that there is no credit event. If a
credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As the seller, BSD
would effectively add leverage to its portfolio because, in addition to its total net assets, BSD would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if BSD had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to
illiquidity risk, counterparty risk and credit risks. BSD expects to enter into credit default swap agreements only with counterparties who are rated investment grade quality by at least one nationally recognized statistical rating organization at
the time of entering into such transaction or whose creditworthiness is believed by the Investment Advisor to be equivalent to such rating. A buyer generally also will lose its investment and recover nothing should no credit event occur
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and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments
previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a
credit event occurs, the seller may be required to pay the buyer the full notional value of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations. BSDs obligations under a credit default swap
agreement will be accrued daily (offset against any amounts owing to BSD). BSD will at all times segregate with its custodian in connection with each such transaction liquid securities or cash with a value at least equal to BSDs exposure (any
accrued but unpaid net amounts owed by BSD to any counterparty), on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation will
ensure that BSD has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of BSDs portfolio. Such segregation will not limit BSDs exposure to loss.
Futures Contracts and Options on Futures Contracts. BSD may also enter into contracts for the purchase or sale for future delivery
(futures contracts) of debt securities, aggregates of debt securities or indices or prices thereof, other financial indices and U.S. government debt securities or options on the above. BSD will ordinarily engage in such transactions only
for bona fide hedging, risk management (including duration management) and other portfolio management purposes. However, BSD is also permitted to enter into such transactions for non-hedging purposes to
enhance income or gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of BSDs net assets would be posted as initial margin and
premiums with respect to such non-hedging transactions.
Calls on Securities
Indices and Futures Contracts. BSD may sell or purchase call options (calls) on Municipal Bonds and indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in
the over-the-counter markets. A call gives the purchaser of the option the right to buy, and obligates the seller to sell, the underlying security, futures contract or
index at the exercise price at any time or at a specified time during the option period. All such calls sold by BSD must be covered as long as the call is outstanding (i.e., BSD must own the securities or futures contract subject
to the call or other securities acceptable for applicable escrow requirements). A call sold by BSD exposes BSD during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security,
index or futures contract and may require BSD to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives BSD the right to buy a security, futures contract or index at a fixed price. Calls on futures on
Municipal Bonds must also be covered by deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy BSDs obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. BSD may purchase put options (puts) that relate to Municipal Bonds
(whether or not it holds such securities in its portfolio), indices or futures contracts. BSD may also sell puts on Municipal Bonds, indices or futures contracts on such securities if BSDs contingent obligations on such puts are secured by
segregated assets consisting of cash or liquid high grade debt securities having a value not less than the exercise price. BSD may not sell puts if, as a result, more than 50% of BSDs assets would be required to cover its potential obligations
under its hedging and other investment transactions. In selling puts, there is a risk that BSD may be required to buy the underlying security at a price higher than the current market price.
Municipal Market Data Rate Locks. BSD may purchase and sell Municipal Market Data Rate Locks (MMD Rate Locks). An MMD
Rate Lock permits BSD to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any increase
in the price of securities to be purchased at a later date. BSD will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. An MMD Rate Lock is a
contract between BSD and an MMD Rate Lock provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a
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specified level on the expiration date of the contract. For example, if BSD buys an MMD Rate Lock and the Municipal Market Data AAA General Obligation Scale is below the specified level on the
expiration date, the counterparty to the contract will make a payment to BSD equal to the specified level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above
the specified level on the expiration date, BSD will make a payment to the counterparty equal to the actual level minus the specified level multiplied by the notional amount of the contract. In entering into MMD Rate Locks, there is a risk that
municipal yields will move in the direction opposite of the direction anticipated by BSD. BSD may not enter into MMD Rate Locks if, as a result, more than 50% of its total assets would be required to cover its potential obligations under its hedging
and other investment transactions.
Short Sales
BSD may make short sales of Municipal Bonds. A short sale is a transaction in which BSD sells a security it does not own in anticipation that the market price of that security will decline. BSD may make
short sales to hedge positions, for duration and risk management, in order to maintain portfolio flexibility or to enhance income or gain.
When BSD makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon
conclusion of the sale. BSD may have to pay a fee to borrow particular securities and is often obligated to pay over any payments received on such borrowed securities.
BSDs obligation to replace the borrowed security are required to be secured by collateral deposited with the broker-dealer, usually cash, U.S. government securities or other liquid securities. BSD
will also be required to segregate similar collateral with its custodian to the extent, if any, necessary so that the aggregate collateral value is at all times at least equal to the current market value of the security sold short. Depending on
arrangements made with the broker-dealer from which it borrowed the security regarding payment over of any payments received by BSD on such security, BSD may not receive any payments (including interest) on its collateral deposited with such
broker-dealer.
If the price of the security sold short increases between the time of the short sale and the time BSD replaces
the borrowed security, BSD will incur a loss; conversely, if the price declines, BSD will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Although BSDs gain is limited to the price
at which it sold the security short, its potential loss is theoretically unlimited.
BSD may not make a short sale if, after
giving effect to such sale, the market value of all securities sold short exceeds 25% of the value of its total assets or BSDs aggregate short sales of a particular class of securities exceeds 25% of the outstanding securities of that class.
BSD may also make short sales against the box without respect to such limitations. In this type of short sale, at the time of the sale, BSD owns or has the immediate and unconditional right to acquire at no additional cost the identical
security.
VRDOs
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to
receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The
interest rates are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par
value of the VRDOs on the adjustment date. The adjustments typically are based upon SIFMA or some other appropriate interest rate adjustment index. BSD 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. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to
be illiquid securities.
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Restricted and Illiquid Securities
Certain of BSDs investments may be illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or
lack of an established secondary trading market. The sale of restricted and illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible
for trading on national securities exchanges or in the over-the- counter markets. Restricted securities may sell at a price lower than similar securities that are not
subject to restrictions on resale.
Repurchase Agreements
As temporary investments, BSD may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller of securities agrees to repurchase the same security at a specified
price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during BSDs holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject
of the repurchase contract. BSD may only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Investment Advisor, present minimal credit risk. The risk to BSD is limited to the ability of
the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of
the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but BSD might incur a loss if the value of the collateral declines, and might incur disposition costs or experience
delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by BSD may be delayed or limited. The Investment Advisor will
monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase
price. In the event the value of the collateral declines below the repurchase price, the Investment Advisor will demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including
interest.
Reverse Repurchase Agreements
BSD may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of
securities held by BSD with an agreement by BSD to repurchase the securities at an agreed upon price, date and interest payment. At the time BSD enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the
custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If BSD establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by
BSD; however, under certain circumstances in which BSD does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of BSDs limitation on borrowings. The use by BSD
of reverse repurchase agreements involves many of the same risks of leverage since the proceeds derived from such reverse repurchase agreements may be invested in additional securities. Reverse repurchase agreements involve the risk that the market
value of the securities acquired in connection with the reverse repurchase agreement may decline below the price of the securities BSD has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market
value of the securities retained in lieu of sale by BSD in connection with the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to
enforce BSDs obligation to repurchase the securities, and BSDs use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, BSD would bear the risk of loss to the extent that the
proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement.
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Borrowings
BSD reserves the right to borrow funds to the extent permitted as described under the below caption Investment Restrictions. The proceeds of borrowings may be used for any valid purpose
including, without limitation, liquidity, investments and repurchases of shares of BSD. Borrowing is a form of leverage and, in that respect, entails risks comparable to those associated with the issuance of Preferred Shares.
Lending of Securities
See The Acquiring Funds InvestmentsLending of Securities for a discussion of the securities lending arrangements
applicable to BSD.
MFTs Investment Objective and Policies
MFTs investment objective is to provide shareholders with as high a level of current income exempt from Federal income taxes as is
consistent with its investment policies and prudent investment management. MFTs investment policies provide that it will invest, as a fundamental policy, at least 80% of an aggregate of MFTs net assets (including proceeds from the
issuance of any preferred shares) and the proceeds of any borrowings for investment purposes, in a portfolio of municipal obligations the interest on which, 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 alternative minimum tax) and which enables shares of MFT to be exempt from Florida intangible personal property
taxes (Florida Municipal Bonds). MFT 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 do not enable shares of MFT to be exempt from Florida intangible personal property taxes (Municipal
Bonds). In general, MFT does not intend for its investments to earn a large amount of interest income that is includable in gross income for Federal income tax purposes. There can be no assurance that MFTs investment objective will be
realized. Unless otherwise noted, the term Municipal Bonds also includes Florida Municipal Bonds.
MFTs
investment objective and its policy of investing at least 80% of an aggregate of MFTs net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in Municipal Bonds are
fundamental policies that may not be changed without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the 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. See Description of VMTP Shares Voting Rights for additional information with respect to the voting rights of holders of
VMTP Shares.
MFTs investment policies provide that, under normal market conditions, MFT 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), Standard & Poors (S&P) (currently AAA, AA, A and BBB) or Fitch Ratings (Fitch) (currently AAA, AA, A and BBB). In the case
of short-term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for 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
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requirements, the Investment Advisor takes into account the Municipal Bond insurance as well as 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 Municipal Bond insurance or credit enhancement. If unrated, such securities will possess creditworthiness comparable, in the opinion of the Investment
Advisor, to other obligations in which MFT may invest.
MFT may invest up to 20% of its managed assets in securities that are
rated below investment grade, or are considered by MFTs investment adviser to be of comparable quality, at the time of purchase, subject to MFTs other investment policies. Bonds of below investment grade quality (Ba/BB or below) are
commonly referred to as junk bonds. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities,
sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater
volatility of price than securities in higher rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuers ability to pay
interest and any required redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing credit quality policies apply only at the time a security is purchased, and MFT 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 Investment Advisor may consider such factors as the Investment Advisors assessment of the credit quality of the
issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. Appendix D contains a general description of Moodys, S&Ps and Fitchs
ratings of municipal bonds. In the event that MFT disposes of a portfolio security subsequent to its being downgraded, MFT may experience a greater risk of loss than if such security had been sold prior to such downgrade.
MFT 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 MFTs income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. MFT may purchase insured bonds and may purchase insurance for bonds in its
portfolio.
MFT may invest in certain tax exempt securities classified as private activity bonds (or industrial
development bonds, under pre-1986 law) (in general, bonds that benefit non-governmental entities) that may subject certain investors in MFT to an alternative minimum
tax. See Certain U.S. Federal Income Tax Considerations. The percentage of MFTs total assets invested in private activity bonds will vary from time to time. MFT has not established any limit on the percentage of its portfolio that
may be invested in Municipal Bonds subject to the alternative minimum tax provisions of federal tax law, and MFT expects that a portion of the income it produces will be includable in alternative minimum taxable income. VMTP Shares therefore would
not ordinarily be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing VMTP Shares. The suitability of an investment in VMTP Shares will depend upon a
comparison of the after-tax yield likely to be provided from MFT with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from
comparable fully taxable investments, in light of each such investors tax position. Special considerations may apply to corporate investors.
The average maturity of MFTs portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. MFTs portfolio at any given
time may include long-term, intermediate-term and short-term Municipal Bonds.
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MFTs stated expectation is that it will invest in Municipal Bonds that, in the
Investment Advisors opinion, are underrated or undervalued. Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Investment Advisor, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds
that, in the opinion of the Investment Advisor, are worth more than the value assigned to them in the marketplace. The Investment Advisor 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 Investment Advisor may purchase those bonds for MFTs portfolio because they represent a market sector or issuer that the Investment Advisor
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. MFTs investment in underrated or undervalued Municipal Bonds will be based on the Investment Advisors 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 MFT will generally result in
capital gain distributions subject to federal capital gains taxation.
MFT ordinarily does not intend to realize significant
investment income not exempt from federal income tax. From time to time, MFT 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 MFT.
The State of Florida repealed the Florida Intangible Tax as of January 2007. As a result, on September
12, 2008, the Board of Trustees of MFT voted unanimously to approve MFT investing in Municipal Bonds regardless of geographic location. If Florida were to reinstate the Florida Intangible Tax or adopt a state income tax, however, MFT would be
required to realign its portfolio such that substantially all of its assets would be invested in Florida Municipal Bonds or obtain shareholder approval to amend MFTs fundamental investment objective to remove references to the Florida
Intangible Tax. There can be no assurance that the State of Florida will not reinstate the Florida Intangible Tax or adopt a state income tax in the future. There can also be no assurance that the reinstatement of the Florida Intangible Tax or the
adoption of a state income tax will not have a material adverse effect on MFT or will not impair the ability of MFT to achieve its investment objectives.
Description of Municipal Bonds
See The Acquiring Funds
InvestmentsDescription of Municipal Bonds for additional information regarding the types of Municipal Bonds in which MFT invests.
When-Issued, Delayed Delivery Securities and Forward Commitment Securities
MFT may purchase Municipal Bonds on a when-issued basis and may purchase or sell Municipal Bonds on a forward
commitment basis or on a delayed delivery basis. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the
securities take place at a later date. When-issued and forward commitment securities may be sold prior to the settlement date, but MFT will enter into when-issued and forward commitment securities only with the intention of actually receiving or
delivering the securities, as the case may be. If MFT disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it can incur a gain or loss. At the
time MFT entered into a transaction on a when-issued or forward commitment basis, it will segregate with its custodian cash or other liquid high grade debt securities with a value not less than the value of the when-issued or forward commitment
securities. The value of these assets will be monitored daily to ensure that their marked to market value will at all times equal or exceed the
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corresponding obligations of MFT. There is always a risk that the securities may not be delivered and that MFT may incur a loss. Settlements in the ordinary course are not treated by MFT as
when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
Temporary Investments
During temporary defensive periods (e.g., times when, in the Investment Advisors opinion, temporary
imbalances of supply and demand or other temporary dislocations in the tax-exempt bond market adversely affect the price at which long-term or intermediate-term Municipal Bonds are available), and in order to
keep cash on hand fully invested, MFT may invest up to 100% of its total assets in liquid, short-term investments including high quality, short-term securities which may be either tax-exempt or taxable and
securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the type in which MFT may invest directly. MFT intends to invest in taxable short-term investments only
in the event that suitable tax-exempt temporary investments are not available at reasonable prices and yields. MFTs stated expectation is that it will invest only in taxable temporary investments which
are U.S. government securities or securities rated within the highest grade by Moodys, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable or floating rate of interest (such short-term obligations
being referred to herein as Temporary Investments). Temporary Investments of MFT may include certificates of deposit issued by U.S. banks with assets of at least $1 billion, commercial paper or corporate notes, bonds or debentures
with a remaining maturity of one year or less, or repurchase agreements. See Repurchase Agreements. To the extent MFT invests in Temporary Investments, MFT will 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:
(1) 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. U.S. Government securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the
discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. Government
provides financial support to such U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. Government, its agencies and instrumentalities do not
guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of
deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to
pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Certificates of deposit purchased by MFT may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time MFT purchases securities pursuant to a repurchase
agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for MFT during its holding period,
since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for MFT to invest temporarily available cash. MFT may enter into repurchase agreements only with respect to
obligations of the U.S. Government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which MFT may
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invest. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to MFT is limited to the ability of the seller to pay the agreed-upon
sum on the repurchase date; in the event of default, the repurchase agreement provides that MFT is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is entered into, and if the seller defaults
under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, MFT could incur a loss of both principal and interest. The Investment Advisor monitors the value of the collateral at the time the action is
entered into and at all times during the term of the repurchase agreement. The Investment Advisor does so in an effort to determine that the value of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to MFT. If the
seller were to be subject to a federal bankruptcy proceeding, the ability of MFT to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes are direct lending arrangements between MFT and a corporation. There is no secondary market for such notes. However, they are redeemable by MFT at any time. The Investment Advisor
will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its financial obligations, because MFTs
liquidity might be impaired if the corporation were unable to pay principal and interest on demand. MFTs stated expectation is that its investments in commercial paper will be limited to commercial paper rated in the highest categories by a
major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
Tax-exempt temporary investments include various obligations issued by state and local
governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such Municipal Bonds maturing in three years or less from the date of
issuance) and municipal commercial paper. Short-term tax-exempt fixed income securities include, without limitation, the following:
Bond Anticipation Notes (BANs) 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. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuers access to the long-term municipal bond market and the likelihood that the proceeds of
such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are
issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuers
capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies could adversely affect the issuers ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or governmental bodies with the expectation that future revenues
from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of government, could
adversely affect an issuers ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal
and interest on RANs.
Construction Loan Notes are issued to provide construction financing for specific projects. Frequently,
these notes are redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local
government bodies and agencies to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may have
risks similar to the risks associated with TANs and RANs.
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Tax-Exempt Commercial Paper (municipal
paper) represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to the extent the
funds are available therefrom. Maturities on municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of municipal paper.
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment
formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or
insolvency the demand feature of VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to
maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments typically are based upon SIFMA or some other appropriate interest rate adjustment index. MFT 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. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued
interest on a notice period exceeding seven days may be deemed to be illiquid securities.
Certain Municipal Bonds may carry
variable or floating rates of interest whereby the rate of interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market indices.
While the various types of notes described above as a group represent the major portion of the
tax-exempt note market, other types of notes are available in the marketplace and MFT may invest in such other types of notes to the extent permitted under its investment objective, policies and limitations.
Such notes may be issued for different purposes and may be secured differently from those mentioned above.
MFTs
investment policies provide that the Temporary Investments and VRDOs in which MFT 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
Investment Advisor. In addition, MFT reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the Investment Advisor, market conditions warrant.
Strategic Transactions and Other Management Techniques
MFT may use a variety of other investment management techniques and instruments. MFT 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 (collectively, Strategic Transactions).
These Strategic Transactions may be used for duration management and other risk management to attempt to protect against possible changes in the market value of MFTs portfolio resulting from trends in the debt securities markets and changes in
interest rates, to protect MFTs 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. There is no particular strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions
and the composition of the portfolio. The Strategic Transactions are described below. The ability of MFT to use them successfully will depend on the Investment Advisors ability to predict pertinent market movements as well as sufficient
correlation among the instruments, which cannot be assured. Inasmuch as any obligations of MFT that arise from the use of Strategic Transactions will be covered by segregated liquid high grade assets or offsetting transactions, MFT and the
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Investment Advisor believes such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. Certain provisions of the
Internal Revenue Code of 1986 may restrict or affect the ability of MFT to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to taxable income and have certain other consequences.
Interest Rate Transactions. MFT may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. MFT
expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio as a duration management technique or to protect against any increase in the price of securities MFT anticipates
purchasing at a later date. MFT will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. MFT may not sell interest rate caps or floors that it does
not own. Interest rate swaps involve the exchange by MFT with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of
principal. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such
interest rate floor.
MFT may enter into interest rate swaps, caps and floors on either an asset-based or liability-based
basis, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with MFT receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. MFT will
accrue the net amount of the excess, if any, of MFTs obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate with a custodian an amount of cash or liquid high grade securities having an
aggregate net asset value at all times at least equal to the accrued excess. If there is a default by the other party to such a transaction, MFT will have contractual remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. Caps and floors are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less liquid than swaps.
Credit Default Swap
Agreements. MFT may enter into credit default swap agreements for hedging purposes or to seek to increase its return. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by MFT.
The protection buyer in a credit default contract may be obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on a reference
obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described
in the swap, or the seller may be required to deliver the related net cash amount (the difference between the market value of the reference obligation and its par value), if the swap is cash settled. MFT may be either the buyer or seller in the
transaction. If MFT is a buyer and no credit event occurs, MFT may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in
exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, MFT generally receives an upfront payment or a fixed rate of income throughout the term of the swap,
which typically is between six (6) months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of
deliverable obligations of the reference entity whose value may have significantly decreased. As the seller, MFT would effectively add leverage to its portfolio because, in addition to its total net assets, MFT would be subject to investment
exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if MFT had invested in
the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty
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risk and credit risks. MFT expects to enter into credit default swap agreements only with counterparties who are rated investment grade quality by at least one nationally recognized statistical
rating organization at the time of entering into such transaction or whose creditworthiness is believed by the Investment Advisor to be equivalent to such rating. A buyer generally also will lose its investment and recover nothing should no credit
event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full
notional value it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event occurs, the seller may be required to
pay the buyer the full notional value of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations. MFTs obligations under a credit default swap agreement will be accrued daily (offset against any
amounts owing to MFT). MFT will at all times segregate with its custodian in connection with each such transaction liquid securities or cash with a value at least equal to MFTs exposure (any accrued but unpaid net amounts owed by MFT to any
counterparty), on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation will ensure that MFT has assets available to satisfy its
obligations with respect to the transaction and will avoid any potential leveraging of MFTs portfolio. Such segregation will not limit MFTs exposure to loss.
Futures Contracts and Options on Futures Contracts. MFT may also enter into contracts for the purchase or sale for future delivery (futures contracts) of debt securities, aggregates of
debt securities or indices or prices thereof, other financial indices and U.S. government debt securities or options on the above. MFT will ordinarily engage in such transactions only for bona fide hedging, risk management (including duration
management) and other portfolio management purposes. However, MFT is also permitted to enter into such transactions for non-hedging purposes to enhance income or gain, in accordance with the rules and
regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of MFTs net assets would be posted as initial margin and premiums with respect to such
non-hedging transactions.
Calls on Securities Indices and Futures Contracts.
MFT may sell or purchase call options (calls) on Municipal Bonds and indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets. A call gives the purchaser of the option the right to buy, and obligates the seller to sell, the underlying security, futures contract or index
at the exercise price at any time or at a specified time during the option period. All such calls sold by MFT must be covered as long as the call is outstanding (i.e., MFT must own the securities or futures contract subject to the
call or other securities acceptable for applicable escrow requirements). A call sold by MFT exposes MFT during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security, index or
futures contract and may require MFT to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives MFT the right to buy a security, futures contract or index at a fixed price. Calls on futures on Municipal
Bonds must also be covered by deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy MFTs obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. MFT may purchase put options (puts) that relate to Municipal Bonds
(whether or not it holds such securities in its portfolio), indices or futures contracts. MFT may also sell puts on Municipal Bonds, indices or futures contracts on such securities if MFTs contingent obligations on such puts are secured by
segregated assets consisting of cash or liquid high grade debt securities having a value not less than the exercise price.
Municipal Market Data Rate Locks. MFT may purchase and sell Municipal Market Data Rate Locks (MMD Rate Locks). An MMD
Rate Lock permits MFT to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any increase
in the price of securities to be purchased at a later date. MFT will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. An MMD Rate Lock is a
contract between MFT and an MMD Rate Lock provider pursuant to which the parties agree to make payments to each other on a notional amount,
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contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if MFT buys an MMD Rate
Lock and the Municipal Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract will make a payment to MFT equal to the specified level minus the actual level, multiplied by the
notional amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, MFT will make a payment to the counterparty equal to the actual level minus the specified level
multiplied by the notional amount of the contract. In entering into MMD Rate Locks, there is a risk that municipal yields will move in the direction opposite of the direction anticipated by MFT. MFT may not enter into MMD Rate Locks if, as a result,
more than 50% of its total assets would be required to cover its potential obligations under its hedging and other investment transactions.
Restricted and Illiquid Securities
Certain of MFTs investments may be illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or lack an established secondary trading market. The sale of
restricted and illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the- counter markets. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale.
Repurchase Agreements
As temporary investments, MFT may invest in repurchase agreements. A repurchase agreement is a contractual agreement whereby the seller of
securities agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during MFTs holding period. Repurchase agreements are considered to be
loans collateralized by the underlying security that is the subject of the repurchase contract. MFT may only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Investment Advisor,
present minimal credit risk. The risk to MFT is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying collateral at the time the transaction is entered into
always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but MFT might incur a loss if the value of
the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the
collateral by MFT may be delayed or limited. The Investment Advisor will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to
determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, the Investment Advisor will demand additional collateral from the issuer to increase
the value of the collateral to at least that of the repurchase price, including interest.
Reverse Repurchase Agreements
MFT may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set
forth herein. Reverse repurchase agreements involve the sale of securities held by MFT with an agreement by MFT to repurchase the securities at an agreed upon price, date and interest payment. At the time MFT enters into a reverse repurchase
agreement, it may establish and maintain a segregated account with the custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If MFT establishes and maintains such a segregated
account, a reverse repurchase agreement will not be considered a borrowing by MFT; however, under certain circumstances in which MFT does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a
borrowing for the purpose of MFTs limitation on borrowings. The use by MFT of reverse repurchase agreements involves many of the same risks of leverage since the proceeds derived from such reverse repurchase
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agreements may be invested in additional securities. Reverse repurchase agreements involve the risk that the market value of the securities acquired in connection with the reverse repurchase
agreement may decline below the price of the securities MFT has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by MFT in connection with the
reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce MFTs obligation to repurchase the securities, and MFTs use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decision. Also, MFT would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement.
Borrowings
MFT 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 MFT 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 shares pursuant to tender offers or otherwise to redeem or repurchase shares of preferred shares. Borrowings by MFT (commonly known, as with the issuance of preferred shares, as
leveraging) create an opportunity for greater total return since, for example, MFT will not be required to sell portfolio securities to repurchase or redeem shares but, at the same time, increase exposure to capital risk. In addition,
borrowed funds are subject to interest costs that may offset or exceed the return earned on the borrowed funds.
Lending of Securities
See The Acquiring Funds InvestmentsLending of Securities for a discussion of the securities
lending arrangements applicable to MFT.
BBFs Investment Objectives and Policies
BBF seeks as a fundamental investment objective to provide current income exempt from regular federal income tax and Florida intangible
personal property tax. The investment objective of BBF is a fundamental policy that may not be changed without a vote of a majority of BBFs outstanding voting securities. Due to the repeal of the Florida intangible personal property tax, the
Board of BBF approved an investment policy in September 2008, allowing BBF the flexibility to invest in municipal bonds regardless of geographical location. There can be no assurance that BBFs investment objective will be realized.
BBF seeks to achieve its investment objective by investing primarily in municipal bonds exempt from federal income taxes (except that
the interest may be subject to the federal alternative minimum tax). BBFs investment policies provide that, under normal market conditions, BBF will invest at least 80% of its total assets in investment grade quality municipal bonds.
Investment grade quality means that such bonds are rated, at the time of investment, within the four highest grades (Baa or BBB or better by Moodys, S&P or Fitch) or are unrated but judged to be of comparable quality by the Investment
Advisor. Municipal bonds rated Baa by Moodys are investment grade, but Moodys considers municipal bonds rated Baa to have speculative characteristics. Changes in economic conditions or other circumstances are more likely to lead to a
weakened capacity for issuers of municipal bonds that are rated BBB or Baa (or that have equivalent ratings) to make principal and interest payments than is the case for issuers of higher grade municipal bonds. In the case of short-term notes, the
investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through
MIG-3 for 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
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the rating categories set forth above. In assessing the quality of municipal bonds with respect to the foregoing requirements, the Investment Advisor 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.
BBF may invest up to 20% of its total assets in municipal bonds that are rated, at the time of investment, Ba/BB or B by Moodys,
S&P or Fitch or that are unrated but judged to be of comparable quality by the Investment Advisor. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as junk bonds. Bonds of below investment grade
quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities, sometimes referred to as high yield or junk bonds, are
predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. Below investment
grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuers ability to pay interest and any required redemption or principal payments and are susceptible to
default or decline in market value due to adverse economic and business developments.
The foregoing credit quality policies
apply only at the time a security is purchased, and BBF 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 Investment Advisor may consider such factors as the Investment Advisors 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 BBF disposes of a portfolio security subsequent to its being downgraded, BBF may experience a greater risk of loss than if such security had been sold prior to such downgrade.
BBF may also invest in securities of other open- or closed-end investment companies
that invest primarily in municipal bonds of the types in which BBF may invest directly and in tax-exempt preferred shares that pay dividends that are exempt from regular federal income tax. In addition, BBF
may purchase municipal bonds that are additionally secured by insurance, bank credit agreements or escrow accounts. The credit quality of companies which provide these credit enhancements will affect the value of those securities. Although the
insurance feature reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce BBFs income. The insurance feature does not guarantee the market value of the insured obligations
or the net asset value of the common shares.
BBF may invest in certain tax exempt securities classified as private
activity bonds (or industrial development bonds, under pre-1986 law) (in general, bonds that benefit non-governmental entities) that may subject certain investors
in BBF to a federal alternative minimum tax. The percentage of BBFs total assets invested in private activity bonds will vary from time to time. BBF 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 BBF expects that a portion of the income it produces will be includable in alternative minimum taxable income. VRDP Shares therefore would not
ordinarily be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing VRDP Shares. The suitability of an investment in VRDP Shares will depend upon a comparison
of the after-tax yield likely to be provided from BBF with that from comparable tax-exempt investments not subject to the federal alternative minimum tax, and from
comparable fully taxable investments, in light of each such investors tax position. Special considerations may apply to corporate investors.
The average maturity of BBFs portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment Advisor. BBFs portfolio at any given
time may include both long-term and intermediate-term municipal bonds.
BBFs stated expectation is that it will invest
in municipal bonds that, in the Investment Advisors opinion, are underrated or undervalued. Underrated municipal bonds are those whose ratings do not, in the opinion of the
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Investment Advisor, reflect their true higher creditworthiness. Undervalued municipal bonds are bonds that, in the opinion of the Investment Advisor, are worth more than the value assigned to
them in the marketplace. The Investment Advisor 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 Investment Advisor may purchase those bonds for BBFs portfolio because they represent a market sector or issuer that the Investment Advisor 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. BBFs investment in
underrated or undervalued municipal bonds will be based on the Investment Advisors 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 BBF will generally result in capital gain distributions subject to federal capital gains taxation. BBF ordinarily does not
intend to realize significant investment income not exempt from federal income tax. From time to time, BBF may realize taxable capital gains.
The State of Florida repealed the Florida Intangible Tax as of January 2007. As a result, on September 12, 2008, the Board of BBF voted unanimously to approve BBF investing in municipal bonds
regardless of geographic location. If Florida were to reinstate the Florida Intangible Tax or adopt a state income tax, however, BBF would be required to realign its portfolio such that at substantially all of its assets would be invested in Florida
municipal bonds or obtain shareholder approval to amend BBFs fundamental investment objective to remove references to the Florida Intangible Tax. There can be no assurance that the State of Florida will not reinstate the Florida Intangible Tax
or adopt a state income tax in the future. There can also be no assurance that the reinstatement of the Florida Intangible Tax or the adoption of a state income tax will not have a material adverse effect on BBF or will not impair the ability of BBF
to achieve its investment objectives.
Description of Municipal Bonds
Please see The Acquiring Funds InvestmentsDescription of Municipal Bonds for additional information regarding the
types of Municipal Bonds in which BBF invests.
Tender Option Bond Transactions
BBF currently leverages its assets through the use of residual interest municipal tender option bonds (TOB Residuals), which
are derivative interests in municipal bonds. The TOB Residuals in which BBF 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. No independent
investigation will be made to confirm the tax-exempt status of the interest or income paid by TOB Residuals held by BBF. Although volatile, TOB Residuals typically offer the potential for yields exceeding the
yields available on fixed rate municipal bonds with comparable credit quality.
TOB Residuals represent beneficial interests
in a special purpose trust formed for the purpose of holding municipal bonds contributed by one or more funds (a TOB Trust). A TOB Trust typically issues two classes of beneficial interests: short-term floating rate interests (TOB
Floaters), which are sold to third-party investors, and TOB Residuals, which are generally issued to fund(s) that transferred municipal bonds to the TOB Trust. BBF may invest in both TOB Floaters and TOB Residuals. TOB Floaters may have first
priority on the cash flow from the municipal bonds held by the TOB Trust and are enhanced with a liquidity support arrangement from a third-party TOBs Liquidity Provider (defined below) which allows holders to tender their position at par (plus
accrued interest). BBF, as a holder of TOB Residuals, is paid the residual cash flow from the TOB Trust. BBF contributes municipal bonds to the TOB Trust and is paid the cash received by the TOB Trust from the sale of the TOB Floaters, less certain
transaction costs, and typically will invest the cash to purchase additional municipal bonds or other investments permitted by its investment policies. If BBF ever purchases all or a portion of the
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TOB Floaters sold by the TOB Trust, it may surrender those TOB Floaters together with a proportionate amount of TOB Residuals to the TOB Trust in exchange for a proportionate amount of the
municipal bonds owned by the TOB Trust.
Other funds advised by the Investment Advisor (BlackRock-Advised Funds)
may contribute municipal bonds to a TOB Trust into which BBF has contributed municipal bonds. If multiple BlackRock-Advised Funds participate in the same TOB Trust, the economic rights and obligations under the TOB Residual will generally be shared
among the funds ratably in proportion to their participation in the TOB Trust.
The municipal bonds transferred to a TOB Trust
typically are high grade municipal bonds. In certain cases, when municipal bonds transferred are lower grade municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely payment of principal and
interest on the bonds to the TOB Trust by a credit enhancement provider. The TOB Trust would be responsible for the payment of the credit enhancement fee and BBF, as a TOB Residual holder, would be responsible for reimbursement of any payments of
principal and interest made by the credit enhancement provider.
The TOB Residuals held by BBF generally provide BBF with the
right to cause the holders of a proportional share of the TOB Floaters to tender their notes to the TOB Trust at par plus accrued interest. Thereafter, BBF may withdraw a corresponding share of the municipal bonds from the TOB Trust. As a result, a
TOB transaction, in effect, creates exposure for BBF to the entire return of the municipal bonds in the TOB Trust, with a net cash investment by BBF that is less than the value of the municipal bonds in the TOB Trust. This multiplies the positive or
negative impact of the municipal bonds return within BBF (thereby creating leverage). The leverage within a TOB Trust depends on the value of the municipal bonds deposited in the TOB Trust relative to the value of the TOB Floaters it issues.
BBF may invest in highly leveraged TOB Residuals. A TOB Residual generally is considered highly leveraged if the principal
amount of the TOB Floaters issued by the related TOB Trust exceeds 75% of the principal amount of the municipal bonds owned by the TOB Trust.
The leverage attributable to BBFs use of TOB Residuals may be called away on relatively short notice and therefore may be less permanent than more traditional forms of leverage. The TOB
Trust may be collapsed without the consent of BBF upon the occurrence of termination events, as defined in the TOB Trust agreements. Upon the occurrence of a termination event, a TOB Trust would be liquidated with the proceeds applied first to any
accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and the TOBs Liquidity Provider. Upon certain termination events, the holders of the TOB Floaters would be paid before the TOB Residual holders
(i.e., BBF) whereas in other termination events, the holders of TOB Floaters and the TOB Residual holders would be paid pro rata.
TOB Trusts are typically supported by a liquidity facility provided by a TOBs Liquidity Provider that allows the holders of the TOB Floaters to tender their TOB Floaters in exchange for payment of par
plus accrued interest on any business day (subject to the non-occurrence of a termination event). The tendered TOB Floaters are remarketed by a remarketing agent. In the event of a failed remarketing, the TOB
Trust may draw upon a loan from the TOBs Liquidity Provider to purchase the tendered TOB Floaters. Any loans made by the TOBs Liquidity Provider will be secured by the purchased TOB Floaters held by the TOB Trust and will be subject to an increased
interest rate based on number of days the loan is outstanding.
BBF may invest in a TOB Trust on either a non-recourse or recourse basis. When BBF invests in TOB Trusts on a non-recourse basis, and the TOBs Liquidity Provider is required to make a payment under the liquidity
facility, the TOBs Liquidity Provider will typically liquidate all or a portion of the municipal bonds held in the TOB Trust and then fund the balance, if any, of the Liquidation Shortfall. If BBF invests in a TOB Trust on a recourse basis, it will
typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to which BBF is required to reimburse the TOBs Liquidity Provider the amount of any Liquidation
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Shortfall. As a result, if BBF invests in a recourse TOB Trust, BBF will bear the risk of loss with respect to any Liquidation Shortfall. If multiple BlackRock-Advised Funds participate in any
such TOB Trust, these losses will be shared ratably, in proportion to their participation in the TOB Trust.
Under accounting
rules, municipal bonds of BBF that are deposited into a TOB Trust are investments of BBF and are presented on BBFs Schedule of Investments and outstanding TOB Floaters issued by a TOB Trust are presented as liabilities in BBFs Statement
of Assets and Liabilities. Interest income from the underlying municipal bonds is recorded by BBF on an accrual basis. Interest expense incurred on the TOB Floaters and other expenses related to remarketing, administration, trustee and other
services to a TOB Trust are reported as expenses of BBF. In addition, under accounting rules, loans made to a TOB Trust sponsored by BBF may be presented as loans of BBF in BBFs financial statements even if there is no recourse to BBFs
assets.
For TOB Floaters, generally, the interest rate earned will be based upon the market rates for municipal bonds with
maturities or remarketing provisions that are comparable in duration to the periodic interval of the tender option. Since the tender option feature has a shorter term than the final maturity or first call date of the underlying municipal bonds
deposited in the TOB Trust, the holder of the TOB Floaters relies upon the terms of the agreement with the financial institution furnishing the liquidity facility as well as the credit strength of that institution. The risk associated with TOB
Floaters, however, may be increased in the current market environment as a result of recent downgrades to the credit ratings, and thus the perceived reliability and creditworthiness, of many major financial institutions, some of which sponsor and/or
provide liquidity support to TOB Trusts. This in turn may reduce the desirability of TOB Floaters as investments, which could impair the viability or availability of TOB Trusts.
The use of TOB Residuals will require BBF to earmark or segregate liquid assets in an amount equal to any TOB Floaters, plus any accrued
but unpaid interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, BBF that are not owned by BBF. The use of TOB Residuals may also require BBF to earmark or segregate liquid assets in an amount equal to loans provided
by the TOBs Liquidity Provider to the TOB Trust to purchase tendered TOB Floaters. BBF reserves the right to modify its asset segregation policies in the future to the extent that such changes are in accordance with applicable regulations or
interpretations. Future regulatory requirements or SEC guidance may necessitate more onerous contractual or regulatory requirements, which may increase the costs or reduce the degree of potential economic benefits of TOB Trust transactions or limit
BBFs ability to enter into or manage TOB Trust transactions.
When-Issued and Forward Commitment Securities
BBF may purchase municipal bonds on a when-issued basis and may purchase or sell municipal bonds on a forward
commitment basis. When such transactions are negotiated, the price, which is generally expressed in yield terms, is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. When-issued
and forward commitment securities may be sold prior to the settlement date, but BBF expects to enter into when-issued and forward commitment securities only with the intention of actually receiving or delivering the securities, as the case may be.
If BBF disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it can incur a gain or loss.
At the time BBF enters into a transaction on a when-issued basis, it will segregate or designate on its books and records cash or liquid
assets with a value not less than the value of the when-issued securities.
There can be no assurance that a security
purchased on a when issued basis will be issued or that a security purchased or sold through a forward commitment will be delivered. A default by a counterparty may result in BBF missing the opportunity of obtaining a price considered to be
advantageous. The value of securities in these transactions on the delivery date may be more or less than BBFs purchase price. BBF may bear the risk of a decline in the value of the security in these transactions and may not benefit from an
appreciation in the value of the security during the commitment period.
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If deemed advisable as a matter of investment strategy, BBF may dispose of or renegotiate a
commitment after it has been entered into, and may sell securities it has committed to purchase before those securities are delivered to BBF on the settlement date. In these cases BBF may realize a taxable capital gain or loss.
When BBF engages in when-issued, delayed delivery or forward commitment transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in BBFs incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase securities, and any subsequent fluctuations in their market value, is taken into account when determining the market value of BBF
starting on the day BBF agrees to purchase the securities. BBF does not earn interest on the securities it has committed to purchase until they are paid for and delivered on the settlement date.
Other Investment Companies
BBF may invest up to 10% of its total assets in securities of other open- or closed- end investment companies that invest primarily in municipal bonds of the types in which BBF may invest directly. Under
the 1940 Act, BBF may invest up to 10% of its total assets in the aggregate in shares of other investment companies and up to 5% of its total assets in any one investment company, provided the investment does not represent more than 3% of the voting
stock of the acquired investment company at the time such shares are purchased. BBF generally expects to invest in other investment companies either during periods when it has large amounts of uninvested cash or during periods when there is a
shortage of attractive, high- yielding municipal bonds available in the market. As a shareholder in an investment company, BBF will bear its ratable share of that investment companys expenses, and would remain subject to payment of BBFs
advisory and other fees and expenses with respect to assets so invested. The Investment Advisor will take expenses into account when evaluating the investment merits of an investment in an investment company relative to available municipal bond
investments. In addition, the securities of other investment companies may be leveraged and will therefore be subject to leverage risks. The net asset value and market value of leveraged shares will be more volatile and the yield to shareholders
will tend to fluctuate more than the yield generated by unleveraged shares. Investment companies may have investment policies that differ from those of BBF. In addition, to the extent that BBF invests in other investment companies, BBF will be
dependent upon the investment and research abilities of persons other than the Investment Advisor. BBF treats its investments in such open- or closed-end investment companies as investments in municipal bonds.
Tax-Exempt Preferred Shares
BBF may invest up to 10% of its total assets in preferred interests of other investment funds that pay dividends that are exempt from
regular federal income tax. A portion of such dividends may be capital gain distributions subject to federal capital gains tax. Such funds in turn invest in municipal bonds and other assets that pay interest or make distributions that are exempt
from regular federal income tax, such as revenue bonds issued by state or local agencies to fund the development of low-income, multi-family housing. Investment in such
tax- exempt preferred shares involves many of the same issues as investing in other open- or closed- end investment companies as discussed above. These investments also have additional risks, including
liquidity risk, the absence of regulation governing investment practices, capital structure and leverage, affiliated transactions and other matters, and concentration of investments in particular issuers or industries. Revenue bonds issued by state
or local agencies to finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal bonds generally, including that the underlying properties
may not generate sufficient income to pay expenses and interest costs. Such bonds are generally non- recourse against the property owner, may be junior to the rights of others with an interest in the
properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not
generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds. BBF will treat investments in
tax-exempt preferred shares as investments in municipal bonds.
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Temporary Investments
During temporary defensive periods (e.g., times when, in the Investment Advisors opinion, temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt bond market adversely affect the price at which long-term or intermediate-term municipal bonds are available), and in order to keep cash on hand fully invested, BBF may invest up to 100% of its net assets
in liquid, short-term investments including high quality, short-term securities which may be either tax-exempt or taxable and securities of other open- or closed-end
investment companies that invest primarily in municipal bonds of the type in which BBF may invest directly. BBF intends to invest in taxable short-term investments only in the event that suitable tax-exempt
temporary investments are not available at reasonable prices and yields. BBFs investment policies provide that it will invest only in taxable temporary investments which are U.S. government securities or securities rated within the highest
grade by Moodys, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable or floating rate of interest (such short-term obligations being referred to herein as Temporary Investments).
Temporary Investments of BBF may include certificates of deposit issued by U.S. banks with assets of at least $1 billion, commercial paper or corporate notes, bonds or debentures with a remaining maturity of one year or less, or repurchase
agreements. To the extent BBF invests in Temporary Investments, BBF will 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:
(1) 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. U.S. Government Securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and
the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the discretionary authority of the U.S.
Government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. Government provides financial support to such U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. Government, its agencies and instrumentalities do not guarantee the market value of their
securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds
deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus
interest to the bearer of the certificate on the date specified thereon. Certificates of deposit purchased by BBF may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time BBF purchases securities pursuant to a repurchase
agreement, it simultaneously agrees to resell and redeliver such securities to the seller, who also simultaneously agrees to buy back the securities at a fixed price and time. This assures a predetermined yield for BBF during its holding period,
since the resale price is always greater than the purchase price and reflects an agreed-upon market rate. Such actions afford an opportunity for BBF to invest temporarily available cash. BBF may enter into repurchase agreements only with respect to
obligations of the U.S. Government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in which BBF may invest. BBF expects to enter into repurchase agreements with registered securities dealers or domestic
banks that, in the opinion of the Investment Advisor, present minimal credit risk. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to BBF is limited to the ability of the seller to
pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase agreement provides that BBF is entitled to sell the underlying collateral. If the value of the collateral declines after the agreement is
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entered into, and if the seller defaults under a repurchase agreement when the value of the underlying collateral is less than the repurchase price, BBF could incur a loss of both principal and
interest. If the seller were to be subject to a federal bankruptcy proceeding, the ability of BBF to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes are direct lending arrangements between BBF and a corporation. There is no secondary market for such notes. However, they are redeemable by BBF at any time. The Investment Advisor
will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its financial obligations, because BBFs
liquidity might be impaired if the corporation were unable to pay principal and interest on demand. BBFs investment policies provide that its investments in commercial paper will be limited to commercial paper rated in the highest categories
by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
Tax-exempt temporary investments include various obligations issued by state and local governmental issuers, such as
tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such municipal bonds maturing in three years or less from the date of issuance) and municipal
commercial paper. Short-term tax-exempt fixed income securities include, without limitation, the following:
Bond Anticipation Notes (BANs) 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. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuers access to the long-term municipal bond market and the likelihood that the
proceeds of such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes
(TANs) are issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the
issuer. A weakness in an issuers capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies could adversely affect the issuers ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or governmental bodies with the expectation that
future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of
government, could adversely affect an issuers ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to
pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for specific
projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are
notes issued by local government bodies and agencies to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs.
These notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (municipal paper) represents very short-term
unsecured, negotiable promissory notes, issued by states, municipalities and their agencies. Payment of principal and interest on issues of municipal paper may be made from various sources, to the extent the funds are available therefrom. Maturities
on municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of municipal paper.
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Certain municipal bonds may carry variable or floating rates of interest whereby the rate of
interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market indices.
While the various types of notes described above as a group represent the major portion of the
tax-exempt note market, other types of notes are available in the marketplace and BBF may invest in such other types of notes to the extent permitted under its investment objective, policies and limitations.
Such notes may be issued for different purposes and may be secured differently from those mentioned above.
Strategic Transactions and
Other Management Techniques
BBF may use a variety of other investment management techniques and instruments. BBF 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 (collectively, Strategic Transactions). These Strategic Transactions may be used for duration management and other risk management to attempt to protect against possible changes in the
market value of BBFs portfolio resulting from trends in the debt securities markets and changes in interest rates, to protect BBFs 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.
There is no particular strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition
of the portfolio. The ability of BBF to use Strategic Transactions successfully will depend on the Investment Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be
assured. Strategic Transactions subject BBF to the risk that, if the Investment Advisor incorrectly forecasts market values, interest rates or other applicable factors, BBFs performance could suffer. Certain of these Strategic Transactions,
such as investments in inverse floating rate securities and credit default swaps, may provide investment leverage to BBFs portfolio. BBF is not required to use derivatives or other portfolio strategies to seek to hedge its portfolio and may
choose not to do so.
The use of Strategic Transactions may result in losses greater than if they had not been used, may
require BBF to sell or purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation BBF can realize on an investment or may cause BBF to hold a security that it might
otherwise sell. In addition, because of the leveraged nature of the common shares, Strategic Transactions will result in a larger impact on the net asset value of the common shares than would be the case if the common shares were not leveraged.
Furthermore, BBF may only engage in Strategic Transactions from time to time and may not necessarily be engaging in hedging activities when movements in interest rates occur.
Inasmuch as any obligations of BBF that arise from the use of Strategic Transactions will be covered by segregated or earmarked liquid assets or offsetting transactions, BBF and the Investment Advisor
believe such obligations do not constitute senior securities and, accordingly, will not treat such transactions as being subject to its borrowing restrictions. Additionally, segregated or earmarked liquid assets, amounts paid by BBF as premiums and
cash or other assets held in margin accounts with respect to Strategic Transactions are not otherwise available to BBF for investment purposes.
For so long as the VRDP Shares are rated by a rating agency, BBFs use of options and certain financial futures and options thereon will be subject to such rating agencys guidelines and
limitations on such transactions. In order to maintain ratings on the VRDP Shares from one or more rating agencies, BBF may be required to limit its use of Strategic Transactions in accordance with the specified guidelines of the applicable rating
agencies.
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Certain federal income tax requirements may restrict or affect the ability of BBF to engage
in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to taxable income and have certain other consequences.
Interest Rate Transactions. BBF may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. BBF expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio as a duration management technique or to protect against any increase in the price of securities BBF anticipates purchasing at a later date. BBF will ordinarily use these
transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. BBFs investment policies provide that it will not sell interest rate caps or floors that it does not own.
Interest rate swap transactions include Municipal Market Data AAA Cash Curve swaps (MMD Swaps) or Securities
Industry and Financial Markets Association Municipal Swap Index swaps (SIFMA Swaps). In a SIFMA Swap, BBF exchanges with another party their respective commitments to pay or receive interest (e.g., an exchange of fixed rate
payments for floating rate payments linked to the SIFMA Municipal Swap Index). Because the underlying index is a tax-exempt index, SIFMA Swaps may reduce cross-market risks incurred by BBF and increase
BBFs ability to hedge effectively. SIFMA Swaps are typically quoted for the entire yield curve, beginning with a seven day floating rate index out to 30 years. The duration of a SIFMA Swap is approximately equal to the duration of a fixed-rate
municipal bond with the same attributes as the swap (e.g., coupon, maturity, call feature).
BBF may also purchase and
sell MMD Swaps, also known as MMD rate locks. An MMD Swap permits BBF to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration
management technique or to protect against any increase in the price of securities to be purchased at a later date. By using an MMD Swap, BBF can create a synthetic long or short position, allowing BBF to select the most attractive part of the yield
curve. An MMD Swap is a contract between BBF and an MMD Swap provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or
below a specified level on the expiration date of the contract. For example, if BBF buys an MMD Swap and the Municipal Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract
will make a payment to BBF equal to the specified level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, BBF
will make a payment to the counterparty equal to the actual level minus the specified level, multiplied by the notional amount of the contract.
BBFs investment policies provide that it will not enter into MMD Swaps if, as a result, more than 50% of its assets would be required to cover its potential obligations under its hedging and other
investment transactions.
In connection with investments in SIFMA and MMD Swaps, there is a risk that municipal yields will
move in the opposite direction than anticipated by BBF, which would cause BBF to make payments to its counterparty in the transaction that could adversely affect BBFs performance.
BBF has no obligation to enter into SIFMA Swaps or MMD Swaps and may elect not to do so. The net amount of the excess, if any, of
BBFs obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis, and BBF will segregate or designate on its books and records liquid assets having an aggregate net asset value at least equal to
the accrued excess.
If there is a default by the other party to an uncleared interest rate swap transaction, generally BBF
will have contractual remedies pursuant to the agreements related to the transaction. With respect to interest rate swap transactions cleared through a central clearing counterparty, a clearing organization will be substituted for the counterparty
and will guarantee the parties performance under the swap agreement. However, there can be no
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assurances that the clearing organization will satisfy its obligation to BBF or that BBF would be able to recover the full amount of assets deposited on its behalf with the clearing organization
in the event of the default by the clearing organization or BBFs clearing broker. Certain U.S. federal income tax requirements may limit BBFs ability to engage in interest rate swaps. Distributions attributable to transactions in
interest rate swaps generally will be taxable as ordinary income to shareholders.
Credit Default Swap Agreements. BBF
may enter into credit default swap agreements for hedging purposes or to seek to increase its return. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by BBF. The protection
buyer in a credit default contract may be obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the contract provided that no credit event on a reference obligation has occurred.
If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the
seller may be required to deliver the related net cash amount, if the swap is cash settled. BBF may be either the buyer or seller in the transaction. If BBF is a buyer and no credit event occurs, BBF may recover nothing if the swap is held through
its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have
significantly decreased. As a seller, BBF generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six months and three years, provided that there is no credit event. If a credit
event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As the seller, BBF would
effectively add leverage to its portfolio because, in addition to its total net assets, BBF would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if BBF had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to
illiquidity risk, counterparty risk and credit risks. BBF will enter into credit default swap agreements only with counterparties the Investment Advisor believes to be creditworthy at the time they enter into such transactions. A buyer generally
also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or
periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. BBFs obligations under a credit default swap agreement will be accrued daily (offset against any
amounts owing to BBF).
BBF will at all times segregate or designate on its books and records in connection with each such
transaction liquid assets or cash with a value at least equal to BBFs exposure (any accrued but unpaid net amounts owed by BBF to any counterparty) on a marked-to-
market basis (as calculated pursuant to requirements of the SEC). If BBF is a seller of protection in a credit default swap transaction, it will segregate or designate on its books and records in connection with such transaction liquid assets or
cash with a value at least equal to the full notional amount of the contract. Such segregation or designation will ensure that BBF has assets available to satisfy its obligations with respect to the transaction and will avoid any potential
leveraging of BBFs portfolio. Such segregation or designation will not limit BBFs exposure to loss.
Futures
Contracts and Options on Futures Contracts. BBF may also enter into contracts for the purchase or sale for future delivery (futures contracts) of debt securities, aggregates of debt securities or indices or prices thereof, other
financial indices and U.S. government debt securities or options on the above. BBF will ordinarily engage in such transactions only for bona fide hedging, risk management (including duration management) and other portfolio management purposes.
However, BBF is also permitted to enter into such transactions for non-hedging purposes to enhance income or gain, in accordance with the rules and regulations of the CFTC.
The CFTC subjects advisers to registered investment companies to regulation by the CFTC if a fund that is advised by the investment
adviser either (i) invests, directly or indirectly, more than a prescribed level of its
136
liquidation value in CFTC-regulated futures, options and swaps (CFTC Derivatives), or (ii) markets itself as providing investment exposure to such instruments. To the extent BBF
uses CFTC Derivatives, it intends to do so below such prescribed levels and will not market itself as a commodity pool or a vehicle for trading such instruments. Accordingly, The Investment Advisor has claimed an exclusion from the
definition of the term commodity pool operator under the Commodity Exchange Act (CEA) pursuant to Rule 4.5 under the CEA. The Investment Advisor is not, therefore, subject to registration or regulation as a commodity
pool operator under the CEA in respect of BBF.
Calls on Securities Indices and Futures Contracts. BBF may sell
or purchase call options (calls) on municipal bonds and indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the- counter markets. A call gives the purchaser of the option the right to buy, and obligates the seller to sell, the underlying security, futures contract or index at the exercise price at any time or
at a specified time during the option period. All such calls sold by BBF must be covered as long as the call is outstanding (i.e., BBF must own the securities or futures contract subject to the call or other securities acceptable
for applicable escrow requirements). A call sold by BBF exposes BBF during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security, index or futures contract and may require BBF
to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives BBF the right to buy a security, futures contract or index at a fixed price. Calls on futures on municipal bonds must also be covered by
deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy BBFs obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. BBF may purchase put options (puts) that relate to municipal bonds (whether or not it holds such securities in its portfolio), indices
or futures contracts. BBF may also sell puts on municipal bonds, indices or futures contracts on such securities if BBFs contingent obligations on such puts are secured by segregating or designating liquid assets on BBFs books and
records. BBFs investment policies provide that it will not sell puts if, as a result, more than 50% of BBFs assets would be required to cover its potential obligations under its hedging and other investment transactions. In selling puts,
there is a risk that BBF may be required to buy the underlying security at a price higher than the current market price.
Counterparty Credit Standards. To the extent that BBF engages in principal transactions, including, but not limited to, over-the-counter options, forward currency transactions, swap transactions, repurchase and reverse repurchase agreements and the purchase and sale of bonds and other fixed
income securities, it must rely on the creditworthiness of its counterparties under such transactions. In certain instances, the credit risk of a counterparty is increased by the lack of a central clearing house for certain transactions, including
certain swap contracts. In the event of the insolvency of a counterparty, BBF may not be able to recover its assets, in full or at all, during the insolvency process. Counterparties to investments may have no obligation to make markets in such
investments and may have the ability to apply essentially discretionary margin and credit requirements. Similarly, BBF will be subject to the risk of bankruptcy of, or the inability or refusal to perform with respect to such investments by, the
counterparties with which it deals. The Investment Advisor will seek to minimize BBFs exposure to counterparty risk by entering into such transactions with counterparties the Investment Advisor believes to be creditworthy at the time it enters
into the transaction. Certain option transactions and Strategic Transactions may require BBF to provide collateral to secure its performance obligations under a contract, which would also entail counterparty credit risk.
Short Sales
BBF may
make short sales of municipal bonds. A short sale is a transaction in which BBF sells a security it does not own in anticipation that the market price of that security will decline. BBF may make short sales to hedge positions, for duration and risk
management, in order to maintain portfolio flexibility or, to the extent applicable, to enhance income or gain. When BBF makes a short sale, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short
sale as collateral for its obligation to deliver the
137
security upon conclusion of the sale. BBF may have to pay a fee to borrow particular securities and is often obligated to pay over to the securities lender any income, distributions or dividends
received on such borrowed securities until it returns the security to the securities lender. BBFs obligation to replace the borrowed security will be secured by collateral deposited with the securities lender, usually cash, U.S. government
securities or other liquid assets. BBF will also be required to segregate or earmark similar collateral with its custodian to the extent, if any, necessary so that the aggregate collateral value is at all times at least equal to the current market
value of the security sold short. Depending on arrangements made with the securities lender regarding payment over of any income, distributions or dividends received by BBF on such security, BBF may not receive any payments (including interest) on
its collateral deposited with such securities lender. If the price of the security sold short increases between the time of the short sale and the time BBF replaces the borrowed security, BBF will incur a loss; conversely, if the price declines, BBF
will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Although BBFs gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
Restricted and Illiquid Securities
Certain of BBFs investments may be illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or lack of an established secondary trading market. The sale of
restricted and illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the-counter markets. Restricted securities may sell at a price lower than similar securities that are not subject to restrictions on resale.
Reverse Repurchase Agreements
BBF may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of
securities held by BBF with an agreement by BBF to repurchase the securities at an agreed upon price, date and interest payment. At the time BBF enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the
custodian containing, or designate on its books and records, cash and/or liquid assets having a value not less than the repurchase price (including accrued interest). If BBF establishes and maintains such a segregated account, or earmarks such
assets as described, a reverse repurchase agreement will not be considered a senior security under the 1940 Act and therefore will not be considered a borrowing by BBF; however, under certain circumstances in which BBF does not establish and
maintain such segregated account, or earmark such assets on its books and records, such reverse repurchase agreement will be considered a borrowing for the purpose of BBFs limitation on borrowings. The use by BBF of reverse repurchase
agreements involves many of the same risks of leverage since the proceeds derived from such reverse repurchase agreements may be invested in additional securities. BBFs use of leverage through reverse repurchase agreements will be subject to
BBFs policy with respect to the use of leverage. Reverse repurchase agreements involve the risk that the market value of the securities acquired in connection with the reverse repurchase agreement may decline below the price of the securities
BBF has sold but is obligated to repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by BBF in connection with the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its
trustee or receiver may receive an extension of time to determine whether to enforce BBFs obligation to repurchase the securities and BBFs use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such
decision. Also, BBF would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the securities subject to such agreement.
BBF also may effect simultaneous purchase and sale transactions that are known as sale-buybacks. A sale-buyback is similar to
a reverse repurchase agreement, except that in a sale-buyback, the counterparty that purchases the security is entitled to receive any principal or interest payments made on the underlying security pending settlement of BBFs repurchase of the
underlying security.
138
Borrowings
BBF reserves the right to borrow funds to the extent permitted as described under the below caption Investment Restrictions. The proceeds of borrowings may be used for any valid purpose
including, without limitation, liquidity, investments and repurchases of shares of BBF. Borrowing is a form of leverage and, in that respect, entails risks comparable to those associated with the issuance of Preferred Shares.
Lending of Securities
See The Acquiring Funds InvestmentsLending of Securities for a discussion of the securities lending arrangements
applicable to BBF.
139
INFORMATION ABOUT THE COMMON SHARES OF THE FUNDS
General
Common shareholders of each Fund are entitled to share pro rata in dividends declared by such Funds Board as payable to holders of the Funds common shares and in the net assets of the Fund
available for distribution to holders of the common shares. Common shareholders do not have preemptive or conversion rights and each Funds common shares are not redeemable. Voting rights are identical for the common shareholders of each Fund.
Common shareholders of each Fund are entitled to one vote for each Share held by them and do not have any preemptive or preferential right to purchase or subscribe to any Shares of such Fund. Each Funds common shares do not have cumulative
voting rights, which means that the holders of more than 50% of a Funds common shares voting for the election of Board Members can elect all of the Board Members standing for election by such holders, and, in such event, the holders of the
Funds remaining common shares will not be able to elect any Board Members. The outstanding BSD, MFT and BBF and Acquiring Fund common shares are fully paid and non-assessable, except that the Board of
each Fund has the power to cause common shareholders to pay certain expenses of the applicable Fund by setting off charges due from common shareholders from declared but unpaid dividends or distributions owed the common shareholders and/or by
reducing the number of common shares owned by each respective common shareholder. Whenever preferred shares, including VMTP Shares or VRDP Shares, as applicable, are outstanding, a Fund may not declare a dividend or distribution to common
shareholders (other than a distribution in common shares of the Fund) or purchase its common shares unless all accumulated dividends on preferred shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to preferred
shares at the time of declaration of such dividend or distribution or at the time of such purchase would be at least 200% after giving effect to the dividend or distribution or purchase price.
Purchase and Sale of Common Shares
Purchase and sale procedures for the common shares of each of the Funds are identical. Each Fund has its common shares listed on the NYSE. Investors typically purchase and sell common shares of the Funds
through a registered broker-dealer on the NYSE, thereby incurring a brokerage commission set by the broker-dealer. Alternatively, investors may purchase or sell common shares of each of the Funds through privately negotiated transactions with
existing common shareholders. Set forth below is information about each Funds common shares as of October 16, 2020.
|
|
|
|
|
|
|
|
|
Fund
|
|
Title of Class
|
|
Amount
Authorized
|
|
Amount Held by Fund
for its Own
Account
|
|
Amount Outstanding
Exclusive of Amount
Shown in Previous
Column
|
BSD
|
|
Common Shares
|
|
Unlimited
|
|
0
|
|
7,308,173
|
MFT
|
|
Common Shares
|
|
Unlimited
|
|
0
|
|
8,478,719
|
BBF
|
|
Common Shares
|
|
Unlimited
|
|
0
|
|
10,232,375
|
Acquiring Fund (BLE)
|
|
Common Shares
|
|
Unlimited
|
|
0
|
|
23,558,032
|
Common Share Price Data
The following tables set forth the high and low market prices for common shares of each Fund on the NYSE for each full quarterly period
within each Funds two most recent fiscal years and each full quarter since the beginning of each Funds current fiscal year, along with the NAV and discount or premium to NAV for each quotation.
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BSD
|
|
Market Price
|
|
|
NAV
|
|
|
|
|
|
Premium/(Discount) to NAV
|
|
Period Ended
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
7/31/2020
|
|
$
|
14.09
|
|
|
$
|
12.18
|
|
|
$
|
14.47
|
|
|
$
|
13.27
|
|
|
|
|
|
|
|
(2.7)%
|
|
|
|
(8.2)%
|
|
|
|
|
|
|
|
|
|
4/30/2020
|
|
$
|
15.24
|
|
|
$
|
10.33
|
|
|
$
|
15.15
|
|
|
$
|
13.22
|
|
|
|
|
|
|
|
0.6%
|
|
|
|
(21.8)%
|
|
|
|
|
|
|
|
|
|
1/31/2020
|
|
$
|
14.43
|
|
|
$
|
14.01
|
|
|
$
|
14.87
|
|
|
$
|
14.51
|
|
|
|
|
|
|
|
(2.9)%
|
|
|
|
(3.4)%
|
|
|
|
|
|
|
|
|
|
10/31/2019
|
|
$
|
14.98
|
|
|
$
|
12.76
|
|
|
$
|
14.64
|
|
|
$
|
14.55
|
|
|
|
|
|
|
|
2.4%
|
|
|
|
(12.3)%
|
|
|
|
|
|
|
|
|
|
7/31/2019
|
|
$
|
14.41
|
|
|
$
|
13.24
|
|
|
$
|
14.44
|
|
|
$
|
14.20
|
|
|
|
|
|
|
|
(0.2)%
|
|
|
|
(6.7)%
|
|
|
|
|
|
|
|
|
|
4/30/2019
|
|
$
|
13.50
|
|
|
$
|
12.63
|
|
|
$
|
14.09
|
|
|
$
|
13.81
|
|
|
|
|
|
|
|
(4.1)%
|
|
|
|
(8.5)%
|
|
|
|
|
|
|
|
|
|
1/31/2019
|
|
$
|
12.67
|
|
|
$
|
11.64
|
|
|
$
|
13.79
|
|
|
$
|
13.54
|
|
|
|
|
|
|
|
(8.1)%
|
|
|
|
(14.0)%
|
|
|
|
|
|
|
|
|
|
10/31/2018
|
|
$
|
12.67
|
|
|
$
|
11.61
|
|
|
$
|
14.05
|
|
|
$
|
13.58
|
|
|
|
|
|
|
|
(9.8)%
|
|
|
|
(14.5)%
|
|
|
|
|
|
|
|
|
|
7/31/2018
|
|
$
|
12.74
|
|
|
$
|
12.47
|
|
|
$
|
14.06
|
|
|
$
|
13.96
|
|
|
|
|
|
|
|
(9.4)%
|
|
|
|
(10.7)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MFT
|
|
Market Price
|
|
|
NAV
|
|
|
|
|
|
Premium/(Discount) to NAV
|
|
Period Ended
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
7/31/2020
|
|
$
|
13.97
|
|
|
$
|
11.83
|
|
|
$
|
14.37
|
|
|
$
|
13.33
|
|
|
|
|
|
|
|
(2.8)%
|
|
|
|
(11.3)%
|
|
|
|
|
|
|
|
|
|
4/30/2020
|
|
$
|
14.55
|
|
|
$
|
10.10
|
|
|
$
|
14.79
|
|
|
$
|
13.10
|
|
|
|
|
|
|
|
(1.6)%
|
|
|
|
(22.9)%
|
|
|
|
|
|
|
|
|
|
1/31/2020
|
|
$
|
13.96
|
|
|
$
|
13.05
|
|
|
$
|
14.64
|
|
|
$
|
14.27
|
|
|
|
|
|
|
|
(4.6)%
|
|
|
|
(8.5)%
|
|
|
|
|
|
|
|
|
|
10/31/2019
|
|
$
|
13.90
|
|
|
$
|
11.73
|
|
|
$
|
14.51
|
|
|
$
|
14.37
|
|
|
|
|
|
|
|
(4.2)%
|
|
|
|
(18.4)%
|
|
|
|
|
|
|
|
|
|
7/31/2019
|
|
$
|
14.39
|
|
|
$
|
13.40
|
|
|
$
|
14.19
|
|
|
$
|
14.21
|
|
|
|
|
|
|
|
1.4%
|
|
|
|
(5.7)%
|
|
|
|
|
|
|
|
|
|
4/30/2019
|
|
$
|
13.36
|
|
|
$
|
12.94
|
|
|
$
|
13.96
|
|
|
$
|
13.75
|
|
|
|
|
|
|
|
(4.3)%
|
|
|
|
(5.9)%
|
|
|
|
|
|
|
|
|
|
1/31/2019
|
|
$
|
13.10
|
|
|
$
|
11.84
|
|
|
$
|
13.67
|
|
|
$
|
13.43
|
|
|
|
|
|
|
|
(4.1)%
|
|
|
|
(11.8)%
|
|
|
|
|
|
|
|
|
|
10/31/2018
|
|
$
|
13.12
|
|
|
$
|
11.92
|
|
|
$
|
13.89
|
|
|
$
|
13.47
|
|
|
|
|
|
|
|
(5.6)%
|
|
|
|
(11.5)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBF
|
|
Market Price
|
|
|
NAV
|
|
|
|
|
|
Premium/(Discount) to NAV
|
|
Period Ended
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
7/31/2020
|
|
$
|
13.32
|
|
|
$
|
11.48
|
|
|
$
|
14.14
|
|
|
$
|
12.75
|
|
|
|
|
|
|
|
(5.8)%
|
|
|
|
(10.0)%
|
|
|
|
|
|
|
|
|
|
4/30/2020
|
|
$
|
14.30
|
|
|
$
|
9.89
|
|
|
$
|
14.82
|
|
|
$
|
11.54
|
|
|
|
|
|
|
|
(3.5)%
|
|
|
|
(14.3)%
|
|
|
|
|
|
|
|
|
|
1/31/2020
|
|
$
|
14.23
|
|
|
$
|
13.39
|
|
|
$
|
14.18
|
|
|
$
|
14.21
|
|
|
|
|
|
|
|
0.3%
|
|
|
|
(5.8)%
|
|
|
|
|
|
|
|
|
|
10/31/2019
|
|
$
|
14.49
|
|
|
$
|
13.20
|
|
|
$
|
14.22
|
|
|
$
|
14.25
|
|
|
|
|
|
|
|
1.9%
|
|
|
|
(7.4)%
|
|
|
|
|
|
|
|
|
|
7/31/2019
|
|
$
|
14.61
|
|
|
$
|
13.76
|
|
|
$
|
14.07
|
|
|
$
|
13.89
|
|
|
|
|
|
|
|
3.8%
|
|
|
|
(0.9)%
|
|
|
|
|
|
|
|
|
|
4/30/2019
|
|
$
|
13.89
|
|
|
$
|
12.84
|
|
|
$
|
13.86
|
|
|
$
|
13.59
|
|
|
|
|
|
|
|
0.2%
|
|
|
|
(5.5)%
|
|
|
|
|
|
|
|
|
|
1/31/2019
|
|
$
|
12.88
|
|
|
$
|
11.94
|
|
|
$
|
13.55
|
|
|
$
|
13.54
|
|
|
|
|
|
|
|
(5.0)%
|
|
|
|
(11.8)%
|
|
|
|
|
|
|
|
|
|
10/31/2018
|
|
$
|
14.06
|
|
|
$
|
12.02
|
|
|
$
|
13.79
|
|
|
$
|
13.43
|
|
|
|
|
|
|
|
2.0%
|
|
|
|
(10.5)%
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquiring Fund (BLE)
|
|
Market Price
|
|
|
NAV
|
|
|
|
|
|
Premium/(Discount) to NAV
|
|
Period Ended
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
8/31/2020
|
|
$
|
15.78
|
|
|
$
|
14.15
|
|
|
$
|
15.02
|
|
|
$
|
14.15
|
|
|
|
|
|
|
|
5.1%
|
|
|
|
0.0%
|
|
|
|
|
|
|
|
|
|
5/31/2020
|
|
$
|
15.41
|
|
|
$
|
10.40
|
|
|
$
|
15.48
|
|
|
$
|
13.71
|
|
|
|
|
|
|
|
(0.5)%
|
|
|
|
(24.1)%
|
|
|
|
|
|
|
|
|
|
2/29/2020
|
|
$
|
16.12
|
|
|
$
|
14.78
|
|
|
$
|
15.22
|
|
|
$
|
15.54
|
|
|
|
|
|
|
|
5.9%
|
|
|
|
(4.9)%
|
|
|
|
|
|
|
|
|
|
11/30/2019
|
|
$
|
15.47
|
|
|
$
|
13.17
|
|
|
$
|
15.08
|
|
|
$
|
14.99
|
|
|
|
|
|
|
|
2.6%
|
|
|
|
(12.1)%
|
|
|
|
|
|
|
|
|
|
8/31/2019
|
|
$
|
15.62
|
|
|
$
|
14.26
|
|
|
$
|
15.12
|
|
|
$
|
14.86
|
|
|
|
|
|
|
|
3.3%
|
|
|
|
(4.0)%
|
|
|
|
|
|
|
|
|
|
5/31/2019
|
|
$
|
14.93
|
|
|
$
|
13.98
|
|
|
$
|
14.61
|
|
|
$
|
14.65
|
|
|
|
|
|
|
|
2.2%
|
|
|
|
(4.6)%
|
|
|
|
|
|
|
|
|
|
2/28/2019
|
|
$
|
14.10
|
|
|
$
|
12.55
|
|
|
$
|
14.31
|
|
|
$
|
14.32
|
|
|
|
|
|
|
|
(1.4)%
|
|
|
|
(12.4)%
|
|
|
|
|
|
|
|
|
|
11/30/2018
|
|
$
|
13.78
|
|
|
$
|
12.46
|
|
|
$
|
14.56
|
|
|
$
|
14.18
|
|
|
|
|
|
|
|
(5.4)%
|
|
|
|
(12.1)%
|
|
For the periods shown in the tables above, the common shares of each Fund have traded at both a premium
and a discount.
The table below sets forth the market price, NAV, and the premium/discount to NAV of each Fund as of
August 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund
|
|
Market
Price
|
|
|
NAV
|
|
|
Premium/
(Discount)
to NAV
|
|
BSD
|
|
$
|
13.48
|
|
|
$
|
14.30
|
|
|
|
(5.73
|
)%
|
MFT
|
|
$
|
13.73
|
|
|
$
|
14.14
|
|
|
|
(2.90
|
)%
|
BBF
|
|
$
|
13.02
|
|
|
$
|
13.97
|
|
|
|
(6.80
|
)%
|
Acquiring Fund (BLE)
|
|
$
|
14.83
|
|
|
$
|
14.79
|
|
|
|
0.27
|
%
|
To the extent BSDs, MFTs or BBFs common shares are trading at a wider discount (or a
narrower premium) than the Acquiring Fund at the time of its Reorganization, BSDs, MFTs or BBFs common shareholders would have the potential for an economic benefit by the narrowing of the discount or widening of the premium. To
the extent BSDs, MFTs or BBFs common shares are trading at a narrower discount (or wider premium) than the Acquiring Fund at the time of its Reorganization, BSDs, MFTs or BBFs common shareholders may be negatively
impacted if its Reorganization is consummated. Acquiring Fund common shareholders would only benefit from a premium/discount perspective to the extent the post-Reorganization discount (or premium) of the Acquiring Fund common shares improves.
There can be no assurance that, after the Reorganizations, common shares of the Combined Fund will trade at, above or below
NAV. Upon consummation of the Reorganizations, the Combined Fund common shares may trade at a price that is less than the current market price of Acquiring Fund common shares. In the Reorganizations, common shareholders of BSD, MFT and BBF will
receive Acquiring Fund common shares based on the relative NAVs (not the market values) of the respective Funds common shares. The market value of the common shares of the Combined Fund may be less than the market value of the common shares of
a Fund prior to the Reorganizations.
Common Share Dividend History
During the two most recent fiscal years, each Fund has made monthly cash distributions to holders of the Funds common shares and the
aggregate amount of distributions declared during this period by the Acquiring Fund, BSD, MFT and BBF was $32,904,488, $9,858,759, $11,131,146 and
$13,450,326 per common share,
142
respectively. Whenever preferred shares, including VRDP Shares, are outstanding, a Fund may not declare a dividend or distribution to common shareholders (other than a distribution in common
shares of the Fund) or purchase its common shares unless all accumulated dividends on preferred shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to preferred shares at the time of declaration of such
dividend or distribution or at the time of such purchase would be at least 200% after giving effect to the dividend or distribution or purchase price.
Record Holders of Common Shares
As of
October 16, 2020, each Fund had the following number of common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title of Class
|
|
Number of
BSD
Record Holders
|
|
|
Number of
MFT
Record Holders
|
|
|
Number of
BBF
Record Holders
|
|
|
Number of
BLE
Record Holders
|
|
Common Stock
|
|
|
7,308,173
|
|
|
|
8,478,719
|
|
|
|
10,232,375
|
|
|
|
23,558,032
|
|
143
EXPENSE TABLE FOR COMMON SHAREHOLDERS
The purpose of the comparative fee table below is to assist shareholders of each Fund in understanding the various costs and expenses of
investing in common shares of each Fund and Combined Fund. The information in the table reflects (i) the fees and expenses incurred by BSD during the 12-month period ended April 30, 2020 (audited),
the fees and expenses incurred by each of MFT and BBF for the 12-month period ended July 31, 2020 (audited), and the fees and expenses incurred by the Acquiring Fund for the
12-month period ended August 31, 2020 (audited); (ii) the pro forma expenses for the 12-month period ended August 31, 2020 assuming only the
Reorganization of BSD into the Acquiring Fund has taken place on September 1, 2019, which represents the combination of completed Reorganizations presented in this Proxy Statement that would result in the highest Total Expense Ratio for the
Combined Fund; and (iii) the pro forma expenses for the 12-month period ended August 31, 2020, for the Combined Fund, assuming all of the Reorganizations had taken place on September 1,
2019, which represents, in the Investment Advisors view, the most likely combination of the Reorganizations and the combination of completed Reorganizations that would result in the lowest Total Expense Ratio for the Combined Fund.
The level of expense savings (or increases) will vary depending upon the combination of the Funds in the Reorganizations and the
resulting size of the Combined Fund, and furthermore, there can be no assurance that future expenses will not increase or that any expense savings for any Fund will be realized. Because each of the Reorganizations may occur whether or not the other
Reorganization is approved, several combinations are possible, and the pro forma effects on operating expenses for all possible combinations are not illustrated in the table below. The scenarios presented below, however, capture the high and
low range of possible pro forma outcomes for the Reorganizations presented in this Proxy Statement.
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BSD
|
|
|
MFT
|
|
|
BBF
|
|
|
Acquiring
Fund
(BLE)
|
|
|
Combined
Fund
(BSD
into
BLE
|
|
|
Combined
Fund
(BSD,
MFT and
BBF
into
BLE)
|
|
Shareholder Transaction Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Sales Load (as a percentage of the offering price) imposed on purchases of common shares(1)
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Dividend Reinvestment Plan Fees(2)
|
|
|
$0.02 per
share for
open
market
purchases
of
common
shares
|
|
|
|
$0.02 per
share for
open
market
purchases
of
common
shares
|
|
|
|
$0.02 per
share for
open
market
purchases
of
common
shares
|
|
|
|
$0.02 per
share for
open
market
purchases
of
common
shares
|
|
|
|
$0.02 per
share for
open
market
purchases
of
common
shares
|
|
|
|
$0.02 per
share for
open
market
purchases
of
common
shares
|
|
Annual Total Expenses (as a percentage of average net assets attributable to common shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Management Fees(3)(4)
|
|
|
0.99%
|
|
|
|
0.85%
|
|
|
|
0.93%
|
|
|
|
0.90%
|
|
|
|
0.90%
|
|
|
|
0.90%
|
|
Other Expenses(5)
|
|
|
0.22%
|
|
|
|
0.22%
|
|
|
|
0.20%
|
|
|
|
0.12%
|
|
|
|
0.07%
|
|
|
|
0.06%
|
|
Interest Expense(6)
|
|
|
1.39%
|
|
|
|
1.23%
|
|
|
|
1.06%
|
|
|
|
1.01%
|
|
|
|
1.01%
|
|
|
|
1.01%
|
|
Total Annual Fund Operating Expenses(5)(6)
|
|
|
2.60%
|
|
|
|
2.30%
|
|
|
|
2.19%
|
|
|
|
2.03%
|
|
|
|
1.98%
|
|
|
|
1.97%
|
|
Fee Waivers and/or Expense Reimbursements(4)
|
|
|
|
|
|
|
|
|
|
|
(0.01)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Annual Fund Operating Expenses After Fee Waivers and/or Expense Reimbursements
|
|
|
2.60%
|
|
|
|
2.30%
|
|
|
|
2.18%
|
|
|
|
2.03%
|
|
|
|
1.98%
|
|
|
|
1.97%
|
|
(1)
|
No sales load will be charged in connection with the issuance of Acquiring Fund common shares as part of the Reorganizations. Common shares are not
available for purchase from the Funds but may be purchased on the NYSE through a broker-dealer subject to individually negotiated commission rates. Common shares purchased in the secondary market may be subject to brokerage commissions or other
charges.
|
(2)
|
The Reinvestment Plan Agents fees for the handling of the reinvestment of distributions will be paid by the Fund. However, each
participant will pay a $0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend. 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. For BSD, BBF and the Acquiring Fund, participants that request a sale of shares are subject to a $2.50 sales fee and a $0.15 per share sold brokerage commission fee.
For MFT, participants that request a sale of shares are subject to a $0.02 per share brokerage commission fee. See Automatic Dividend Reinvestment Plan for additional information.
|
(3)
|
BSD currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.60% of its average weekly managed
assets. BBF currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.57% of its average weekly managed assets. The Acquiring Fund currently pays the Investment Advisor a monthly fee at an
annual contractual investment management fee rate of 0.55% of its average weekly managed assets. For purposes of calculating these fees, managed assets means the total assets of the relevant Fund (including any assets attributable to
money borrowed) minus the sum of its accrued liabilities (other than money borrowed for investment purposes, including liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares or VRDP Shares, as
applicable). MFT currently pays the
|
145
|
Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.50% of its average daily net assets. For purposes of calculating these fees, net assets
mean the total assets of MFT minus the sum of its accrued liabilities (which does not include liabilities represented by TOB Trusts and the liquidation preference of any outstanding preferred shares). It is understood that the liquidation preference
of any outstanding preferred shares (other than accumulated dividends) and TOB Trusts is not considered a liability in determining MFTs NAV. If the Reorganizations are consummated, the annual contractual investment management fee rate of the
Acquiring Fund will be the annual contractual investment management fee rate of the Combined Fund, which will be 0.55% of the average weekly managed assets of the Combined Fund. The annual contractual investment management fee rate of the Combined
Fund represents a two basis point reduction in the annual contractual investment management fee rate for BBF, a five basis point reduction in the annual contractual investment management fee rate for BSD and a five basis point increase in the annual
contractual investment management fee rate for MFT.
|
(4)
|
Each Fund and the Investment Advisor have entered into the Fee Waiver Agreement, pursuant to which the Investment Advisor
has contractually agreed to waive the management fee with respect to any portion of each Funds assets attributable to investments in any equity and fixed-income mutual funds and exchange-traded funds managed by the Investment Advisor or its
affiliates that have a contractual fee, through June 30, 2022. In addition, pursuant to the Fee Waiver Agreement, the Investment Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees each Fund
pays to the Investment Advisor indirectly through its investment in money market funds managed by the Investment Advisor or its affiliates, through June 30, 2022. The Fee Waiver Agreement may be terminated at any time, without the payment of
any penalty, only by the Funds (upon the vote of a majority of the Independent Board Members or a majority of the outstanding voting securities of each Fund), upon 90 days written notice by each Fund to the Investment Advisor.
|
(5)
|
Includes Reorganization-related expenses accrued during the applicable period for each Target Fund, other than BSD, and the Acquiring Fund. The
Total Annual Fund Operating Expenses After Fee Waivers and/or Expense Reimbursements (excluding interest expense and, if applicable, Reorganization-related expenses) for the Funds are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
BSD
|
|
MFT
|
|
BBF
|
|
Acquiring
Fund
(BLE)
|
|
Pro
forma
Combined Fund
(BSD into BLE)
|
|
Pro
forma
Combined Fund
(BSD, MFT
and
BBF into BLE)
|
1.21%
|
|
1.03%
|
|
1.09%
|
|
1.01%
|
|
0.97%
|
|
0.96%
|
(6)
|
The total expense table includes interest expense associated with the Funds investments in TOBs (also known as inverse floaters).
Although such interest expense is actually paid by special purpose vehicles in which the Funds invest, they are recorded on the Funds financial statements for accounting purposes. The total expense table also includes, in interest expense,
dividends associated with the VMTP Shares and VRDP Shares, as applicable, because the VMTP Shares and VRDP Shares, as applicable, are considered debt of the Funds for financial reporting purposes.
|
Each Fund uses leverage to seek to enhance its returns to common shareholders. This leverage generally takes two forms: the issuance of
preferred shares and investment in TOBs. Both forms of leverage benefit common shareholders if the cost of the leverage is lower than the returns earned by a Fund when it invests the proceeds from the leverage. In order to help you better understand
the costs associated with the Funds leverage strategy, the Total Annual Fund Operating Expenses After Fee Waivers and/or Expense Reimbursements (excluding interest expense) for the Funds are presented below:
|
|
|
|
|
|
|
|
|
|
|
BSD
|
|
MFT
|
|
BBF
|
|
Acquiring
Fund
(BLE)
|
|
Pro
forma
Combined Fund
(BSD into BLE)
|
|
Pro
forma
Combined Fund
(BSD, MFT
and
BBF into BLE)
|
1.21%
|
|
1.07%
|
|
1.12%
|
|
1.02%
|
|
0.97%
|
|
0.96%
|
The following example is intended to help you compare the costs of investing in the common
shares of the Combined Fund pro forma if (i) only the BSD Reorganization is completed and (ii) all of the Reorganizations are completed with the costs of investing in BSD, MFT, BBF and the Acquiring Fund without the Reorganizations.
An investor in common shares would pay the following expenses on a $1,000 investment, assuming (1) the
146
Total Annual Fund Operating Expenses for each Fund set forth in the total expenses table above and (2) a 5% annual return throughout the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
BSD
|
|
$
|
26
|
|
|
$
|
81
|
|
|
$
|
138
|
|
|
$
|
293
|
|
MFT
|
|
$
|
23
|
|
|
$
|
72
|
|
|
$
|
123
|
|
|
$
|
264
|
|
BBF
|
|
$
|
22
|
|
|
$
|
68
|
|
|
$
|
117
|
|
|
$
|
252
|
|
Acquiring Fund (BLE)
|
|
$
|
21
|
|
|
$
|
64
|
|
|
$
|
109
|
|
|
$
|
236
|
|
Pro forma Combined Fund (BSD into BLE)
|
|
$
|
20
|
|
|
$
|
62
|
|
|
$
|
107
|
|
|
$
|
231
|
|
Pro forma Combined Fund (BSD, MFT and BBF into BLE)
|
|
$
|
20
|
|
|
$
|
62
|
|
|
$
|
106
|
|
|
$
|
230
|
|
The examples set forth above assume common shares of each Fund were owned as of the completion of
the Reorganizations and the reinvestment of all dividends and distributions and uses a 5% annual rate of return as mandated by SEC regulations. The examples should not be considered a representation of past or future expenses or annual rates of
return. Actual expenses or annual rates of return may be more or less than those assumed for purposes of the examples.
Common
shareholders of each Fund will indirectly bear the costs of the Reorganizations. Because of the expected expense savings and other anticipated benefits for BSD and BBF, the Investment Advisor recommended and the Board of each such Fund has approved
that its respective Fund be responsible for its own reorganization expenses. The expenses of the Reorganizations of BSD and BBF into the Acquiring Fund are estimated to be approximately $209,600 and $281,100, respectively. For BBF, the costs of its
Reorganization include estimated VRDP Refinancing costs of $65,000, which are expected to be amortized over one year by the Combined Fund. For MFT and the Acquiring Fund, the expenses of the applicable Reorganizations are estimated to be
approximately, $209,700 and $303,800, respectively, of which the Investment Advisor will bear approximately $35,000 and $241,000, respectively. The actual costs associated with the Reorganizations may be more or less than the estimated costs
discussed herein.
VMTP Holders and VRDP Holders, as applicable, are not expected to bear any costs of the Reorganizations.
147
CAPITALIZATION TABLE
The Board of each Fund may authorize separate classes of shares together with such designation of preferences, rights, voting powers,
restrictions, limitations, qualifications or terms as may be determined from time to time by the Board of such Fund. The tables below set forth (i) the capitalization of BSD and BLE as of August 31, 2020 and the pro forma
capitalization of the Combined Fund assuming only the BSD Reorganization was consummated as of August 31, 2020, which represents the combination of the completed Reorganizations presented in this Proxy Statement that would result in the highest
Total Expense Ratio; and (ii) the capitalization of the Funds as of August 31, 2020 and the pro forma capitalization of the Combined Fund assuming all of the Reorganizations were consummated as of August 31, 2020, which
represents, in the Investment Advisors view, the most likely combination of the Reorganizations and the combination of the completed Reorganizations that would result in the highest level of capitalization of the Combined Fund.
Capitalization of BSD and BLE as of August 31, 2020 and pro forma capitalization of the Combined Fund
assuming only the BSD Reorganization is consummated (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Fund
(BSD)
|
|
|
Acquiring Fund
(BLE)
|
|
|
Adjustments
|
|
|
Pro forma
Combined
Fund (BSD
into BLE)
|
|
Net Assets Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares(1)
|
|
$
|
104,474,299
|
|
|
$
|
348,329,407
|
|
|
$
|
(1,961,171
|
)(2)
|
|
$
|
450,842,535
|
|
VMTP Shares
|
|
$
|
42,900,000
|
|
|
$
|
151,300,000
|
|
|
|
|
|
|
$
|
194,200,000
|
|
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
7,308,173
|
|
|
|
23,552,797
|
|
|
|
(239,145
|
)(3)
|
|
|
30,621,825
|
|
VMTP Shares
|
|
|
429
|
|
|
|
1,513
|
|
|
|
|
|
|
|
1,942
|
|
NAV per Common Share
|
|
$
|
14.30
|
|
|
$
|
14.79
|
|
|
|
|
|
|
$
|
14.72
|
|
Liquidation Preference per VMTP Share
|
|
$
|
100,000.00
|
|
|
$
|
100,000.00
|
|
|
|
|
|
|
$
|
100,000.00
|
|
(1)
|
Based on the number of outstanding common shares as of August 31, 2020.
|
(2)
|
Reflects non-recurring aggregate estimated Reorganization expenses of $272,400, of which $209,600 was
attributable to BSD and $62,800 was attributable to the Acquiring Fund. The actual costs associated with the Reorganizations may be more or less than the estimated costs discussed herein. Reflects undistributed net investment income (previously
defined as UNII) of $1,688,771, of which $188,010 was attributable to BSD and $1,500,761 was attributable to the Acquiring Fund.
|
(3)
|
Reflects adjustments due to differences in per common share NAV.
|
148
Capitalization of each Fund as of August 31, 2020 and pro forma
capitalization of the Combined Fund assuming all Reorganizations are consummated (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BSD
|
|
|
MFT
|
|
|
BBF
|
|
|
Acquiring
Fund
(BLE)
|
|
|
Adjustments
|
|
|
Pro forma
Combined
Fund (BSD,
MFT
and BBF
into BLE)
|
|
Net Assets Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares(1)
|
|
$
|
104,474,299
|
|
|
$
|
119,923,764
|
|
|
$
|
142,895,209
|
|
|
$
|
348,329,407
|
|
|
$
|
(2,857,979
|
)(2)
|
|
$
|
712,764,700
|
|
VMTP/VRDP Shares
|
|
|
42,900,000
|
|
|
$
|
56,500,000
|
|
|
$
|
52,000,000
|
|
|
$
|
151,300,000
|
|
|
|
|
|
|
$
|
302,700,000
|
|
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
7,308,173
|
|
|
|
8,478,719
|
|
|
|
10,232,375
|
|
|
|
23,552,797
|
|
|
|
(1,160,139
|
)(3)
|
|
|
48,411,925
|
|
VMTP/VRDP Shares
|
|
|
429
|
|
|
|
565
|
|
|
|
520
|
|
|
|
1,513
|
|
|
|
|
|
|
|
3,027
|
|
NAV per Common Share
|
|
$
|
14.30
|
|
|
$
|
14.14
|
|
|
$
|
13.97
|
|
|
$
|
14.79
|
|
|
|
|
|
|
$
|
14.72
|
|
Liquidation Preference per VMTP/VRDP Share
|
|
$
|
100,000.00
|
|
|
$
|
100,000.00
|
|
|
$
|
100,000.00
|
|
|
$
|
100,000.00
|
|
|
|
|
|
|
$
|
100,000.00
|
|
(1)
|
Based on the number of outstanding common shares as of August 31, 2020.
|
(2)
|
Reflects non-recurring aggregate estimated Reorganization expenses of $728,200, of which $216,100 was
attributable to BBF, $209,600 was attributable to BSD, $174,700 attributable to MFT and $62,800 was attributable to the Acquiring Fund. The actual costs associated with the Reorganizations may be more or less than the estimated costs discussed
herein. Additionally, for BBF, the costs of the VRDP Refinancing are estimated to be $65,000. These costs will be amortized over the life of the VMTP Shares by the Combined Fund. Reflects UNII of $2,129,779, of which $188,010 was attributable to
BSD, $441,008 was attributable to MFT and $1,500,761 was attributable to the Acquiring Fund.
|
(3)
|
Reflects adjustments due to differences in per common share NAV.
|
(4)
|
Assumes no MFT VMTP Holders exercise their appraisal rights, if available.
|
149
FINANCIAL HIGHLIGHTS
The BlackRock Strategic Municipal Trust (BSD)
The Financial Highlights table is intended to help you understand BSDs financial performance for the periods shown. Certain information reflects the financial results for a single common share of
BSD. The total returns in the table represent the rate an investor would have earned or lost on an investment in BSD (assuming reinvestment of all dividends and/or distributions, if applicable). The information shown has been audited by
Deloitte & Touche LLP, BSDs independent registered public accounting firm. Financial statements for the fiscal year ended April 30, 2020 and the Report of the Independent Registered Public Accounting Firm thereon appear in
BSDs Annual Report for the fiscal year ended April 30, 2020, which is available upon request.
Please see next
page for Financial Highlights Table
150
BSD Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net asset value, beginning of year
|
|
$
|
14.15
|
|
|
$
|
13.96
|
|
|
$
|
14.21
|
|
|
$
|
15.04
|
|
|
$
|
14.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(a)
|
|
|
0.66
|
|
|
|
0.68
|
|
|
|
0.72
|
|
|
|
0.78
|
|
|
|
0.82
|
|
Net realized and unrealized gain (loss)
|
|
|
(1.21
|
)
|
|
|
0.20
|
|
|
|
(0.20
|
)
|
|
|
(0.82
|
)
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
(0.55
|
)
|
|
|
0.88
|
|
|
|
0.52
|
|
|
|
(0.04
|
)
|
|
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Shareholders from net investment income(b)
|
|
|
(0.66
|
)
|
|
|
(0.69
|
)
|
|
|
(0.77
|
)
|
|
|
(0.79
|
)
|
|
|
(0.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
12.94
|
|
|
$
|
14.15
|
|
|
$
|
13.96
|
|
|
$
|
14.21
|
|
|
$
|
15.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of year
|
|
$
|
12.17
|
|
|
$
|
13.21
|
|
|
$
|
12.65
|
|
|
$
|
13.67
|
|
|
$
|
15.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Applicable to Common Shareholders(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
(4.10
|
)%
|
|
|
6.99
|
%
|
|
|
3.89
|
%
|
|
|
(0.19
|
)%
|
|
|
8.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
(3.38
|
)%
|
|
|
10.23
|
%
|
|
|
(2.15
|
)%
|
|
|
(3.85
|
)%
|
|
|
14.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2.60
|
%
|
|
|
2.81
|
%
|
|
|
2.46
|
%
|
|
|
2.08
|
%
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and paid indirectly
|
|
|
2.60
|
%
|
|
|
2.81
|
%
|
|
|
2.46
|
%
|
|
|
2.08
|
%
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and paid indirectly and excluding interest expense and fees, and amortization
of offering costs(d)
|
|
|
1.21
|
%
|
|
|
1.19
|
%
|
|
|
1.20
|
%
|
|
|
1.15
|
%
|
|
|
1.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income to Common Shareholders
|
|
|
4.61
|
%
|
|
|
4.92
|
%
|
|
|
5.05
|
%
|
|
|
5.28
|
%
|
|
|
5.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of year (000)
|
|
$
|
94,555
|
|
|
$
|
103,430
|
|
|
$
|
101,995
|
|
|
$
|
103,827
|
|
|
$
|
109,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMTP Shares outstanding at $100,000 liquidation value, end of year (000)
|
|
$
|
42,900
|
|
|
$
|
42,900
|
|
|
$
|
42,900
|
|
|
$
|
42,900
|
|
|
$
|
42,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage per VMTP Shares at $100,000 liquidation value, end of year
|
|
$
|
320,407
|
|
|
$
|
341,094
|
|
|
$
|
337,750
|
|
|
$
|
342,022
|
|
|
$
|
356,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of year (000)
|
|
$
|
25,654
|
|
|
$
|
26,839
|
|
|
$
|
27,378
|
|
|
$
|
24,984
|
|
|
$
|
20,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
33
|
%
|
|
|
28
|
%
|
|
|
34
|
%
|
|
|
45
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Based on average Common Shares outstanding.
|
(b)
|
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
(c)
|
Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different
returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices.
|
(d)
|
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares. See Note 4 and Note 10 of the Notes to Financial
Statements for details.
|
151
BlackRock MuniYield Investment Quality Fund (MFT)
The Financial Highlights table is intended to help you understand MFTs financial performance for the periods shown. Certain
information reflects the financial results for a single common share of MFT. The total returns in the table represent the rate an investor would have earned or lost on an investment in MFT (assuming reinvestment of all dividends and/or
distributions, if applicable). The information shown has been audited by Deloitte & Touche LLP, MFTs independent registered public accounting firm. Financial statements for the fiscal year ended July 31, 2020 and the Report of
the Independent Registered Public Accounting Firm thereon appear in MFTs Annual Report for the fiscal year ended July 31, 2020, which is available upon request.
Please see next page for Financial Highlights Table
152
MFT Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net asset value, beginning of year
|
|
$
|
14.26
|
|
|
$
|
13.90
|
|
|
$
|
14.60
|
|
|
$
|
15.55
|
|
|
$
|
14.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(a)
|
|
|
0.65
|
|
|
|
0.65
|
|
|
|
0.74
|
|
|
|
0.79
|
|
|
|
0.83
|
|
Net realized and unrealized gain (loss)
|
|
|
0.07
|
|
|
|
0.41
|
|
|
|
(0.64
|
)
|
|
|
(0.91
|
)
|
|
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
0.72
|
|
|
|
1.06
|
|
|
|
0.10
|
|
|
|
(0.12
|
)
|
|
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Shareholders from net investment income(b)
|
|
|
(0.61
|
)
|
|
|
(0.70
|
)
|
|
|
(0.80
|
)
|
|
|
(0.83
|
)
|
|
|
(0.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
14.37
|
|
|
$
|
14.26
|
|
|
$
|
13.90
|
|
|
$
|
14.60
|
|
|
$
|
15.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of year
|
|
$
|
13.97
|
|
|
$
|
13.59
|
|
|
$
|
13.03
|
|
|
$
|
14.67
|
|
|
$
|
16.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Applicable to Common Shareholders(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
5.48
|
%
|
|
|
8.21
|
%
|
|
|
0.92
|
%
|
|
|
(0.51
|
)%
|
|
|
10.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
7.60
|
%
|
|
|
10.01
|
%
|
|
|
(5.85
|
)%
|
|
|
(3.39
|
)%
|
|
|
27.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2.30
|
%(d)
|
|
|
2.82
|
%
|
|
|
2.47
|
%
|
|
|
2.07
|
%
|
|
|
1.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed
|
|
|
2.30
|
%(d)
|
|
|
2.82
|
%
|
|
|
2.47
|
%
|
|
|
2.07
|
%
|
|
|
1.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and excluding interest expense, fees and amortization of offering costs(e)
|
|
|
1.07
|
%(d)
|
|
|
1.05
|
%
|
|
|
1.03
|
%
|
|
|
1.00
|
%
|
|
|
0.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income to Common Shareholders
|
|
|
4.58
|
%
|
|
|
4.68
|
%
|
|
|
5.23
|
%
|
|
|
5.35
|
%
|
|
|
5.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of year (000)
|
|
$
|
121,810
|
|
|
$
|
120,895
|
|
|
$
|
117,795
|
|
|
$
|
123,705
|
|
|
$
|
131,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMTP Shares outstanding at $100,000 liquidation value, end of year (000)
|
|
$
|
56,500
|
|
|
$
|
56,500
|
|
|
$
|
56,500
|
|
|
$
|
56,500
|
|
|
$
|
56,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage per VMTP Shares at $100,000 liquidation value, end of year
|
|
$
|
315,593
|
|
|
$
|
313,973
|
|
|
$
|
308,487
|
|
|
$
|
318,947
|
|
|
$
|
333,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of year (000)
|
|
$
|
26,722
|
|
|
$
|
26,002
|
|
|
$
|
28,786
|
|
|
$
|
27,229
|
|
|
$
|
21,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
36
|
%
|
|
|
39
|
%
|
|
|
30
|
%
|
|
|
34
|
%
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Based on average Common Shares outstanding.
|
(b)
|
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
(c)
|
Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different
returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices.
|
(d)
|
Includes non-recurring expenses of reorganization costs. Without these costs, total expenses, total expenses
after fees waived and total expenses after fees waived and/or reimbursed and excluding interest expense, fees and amortization of offering costs would have been 2.26%, 2.26% and 1.03%, respectively.
|
(e)
|
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares. See Note 4 and Note 10 of the Notes to Financial
Statements for details.
|
153
BlackRock Municipal Income Investment Trust (BBF)
The Financial Highlights table is intended to help you understand BBFs financial performance for the periods shown. Certain
information reflects the financial results for a single common share of BBF. The total returns in the table represent the rate an investor would have earned or lost on an investment in BBF (assuming reinvestment of all dividends and/or
distributions, if applicable). The information shown has been audited by Deloitte & Touche LLP, BBFs independent registered public accounting firm. Financial statements for the fiscal year ended July 31, 2020 and the Report of
the Independent Registered Public Accounting Firm thereon appear in BBFs Annual Report for the fiscal year ended July 31, 2020, which is available upon request.
Please see next page for Financial Highlights Table
154
BBF Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net asset value, beginning of year
|
|
$
|
14.14
|
|
|
$
|
13.87
|
|
|
$
|
14.48
|
|
|
$
|
15.47
|
|
|
$
|
15.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(a)
|
|
|
0.64
|
|
|
|
0.69
|
|
|
|
0.80
|
|
|
|
0.84
|
|
|
|
0.84
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.02
|
)
|
|
|
0.28
|
|
|
|
(0.59
|
)
|
|
|
(0.96
|
)
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
0.62
|
|
|
|
0.97
|
|
|
|
0.21
|
|
|
|
(0.12
|
)
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Shareholders(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.62
|
)
|
|
|
(0.69
|
)
|
|
|
(0.82
|
)
|
|
|
(0.87
|
)
|
|
|
(0.87
|
)
|
From return of capital
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(0.62
|
)
|
|
|
(0.70
|
)
|
|
|
(0.82
|
)
|
|
|
(0.87
|
)
|
|
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
14.14
|
|
|
$
|
14.14
|
|
|
$
|
13.87
|
|
|
$
|
14.48
|
|
|
$
|
15.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of year
|
|
$
|
13.32
|
|
|
$
|
14.25
|
|
|
$
|
13.37
|
|
|
$
|
15.27
|
|
|
$
|
16.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Applicable to Common Shareholders(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
4.77
|
%
|
|
|
7.49
|
%
|
|
|
1.65
|
%
|
|
|
(0.65
|
)%
|
|
|
8.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
(2.07
|
)%
|
|
|
12.38
|
%
|
|
|
(7.08
|
)%
|
|
|
1.30
|
%
|
|
|
26.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2.19
|
%
|
|
|
2.77
|
%
|
|
|
2.53
|
%
|
|
|
2.16
|
%
|
|
|
2.01
|
%(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and paid indirectly
|
|
|
2.18
|
%
|
|
|
2.77
|
%
|
|
|
2.53
|
%
|
|
|
2.16
|
%
|
|
|
2.01
|
%(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and paid indirectly and excluding interest expense and fees, and amortization
of offering costs(e)(f)
|
|
|
1.12
|
%
|
|
|
1.16
|
%
|
|
|
1.15
|
%
|
|
|
1.13
|
%
|
|
|
1.45
|
%(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income to Common Shareholders
|
|
|
4.58
|
%
|
|
|
5.01
|
%
|
|
|
5.63
|
%
|
|
|
5.72
|
%
|
|
|
5.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of year (000)
|
|
$
|
144,676
|
|
|
$
|
144,665
|
|
|
$
|
141,808
|
|
|
$
|
147,990
|
|
|
$
|
157,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VRDP Shares outstanding at $100,000 liquidation value, end of year (000)
|
|
$
|
52,000
|
|
|
$
|
52,000
|
|
|
$
|
52,000
|
|
|
$
|
52,000
|
|
|
$
|
52,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage per VRDP Shares at $100,000 liquidation value, end of year
|
|
$
|
378,223
|
|
|
$
|
378,202
|
|
|
$
|
372,708
|
|
|
$
|
384,597
|
|
|
$
|
403,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of year (000)
|
|
$
|
38,121
|
|
|
$
|
39,565
|
|
|
$
|
49,043
|
|
|
$
|
50,028
|
|
|
$
|
47,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
47
|
%
|
|
|
36
|
%
|
|
|
31
|
%
|
|
|
39
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Based on average Common Shares outstanding.
|
(b)
|
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
(c)
|
Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different
returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices.
|
(d)
|
Includes reorganization costs associated with the Trusts reorganization in 2016. Without these costs, total expenses, total expenses after fees
waived and/or paid indirectly and total expenses after fees waived and/or paid indirectly and excluding interest expense, fees and amortization of offering costs would have been 1.83%, 1.83% and 1.26%, respectively, for the year ended July 31,
2016.
|
(e)
|
Interest expense, fees and amortization of offering costs related to TOBs and/or VRDP Shares. See Note 4 and Note 10 of the Notes to Financial
Statements for details.
|
(f)
|
The total expense ratio after fees waived and paid indirectly and excluding interest expense, fees, amortization of offering costs, liquidity and
remarketing fees as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Expense ratios
|
|
|
1.11
|
%
|
|
|
1.16
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
1.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155
BlackRock Municipal Income Trust II (BLE)
The Financial Highlights table is intended to help you understand the Acquiring Funds financial performance for the periods shown.
Certain information reflects the financial results for a single common share of the Acquiring Fund. The total returns in the table represent the rate an investor would have earned or lost on an investment in the Acquiring Fund (assuming reinvestment
of all dividends and/or distributions, if applicable). The information shown has been audited by Deloitte & Touche LLP, the Acquiring Funds independent registered public accounting firm. Financial statements for the fiscal year ended
August 31, 2020 and the Report of the Independent Registered Public Accounting Firm thereon appear in the Acquiring Funds Annual Report for the fiscal year ended August 31, 2020, which is available upon request.
Please see next page for Financial Highlights Table
156
The Acquiring Fund (BLE) Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net asset value, beginning of year
|
|
$
|
15.16
|
|
|
$
|
14.55
|
|
|
$
|
15.17
|
|
|
$
|
16.12
|
|
|
$
|
15.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(a)
|
|
|
0.73
|
|
|
|
0.71
|
|
|
|
0.76
|
|
|
|
0.83
|
|
|
|
0.93
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.40
|
)
|
|
|
0.60
|
|
|
|
(0.60
|
)
|
|
|
(0.89
|
)
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
0.33
|
|
|
|
1.31
|
|
|
|
0.16
|
|
|
|
(0.06
|
)
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Shareholders from net investment income(b)
|
|
|
(0.70
|
)
|
|
|
(0.70
|
)
|
|
|
(0.78
|
)
|
|
|
(0.89
|
)
|
|
|
(0.93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
14.79
|
|
|
$
|
15.16
|
|
|
$
|
14.55
|
|
|
$
|
15.17
|
|
|
$
|
16.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of year
|
|
$
|
14.83
|
|
|
$
|
15.48
|
|
|
$
|
13.77
|
|
|
$
|
15.45
|
|
|
$
|
16.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Applicable to Common Shareholders(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
2.37
|
%
|
|
|
9.52
|
%
|
|
|
1.35
|
%
|
|
|
(0.18
|
)%
|
|
|
12.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
0.52
|
%
|
|
|
18.17
|
%
|
|
|
(5.82
|
)%
|
|
|
0.29
|
%
|
|
|
22.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2.03
|
%(d)
|
|
|
2.55
|
%
|
|
|
2.32
|
%
|
|
|
2.02
|
%
|
|
|
1.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed
|
|
|
2.00
|
%(d)
|
|
|
2.55
|
%
|
|
|
2.31
|
%
|
|
|
2.02
|
%
|
|
|
1.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and excluding interest expense, fees, and amortization of offering
costs(e)
|
|
|
0.99
|
%(d)
|
|
|
0.98
|
%
|
|
|
0.98
|
%
|
|
|
0.99
|
%
|
|
|
0.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income to Common Shareholders
|
|
|
4.96
|
%
|
|
|
4.86
|
%
|
|
|
5.12
|
%
|
|
|
5.47
|
%
|
|
|
5.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of year (000)
|
|
$
|
348,328
|
|
|
$
|
356,649
|
|
|
$
|
342,437
|
|
|
$
|
356,901
|
|
|
$
|
378,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMTP Shares outstanding at $100,000 liquidation value, end of year (000)
|
|
$
|
151,300
|
|
|
$
|
151,300
|
|
|
$
|
151,300
|
|
|
$
|
151,300
|
|
|
$
|
151,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage per VMTP Shares at $100,000 liquidation value, end of year
|
|
$
|
330,223
|
|
|
$
|
335,723
|
|
|
$
|
326,330
|
|
|
$
|
335,890
|
|
|
$
|
350,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of year (000)
|
|
$
|
73,763
|
|
|
$
|
59,519
|
|
|
$
|
67,497
|
|
|
$
|
71,274
|
|
|
$
|
77,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
19
|
%
|
|
|
18
|
%
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Based on average Common Shares outstanding.
|
(b)
|
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
(c)
|
Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different
returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices.
|
(d)
|
Includes non-recurring expenses of reorganization costs. Without these costs, total expenses, total expenses
after fees waived and/or reimbursed and total expenses after fees waived and/or reimbursed and excluding interest expense, fees, and amortization of offering costs would have been 2.00%, 2.00% and 0.98%, respectively.
|
(e)
|
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares. See Note 4 and Note 10 of the Notes to Financial
Statements for details.
|
157
Submission of Shareholder Proposals
To be considered for presentation at a shareholders meeting, rules promulgated by the SEC generally require that, among other
things, a shareholders proposal must be received at the offices of the relevant Fund a reasonable time before solicitation is made. In addition, each Funds bylaws provide for advance notice provisions, which require shareholders to give
timely notice in proper written form to the Secretary of the Fund. Shareholders should review each Funds bylaws for additional information regarding the Funds advance notice provisions. The bylaws of BSD, BBF and the Acquiring Fund were
filed with the SEC on October 29, 2010 on Form 8-K and the bylaws of MFT were filed with the SEC on September 9, 2010 on Form 8-K. Shareholders may obtain
copies of such documents as described on page v of this Proxy Statement.
The timely submission of a proposal does not
necessarily mean that such proposal will be included. Any shareholder who wishes to submit a proposal for consideration at a meeting of such shareholders Fund should send such proposal to the relevant Fund at 40 East 52nd Street, New York, New
York 10022.
Shareholder Communications
Shareholders who want to communicate with the Board or any individual Board Member should write to the attention of the Secretary of their Fund, 40 East 52nd Street, New York, NY 10022. Shareholders may
communicate with the Boards electronically by sending an e-mail to closedendfundsbod@blackrock.com. The communication should indicate that you are a Fund shareholder. If the communication is intended
for a specific Board Member and so indicates, it will be sent only to that Board Member. If a communication does not indicate a specific Board Member, it will be sent to the Chair of the Governance Committee and the outside counsel to the
Independent Board Members for further distribution as deemed appropriate by such persons.
Additionally, shareholders with
complaints or concerns regarding accounting matters may address letters to the CCO of their respective Fund 40 East 52nd Street, New York, NY 10022. Shareholders who are uncomfortable submitting complaints to the CCO may address letters directly to
the Chair of the Audit Committee of the Board that oversees the Fund. Such letters may be submitted on an anonymous basis.
Expense of Proxy Solicitation
The cost of preparing, printing and mailing the enclosed proxy, accompanying notice and
this Proxy Statement, and costs in connection with the solicitation of proxies will be borne by the Funds. Additional out-of-pocket costs, such as legal expenses and
auditor fees, incurred in connection with the preparation of this Proxy Statement, also will be borne by the Funds. Costs that are borne by the Funds collectively will be allocated among the Funds on the basis of a combination of their respective
net assets and number of shareholder accounts, except when direct costs can reasonably be attributed to one or more specific Fund(s).
Solicitation is being made primarily by the mailing of this Notice and Proxy Statement with its enclosures on or about November 4, 2020, but may also be made by mail, telephone, fax, e-mail or the Internet by officers or employees of the Investment Advisor, or by dealers and their representatives. Brokerage houses, banks and other fiduciaries may be requested to forward proxy solicitation
material to their principals to obtain authorization for the execution of proxies. Shareholders of the Funds whose shares are held by nominees such as brokers can vote their proxies by contacting their respective nominee. The Funds will reimburse
brokerage firms, custodians, banks and fiduciaries for their expenses in forwarding this Proxy Statement and proxy materials to the beneficial owners of each Funds Shares. The Funds and the Investment Advisor have retained Georgeson LLC to
assist with the distribution of proxy materials and the solicitation and tabulation of proxies. It is anticipated that Georgeson LLC will be paid approximately $25,100, $25,700, $29,700 and $90,200 for BSD,
MFT, BBF and the Acquiring Fund, respectively, for such services (including reimbursements of out-of-pocket expenses) with respect to the solicitation of proxies from
the common shares, the VRDP Shares and the VMTP Shares. Georgeson LLC may solicit proxies personally and by mail, telephone, fax, e-mail or the Internet. Each Funds portion of the foregoing expenses is
not subject to any cap or voluntary agreement to waive fees and/or reimburse expenses that may otherwise apply to that Fund.
174
Privacy Principles of the Funds
The Funds are committed to maintaining the privacy of shareholders and to safeguarding their
non-public personal information. The following information is provided to help you understand what personal information the Funds collect, how we protect that information, and why in certain cases we may share
such information with select other parties.
The Funds do not receive any non-public
personal information relating to their shareholders who purchase shares through their broker-dealers. In the case of shareholders who are record holders of a Fund, the Fund receives personal non-public
information on account applications or other forms. With respect to these shareholders, the Funds also have access to specific information regarding their transactions in each Fund.
The Funds do not disclose any non-public personal information about their shareholders or former
shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders accounts (for example, to a transfer agent).
The Funds restrict access to non-public personal information about their shareholders to BlackRock employees with a legitimate business need for the information.
The Funds maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our shareholders.
Incorporation by Reference
The financial
statements of the Acquiring Fund for the fiscal year ended August 31, 2020 are incorporated by reference herein to the Acquiring Funds annual report filed on Form N-CSR on October 30, 2020.
The financial statements of BSD for the fiscal year ended April 30, 2020 are incorporated by reference herein to
BSDs annual report filed on Form N-CSR on July 2, 2020.
The financial statements of MFT for the fiscal year ended July
31, 2020 are incorporated by reference herein to MFTs annual report filed on Form N-CSR on October 2,
2020.
The financial statements of BBF for the fiscal year ended July 31, 2020 are incorporated by reference herein to
BBFs annual report filed on Form N-CSR on October 2, 2020.
See Financial Statements. The financial statements have been audited by Deloitte & Touche LLP,
independent registered public accounting firm, as set forth in their report thereon and incorporated herein by reference. Such financial statements are incorporated herein by reference in reliance upon such report given on the authority of such firm
as experts in accounting and auditing.
Adjournments and Postponements
Failure of a quorum to be present at the Special Meeting may necessitate adjournment. The Board of each Fund, prior to the Special Meeting
being convened, may postpone such meeting from time to time to a date not more than 120 days after the original record date. The chair of the Special Meeting may also adjourn the Special Meeting from time to time to reconvene at the same or some
other place, and notice need not be given of any such adjourned meeting if the time and place by which shareholders may be deemed to be present at such adjourned meeting and vote at such adjourned meeting are announced at the meeting at which the
adjournment is taken. The chair of the Special Meeting may adjourn the Special Meeting to permit further solicitation of proxies with respect to a proposal if they determine that adjournment and further solicitation is reasonable and in the best
interests of shareholders. At the adjourned meeting, the Fund may transact any business which might have been transacted at the original meeting. Any adjourned meeting may be held as adjourned one or more times without further notice not later than
120 days after the record date.
175
Please vote promptly by signing and dating each enclosed proxy card, and if received by
mail, returning it (them) in the accompanying postage paid return envelope OR by following the enclosed instructions to provide voting instructions by telephone or via the Internet.
BlackRock is independent in ownership and governance, with no single majority stockholder and a majority of independent directors.
By Order of the Boards,
Janey Ahn
Secretary of the Funds
November 4, 2020
176
APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
In order to consummate the reorganization contemplated herein (the Reorganization) and in consideration of the promises and the covenants and agreements hereinafter set forth, and
intending to be legally bound, [Target Fund], a registered diversified closed-end investment company, File No. 811-[●] (the Target
Fund) and BlackRock Municipal Income Trust II, a registered diversified closed-end investment company, File No. 811-21126 (the Acquiring
Fund and together with the Target Fund, the Funds), each hereby agree as follows:
1.
REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING FUND.
The Acquiring Fund represents and warrants to,
and agrees with, the Target Fund that:
(a) The Acquiring Fund is a statutory trust duly formed,
validly existing and in good standing in conformity with the Delaware Statutory Trust Act (the DSTA) and has the power to own all of its assets and to carry out this Agreement. The Acquiring Fund has all necessary federal, state
and local authorizations to carry on its business as it is now being conducted and to carry out this Agreement.
(b) The Acquiring Fund is duly registered under the Investment Company Act of 1940, as amended (the 1940
Act) as a diversified, closed-end management investment company and such registration has not been revoked or rescinded and is in full force and effect.
(c) The Acquiring Fund has full power and authority to enter into and perform its obligations under this Agreement
subject:
(i) in the case of the consummation of the
Reorganization, to the approval of this Agreement and the transactions contemplated herein, including amendments to the Statement of Preferences (as defined below) in connection with the issuance of additional Acquiring Fund VMTP Shares (as defined
in Section 1(o) herein) in the Reorganization by the holders of the Acquiring Fund VMTP Shares (Acquiring Fund VMTP Holders) voting as a separate class, and
(ii) in the case of the issuance of additional Acquiring Fund Common Shares (as defined in
Section 1(o) herein) in connection with the Reorganization to the approval of such issuance of additional Acquiring Fund Common Shares by the common shareholders of the Acquiring Fund (Acquiring Fund Common Shareholders and
together with the Acquiring Fund VMTP Holders, the Acquiring Fund Shareholders) and the Acquiring Fund VMTP Holders voting as a single class, in each case as described in Sections 9(a) and (b) hereof.
(d) The execution, delivery and performance of this Agreement have been duly authorized by all necessary action of
the Acquiring Funds Board of Trustees, and this Agreement constitutes a valid and binding contract of the Acquiring Fund enforceable against the Acquiring Fund in accordance with its terms, subject to the effects of bankruptcy, insolvency,
moratorium, fraudulent conveyance and similar laws relating to or affecting creditors rights generally and court decisions with respect thereto.
(e) The Acquiring Fund has provided or made available (including by electronic format) to the Target Fund the most recent audited annual financial statements of the Acquiring Fund,
which have been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP) consistently applied and have been audited by Deloitte & Touche LLP, each
Funds independent registered public accounting firm, and such statements fairly present the financial condition and the results of operations of the Acquiring Fund as of the respective dates indicated and the results of operations and changes
in net assets for the periods indicated, and there are no liabilities of the Acquiring Fund whether actual or contingent and whether or not determined or determinable as of such date that are required to be disclosed but are not disclosed in such
statements.
A-1
(f) An unaudited statement of assets, capital and liabilities of the
Acquiring Fund and an unaudited schedule of investments of the Acquiring Fund, each as of the Valuation Time (as defined in Section 3(e) herein) (together, the Acquiring Fund Closing Financial Statements), will be provided or
made available (including by electronic format) to the Target Fund, at or prior to the Closing Date (as defined in Section 7(a) herein), for the purpose of determining the number of Acquiring Fund Shares (as defined in Section 1(o) herein)
to be issued to the Target Fund shareholders (the Target Fund Shareholders) pursuant to Section 3 of this Agreement; the Acquiring Fund Closing Financial Statements will fairly present the financial position of the Acquiring
Fund as of the Valuation Time in conformity US GAAP consistently applied.
(g) There are no
material legal, administrative or other proceedings pending or, to the knowledge of the Acquiring Fund, threatened against it which assert liability on the part of the Acquiring Fund or which materially affect its financial condition or its ability
to consummate the Reorganization other than as have been disclosed to the Target Fund and/or in the N-14 Registration Statement (as defined in Section 1(l) herein). The Acquiring Fund is not charged with
or, to the best of its knowledge, threatened with any violation or investigation of any possible violation of any provisions of any federal, state or local law or regulation or administrative ruling relating to any aspect of its business.
(h) There are no material contracts outstanding to which the Acquiring Fund is a party that have
not been disclosed in the N-14 Registration Statement or that will not otherwise be disclosed to the Target Fund prior to the Valuation Time.
(i) The Acquiring Fund is not obligated under any provision of its Agreement and Declaration of Trust or By-laws, each as amended to the date hereof, and is not a party to any contract or other commitment or obligation, and is not subject to any order or decree, which would be violated by its execution of or
performance under this Agreement, except insofar as the Funds have mutually agreed to amend such contract or other commitment or obligation to cure any potential violation as a condition precedent to the Reorganization.
(j) The Acquiring Fund has no known liabilities of a material amount, contingent or otherwise, other than those
shown on the Acquiring Funds Annual Report for the fiscal year ended August 31, 2020, those incurred since the date thereof in the ordinary course of its business as an investment company, and those incurred in connection with the
Reorganization. As of the Valuation Time, the Acquiring Fund will advise the Target Fund of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of such time, except to
the extent disclosed in the Acquiring Fund Closing Financial Statements or to the extent already known by the Target Fund.
(k) No consent, approval, authorization or order of any court or government authority is required for the
consummation by the Acquiring Fund of the Reorganization, except such as may be required under the Securities Act of 1933, as amended (the 1933 Act), the Securities Exchange Act of 1934, as amended (the 1934
Act) and the 1940 Act or state securities laws (which term as used herein shall include the laws of the District of Columbia and Puerto Rico) or the rules of the New York Stock Exchange, each of which will have been obtained on or prior to
the Closing Date.
(l) The registration statement filed by the Acquiring Fund on Form N-14, which includes the proxy statement for the common shareholders of the Target Fund and the Acquiring Fund with respect to the transactions contemplated herein (the Joint Proxy
Statement/Prospectus), and any supplement or amendment thereto or to the documents included or incorporated by reference therein (collectively, as so amended or supplemented, the N-14
Registration Statement), on its effective date, at the time of the shareholder meeting called to vote on this Agreement and on the Closing Date, insofar as it relates to the Acquiring Fund, (i) complied or will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, not misleading; and the Joint Proxy Statement/Prospectus included therein did not or will not contain any untrue
A-2
statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this subsection only shall apply to statements in or omissions from the N-14 Registration Statement made in reliance upon and in
conformity with information furnished by the Acquiring Fund for use in the N-14 Registration Statement.
(m) The proxy statement for the Acquiring Fund VMTP Holders and holders of the Target Fund [VRDP]3 [VMTP]4 Shares (as defined in section 2(o) herein) (the Target Fund [VRDP]5
[VMTP]6 Holders) with respect to the
transactions contemplated herein, and any supplement or amendment thereto (the Preferred Shares Proxy Statement) or to the documents included or incorporated by reference therein, at the time of the shareholder meeting called to
vote on this Agreement and on the Closing Date, insofar as it relates to the Acquiring Fund, (i) complied or will comply in all material respects with the provisions of the 1934 Act and the 1940 Act and the rules and regulations thereunder and
(ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in this subsection only shall apply to statements in or omissions from the Preferred Shares Proxy Statement made in reliance upon and in conformity with information
furnished by the Acquiring Fund for use in the Preferred Shares Proxy Statement.
(n) The Acquiring
Fund has filed, or intends to file, or has obtained extensions to file, all federal, state and local tax returns which are required to be filed by it, and has paid or has obtained extensions to pay, all federal, state and local taxes shown on said
returns to be due and owing and all assessments received by it, up to and including the taxable year in which the Closing Date occurs. All tax liabilities of the Acquiring Fund have been adequately provided for on its books, and no tax deficiency or
liability of the Acquiring Fund has been asserted and no question with respect thereto has been raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable
year in which the Closing Date occurs.
(o) The Acquiring Fund is authorized to issue an unlimited
number of common shares of beneficial interest, par value $0.001 per share (the Acquiring Fund Common Shares) and [3,027] preferred shares of beneficial interest of Series W-7 Variable Rate
Muni Term Preferred Shares or any other series of Variable Rate Muni Term Preferred Shares, par value $0.001 per share and liquidation preference $100,000 per share (Acquiring Fund VMTP Shares and together with Acquiring Fund
Common Shares, the Acquiring Fund Shares). Each outstanding Acquiring Fund Share is fully paid and nonassessable, and has the voting rights provided by the Acquiring Funds Agreement and Declaration of Trust and applicable
law.
(p) The books and records of the Acquiring Fund made available to the Target Fund and/or its
counsel are substantially true and correct and contain no material misstatements or omissions with respect to the operations of the Acquiring Fund.
(q) The Acquiring Fund Shares to be issued to the Target Fund Shareholders pursuant to this Agreement will have been duly authorized and, when issued and delivered pursuant to this
Agreement, will be legally and validly issued and will be fully paid and nonassessable and will have full voting rights, except as provided by the Acquiring Funds Agreement and Declaration of Trust or applicable law, and no Acquiring Fund
Shareholder will have any preemptive right of subscription or purchase in respect thereof.
(r) At or
prior to the Closing Date, the Acquiring Fund Common Shares to be transferred to the Target Fund for distribution to the Target Fund Shareholders on the Closing Date will be duly qualified for offering to
4
|
[Applies to BSD and MFT.]
|
6
|
[Applies to BSD and MFT.]
|
A-3
the public in all states of the United States in which the sale of shares of the Funds presently are qualified, and there will be a sufficient number of such Acquiring Fund Common Shares
registered under the 1933 Act and, as may be necessary, with each pertinent state securities commission to permit the transfers contemplated by this Agreement to be consummated.
(s) At or prior to the Closing Date, the Acquiring Fund will have obtained any and all regulatory, board and
shareholder approvals necessary to issue the Acquiring Fund Shares to the Target Fund Shareholders.
(t) The Acquiring Fund has elected to qualify and has qualified as a regulated investment company
(RIC) within the meaning of Section 851 of the Internal Revenue Code of 1986, as amended (the Code) for each of its taxable years since its inception, and the Acquiring Fund has satisfied the distribution
requirements imposed by Section 852 of the Code to maintain RIC status for each of its taxable years.
2. REPRESENTATIONS AND WARRANTIES OF THE TARGET FUND.
The Target Fund represents and warrants to, and agrees with, the Acquiring Fund that:
(a) The Target Fund is a [statutory trust duly formed, validly existing and in good standing in conformity with
the Delaware Statutory Trust Act (the DSTA)]7 [business trust duly formed, validly existing and in good standing in conformity with the laws of the Commonwealth of Massachusetts]8 and has the power to own all of its assets and to carry out this Agreement. The Target Fund has all necessary federal,
state and local authorizations to carry on its business as it is now being conducted and to carry out this Agreement.
(b) The Target Fund is duly registered under the 1940 Act as a diversified,
closed-end management investment company, and such registration has not been revoked or rescinded and is in full force and effect.
(c) The Target Fund has full power and authority to enter into and perform its obligations under this Agreement subject, in the case of consummation of the Reorganization, to the
approval and adoption of this Agreement by the Target Fund Shareholders as described in Section 8(a) hereof. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action of the Target Funds
Board of Trustees and this Agreement constitutes a valid and binding contract of the Target Fund enforceable against the Target Fund in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance
and similar laws relating to or affecting creditors rights generally and court decisions with respect thereto.
(d) The Target Fund has provided or made available (including by electronic format) to the Acquiring Fund the most
recent audited annual financial statements of the Target Fund which have been prepared in accordance with US GAAP consistently applied and have been audited by Deloitte & Touche LLP, and such statements
fairly present the financial condition and the results of operations of the Target Fund as of the respective dates indicated and the results of operations and changes in net assets for the periods indicated, and there are no liabilities of the
Target Fund whether actual or contingent and whether or not determined or determinable as of such date that are required to be disclosed but are not disclosed in such statements.
(e) An unaudited statement of assets, capital and liabilities of the Target Fund and an unaudited schedule of
investments of the Target Fund, each as of the Valuation Time (together, the Target Fund Closing Financial Statements), will be provided or made available (including by electronic format) to the Acquiring Fund at or prior to the
Closing Date, for the purpose of determining the number of Acquiring Fund Shares to be issued to the Target Fund Shareholders pursuant to Section 3 of this Agreement; the Target Fund Closing Financial Statements will fairly present the
financial position of the Target Fund as of the Valuation Time in conformity with US GAAP consistently applied.
7
|
[Applies to BSD and BBF.]
|
A-4
(f) There are no material legal, administrative or other proceedings
pending or, to the knowledge of the Target Fund, threatened against it which assert liability on the part of the Target Fund or which materially affect its financial condition or its ability to consummate the Reorganization other than as have been
disclosed to the Acquiring Fund. The Target Fund is not charged with or, to the best of its knowledge, threatened with any violation or investigation of any possible violation of any provisions of any federal, state or local law or regulation or
administrative ruling relating to any aspect of its business.
(g) There are no material contracts
outstanding to which the Target Fund is a party that have not been disclosed in the N-14 Registration Statement or will not otherwise be disclosed to the Acquiring Fund prior to the Valuation Time.
(h) The Target Fund is not obligated under any provision of its [Agreement and Declaration of Trust]9 [Declaration of Trust]10 or By-laws, each as amended
to the date hereof, or a party to any contract or other commitment or obligation, and is not subject to any order or decree, which would be violated by its execution of or performance under this Agreement, except insofar as the Funds have mutually
agreed to amend such contract or other commitment or obligation to cure any potential violation as a condition precedent to the Reorganization.
(i) The Target Fund has no known liabilities of a material amount, contingent or otherwise, other than those shown on the Target Funds Annual Report for the fiscal year ended
[April 30, 2020]11 [July 31, 2020]12, those incurred since the date thereof in the ordinary course of its
business as an investment company and those incurred in connection with the Reorganization. As of the Valuation Time, the Target Fund will advise the Acquiring Fund of all known liabilities, contingent or otherwise, whether or not incurred in the
ordinary course of business, existing or accrued as of such time, except to the extent disclosed in the Target Fund Closing Financial Statements or to the extent already known by the Acquiring Fund.
(j) At both the Valuation Time and the Closing Date, the Target Fund will have full right, power and authority to
sell, assign, transfer and deliver the Target Fund Investments. As used in this Agreement, the term Target Fund Investments shall mean (i) the investments of the Target Fund shown on the schedule of its investments as of the
Valuation Time furnished to the Acquiring Fund; and (ii) all other assets owned by the Target Fund as of the Valuation Time, other than cash held in liability reserves in amounts necessary to pay taxes and expenses as provided in
Section 6(a)(ii) and Section 6(c)(iv) of this Agreement, respectively, and distributions, if any, as provided in Section 3(c) and Section 9(l) of this Agreement. At the Closing Date, subject only to the
obligation to deliver the Target Fund Investments as contemplated by this Agreement, the Target Fund will have good and marketable title to all of the Target Fund Investments, and the Acquiring Fund will acquire all of the Target Fund Investments
free and clear of any encumbrances, liens or security interests and without any restrictions upon the transfer thereof (except those imposed by the federal or state securities laws and those imperfections of title or encumbrances as do not
materially detract from the value or use of the Target Fund Investments or materially affect title thereto).
(k) No consent, approval, authorization or order of any court or governmental authority is required for the
consummation by the Target Fund of the Reorganization, except such as may be required under the 1933 Act, the 1934 Act and the 1940 Act or state securities laws (which term as used herein shall include the laws of the District of Columbia and Puerto
Rico) or the rules of the New York Stock Exchange, each of which will have been obtained on or prior to the Closing Date.
(l) The N-14 Registration Statement, on its effective date, at the time of
the Target Fund Shareholders meeting called to vote on this Agreement and on the Closing Date, insofar as it relates to the Target Fund (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and
the
9
|
[Applies to BSD and BBF.]
|
12
|
[Applies to MFT and BBF.]
|
A-5
1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; and the Joint Proxy Statement/Prospectus included therein did not or will not contain any untrue statement of a material
fact or omit to state any material fact necessary to make the statements therein, not misleading; provided, however, that the representations and warranties in this subsection shall apply only to statements in or omissions from the N-14 Registration Statement made in reliance upon and in conformity with information furnished by the Target Fund for use in the N-14 Registration Statement.
(m) The Preferred Shares Proxy Statement for the Target Fund [VRDP]13[VMTP]14 Holders with respect to the transactions contemplated herein, and any supplement or amendment thereto or to the
documents included or incorporated by reference therein, at the time of the shareholder meeting called to vote on this Agreement and on the Closing Date, insofar as it relates to the Target Fund, (i) complied or will comply in all material
respects with the provisions of the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall apply only to statements in or
omissions from the Preferred Shares Proxy Statement made in reliance upon and in conformity with information furnished by the Target Fund for use in the Preferred Shares Proxy Statement.
(n) The Target Fund has filed, or intends to file, or has obtained extensions to file, all federal, state and
local tax returns which are required to be filed by it, and has paid or has obtained extensions to pay, all federal, state and local taxes shown on said returns to be due and owing and all assessments received by it, up to and including the taxable
year in which the Closing Date occurs. All tax liabilities of the Target Fund have been adequately provided for on its books, and no tax deficiency or liability of the Target Fund has been asserted and no question with respect thereto has been
raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Closing Date occurs.
(o) The Target Fund is authorized to issue an unlimited number of common shares of beneficial interest, par value
$0.001 per share (the Target Fund Common Shares) [and 520 preferred shares of beneficial interest of Series W-7 Variable Rate Demand Preferred Shares or any other series of Variable Rate
Demand Preferred Shares, par value $0.001 per share and liquidation preference $100,000 per share (Target Fund VRDP Shares and together with Target Fund Common Shares, the Target Fund Shares)]15 [and [429]16 [565]17 preferred shares of beneficial interest of Series W-7 Variable Rate Muni Term
Preferred Shares or any other series of Variable Rate Muni Term Preferred Shares, par value $0.001 per share and liquidation preference $100,000 per share (Target Fund VMTP Shares and together with Target Fund Common Shares, the
Target Fund Shares)]18. Each
outstanding Target Fund Share is duly and validly issued and is fully paid and nonassessable, except as provided by the Target Funds [Agreement and Declaration of Trust]19 [Declaration of Trust]20, and has the voting rights provided by the Target Funds [Agreement and Declaration of Trust]21 [Declaration of Trust]22
14
|
[Applies to BSD and MFT.]
|
18
|
[Applies to BSD and MFT.]
|
19
|
[Applies to BSD and BBF.]
|
21
|
[Applies to BSD and BBF.]
|
A-6
and applicable law. The Target Fund has no outstanding preferred shares other than [520 VRDP]23 [[429]24 [565]25 VMTP]26 Shares; no outstanding options, warrants or other rights to subscribe for or purchase any shares of the Target Fund;
and no outstanding securities convertible into shares of the Target Fund. All of the issued and outstanding Target Fund Shares will, at the time of the Closing, be held by the persons and in the amounts set forth in the records of the Target
Funds transfer agent as provided in Section 7(d).
(p) All of the issued and outstanding
Target Fund Shares were offered for sale and sold in conformity with all applicable federal and state securities laws.
(q) The Target Fund will not sell or otherwise dispose of any of the Acquiring Fund Shares to be received in the
Reorganization, except in distribution to the Target Fund Shareholders as provided in Section 3 of this Agreement.
(r) The books and records of the Target Fund made available to the Acquiring Fund and/or its counsel are
substantially true and correct and contain no material misstatements or omissions with respect to the operations of the Target Fund.
(s) The Target Fund has elected to qualify and has qualified as a RIC within the meaning of Section 851 of the Code for each of its taxable years since its inception, and the
Target Fund has satisfied the distribution requirements imposed by Section 852 of the Code to maintain RIC status for each of its taxable years.
3. THE REORGANIZATION.
[(a) Subject to receiving the
requisite approvals of the Target Fund Shareholders and the Acquiring Fund Shareholders, and to the other terms and conditions contained herein, and in accordance with the applicable law, the Target Fund agrees to convey, transfer and deliver to the
Acquiring Fund and the Acquiring Fund agrees to acquire from the Target Fund, on the Closing Date, all of the Target Fund Investments (including interest accrued as of the Valuation Time on debt instruments held by the Target Fund), and assume
substantially all of the liabilities of the Target Fund, in exchange for that number of Acquiring Fund Shares provided in Section 4 of this Agreement, provided however that if, pursuant to the provisions of paragraph (c) of this
Section 3 and paragraph (l) of Section 9 hereof, (i) the Target Fund determines to make any portion of the UNII Distributions (as defined in Section 3(c) herein) to the Target Fund Common Shareholders after the Closing Date,
the Target Fund Investments to be conveyed, transferred and delivered to the Acquiring Fund hereunder will exclude the amounts required for the payment of such portion of the UNII Distributions and the liabilities to be assumed by the Acquiring Fund
shall not include such undistributed amount of such UNII Distributions, or (ii) the Target Fund determines that the Acquiring Fund will pay amounts in respect of such UNII Distributions on behalf of the Target Fund to the Target Fund Common
Shareholders entitled to receive such UNII Distributions after the Closing Date, then the Target Fund Investments to be conveyed, transferred and delivered to the Acquiring Fund hereunder will include the amounts required for the payment of such
portion of the UNII Distributions and the liabilities to be assumed by the Acquiring Fund shall include such undistributed amount of such UNII Distributions. The existence of the Acquiring Fund shall continue unaffected and unimpaired by the
Reorganization and it shall be governed by the laws of Delaware.]27
[(a) Subject to receiving the requisite approvals of the
Target Fund Shareholders and the Acquiring Fund Shareholders, the Target Funds issuance of [520] preferred shares of beneficial interest of Series W-7 Variable Rate Muni Term Preferred Shares, par value
$0.001 per share and liquidation preference $100,000 per share
26
|
[Applies to BSD and MFT.]
|
27
|
[Applies to the reorganization of each of BSD and MFT into BLE]
|
A-7
(Target Fund VMTP Shares) and the redemption by the Target Fund of all outstanding Target Fund VRDP Shares with the proceeds from such issuance (the Target Fund VRDP
Refinancing) and to the other terms and conditions contained herein, and in accordance with the applicable law, the Target Fund agrees to convey, transfer and deliver to the Acquiring Fund and the Acquiring Fund agrees to acquire from the
Target Fund, on the Closing Date, all of the Target Fund Investments (including interest accrued as of the Valuation Time on debt instruments held by the Target Fund), and assume substantially all of the liabilities of the Target Fund, in exchange
for that number of Acquiring Fund Shares provided in Section 4 of this Agreement, provided however that if, pursuant to the provisions of paragraph (c) of this Section 3 and paragraph (l) of Section 9 hereof, (i) the
Target Fund determines to make any portion of the UNII Distributions (as defined in Section 3(c) herein) to the Target Fund Common Shareholders after the Closing Date, the Target Fund Investments to be conveyed, transferred and delivered to the
Acquiring Fund hereunder will exclude the amounts required for the payment of such portion of the UNII Distributions and the liabilities to be assumed by the Acquiring Fund shall not include such undistributed amount of such UNII Distributions, or
(ii) the Target Fund determines that the Acquiring Fund will pay amounts in respect of such UNII Distributions on behalf of the Target Fund to the Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing
Date, then the Target Fund Investments to be conveyed, transferred and delivered to the Acquiring Fund hereunder will include the amounts required for the payment of such portion of the UNII Distributions and the liabilities to be assumed by the
Acquiring Fund shall include such undistributed amount of such UNII Distributions.. The existence of the Acquiring Fund shall continue unaffected and unimpaired by the Reorganization and it shall be governed by the laws of Delaware.]28
(b) If the investment adviser determines that the portfolios of the Target Fund and the Acquiring Fund,
when aggregated, would contain investments exceeding certain percentage limitations imposed upon the Acquiring Fund with respect to such investments or that the disposition of certain assets is necessary to ensure that the resulting portfolio will
meet the Acquiring Funds investment objective, policies and restrictions, as set forth in the Joint Proxy Statement/Prospectus, a copy of which has been delivered (including by electronic format) to the Target Fund, the Target Fund, if
requested by the Acquiring Fund, will dispose of a sufficient amount of such investments as may be necessary to avoid violating such limitations as of the Closing Date. Notwithstanding the foregoing, nothing herein will require the Target Fund to
dispose of any portion of its assets if, in the reasonable judgment of the Target Funds Board of Trustees or investment adviser, such disposition would create more than an insignificant risk that the Reorganization would not be treated as a
reorganization described in Section 368(a) of the Code or would otherwise not be in the best interests of the Target Fund.
(c) Prior to the Closing Date, the Target Fund shall declare a dividend or dividends which, together with all such previous dividends, shall have the
effect of distributing to holders of Target Fund Common Shares (Target Fund Common Shareholders) entitled to such dividends (i) all of its investment company taxable income to and including the Closing Date, if any
(computed without regard to any deduction for dividends paid), (ii) all of its net capital gain, if any, recognized to and including the Closing Date and (iii) the excess of its interest income excludable from gross income under
Section 103(a) of the Code, if any, over its deductions disallowed under Sections 265 and 171(a)(2) of the Code for the period to and including the Closing Date. The Target Fund may pay amounts in respect of such distributions (UNII
Distributions) in one or more distributions to Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing Date. In addition, the Acquiring Fund may pay amounts in respect of such UNII Distributions on
behalf of the Target Fund to the Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing Date as an agent out of cash or other short-term liquid assets maturing prior to the payment date of the UNII
Distributions acquired from the Target Fund in the Reorganization, segregated for this purpose and maintained in an amount at least equal to the remaining payment obligations in respect of the UNII Distributions.
(d) Pursuant to this Agreement, as soon as practicable, and in no event more than 48 hours, exclusive of Sundays
and holidays, after the Closing Date, the Target Fund will distribute all Acquiring Fund Common Shares
28
|
[Applies to reorganization of BBF into BLE.]
|
A-8
and Acquiring Fund VMTP Shares received by it to its shareholders in exchange for their Target Fund Common Shares and Target Fund VMTP Shares, respectively. Such distributions shall be
accomplished by the opening of shareholder accounts on the share ledger records of the Acquiring Fund in the names of and in the amounts due to the Target Fund Shareholders based on their respective holdings in the Target Fund as of the Valuation
Time.
(e) The Valuation Time shall be at the close of business of the
New York Stock Exchange on the business day immediately preceding the Closing Date, or such earlier or later day and time as may be mutually agreed upon in writing by the Funds (the Valuation Time).
(f) The Target Fund will pay or cause to be paid to the Acquiring Fund any interest
the Target Fund receives on or after the Closing Date with respect to any of the Target Fund Investments transferred to the Acquiring Fund hereunder.
(g) Recourse for liabilities assumed from the Target Fund by the Acquiring Fund in the Reorganization will be limited to the net assets acquired by the
Acquiring Fund. The known liabilities of the Target Fund, as of the Valuation Time, shall be confirmed to the Acquiring Fund pursuant to Section 2(i) of this Agreement.
(h) The Target Fund will be terminated as soon as practicable following the
Closing Date by terminating its registration under the 1940 Act and dissolving and terminating [under the
DSTA]29 [under the laws of the Commonwealth of
Massachusetts applicable to business trusts]30 and will withdraw its authority to do business in any state where it is registered.
(i) For U.S. federal income tax purposes, the parties to this Agreement intend
that (i) the Reorganization qualify as a reorganization within the meaning of Section 368(a) of the Code, (ii) this Agreement constitutes a plan of reorganization within the meaning of U.S. Treasury Regulations Section 1.368-2(g), and (iii) the parties to this Agreement will each be a party to such reorganization within the meaning of Section 368(b) of the Code.
4. ISSUANCE AND VALUATION OF ACQUIRING FUND SHARES IN THE REORGANIZATION.
(a) A number of Acquiring Fund Common Shares with an aggregate net asset value equal to the value of the Target
Fund Investments (including interest accrued as the Valuation Time on debt instruments held by the Target Fund) acquired in the Reorganization determined as hereinafter provided, reduced by the amount of liabilities of the Target Fund assumed by the
Acquiring Fund in the Reorganization, shall be issued by the Acquiring Fund to the Target Fund in exchange for such Target Fund Investments, which shall be determined as set forth below. The value of each Funds net assets shall be calculated
net of the liquidation preference (including accumulated and unpaid dividends) of all outstanding preferred shares of such Fund.
(b) A number of Acquiring Fund VMTP Shares equal to the number of Target Fund VMTP Shares outstanding immediately prior to the Closing Date, with the terms described in the
Preferred Shares Proxy Statement, shall be issued by the Acquiring Fund to the Target Fund. No fractional Acquiring Fund VMTP Shares will be issued. Each Acquiring Fund VMTP Share issued to the Target Fund in exchange for a Target Fund VMTP Share
will have a liquidation preference of $100,000 plus any accumulated and unpaid dividends that have accrued on such Target Fund VMTP Share up to and including the day immediately preceding the Closing Date. The Target Fund may pay any such
accumulated and unpaid dividends prior to the Closing Date.
(c) The net asset value of the Acquiring
Fund and the Target Fund, the values of their assets, the amounts of their liabilities, and the liquidation preference (including accumulated and unpaid dividends) of the Target Fund VMTP Shares and the Acquiring Fund VMTP Shares shall be determined
as of the Valuation Time in accordance with the regular procedures of the Acquiring Fund or such other valuation procedures as shall be
29
|
[Applies to BSD and BBF.]
|
A-9
mutually agreed by the parties, and no adjustment will be made to the net asset value or liquidation preference so determined of any Fund to take into account differences in realized and
unrealized gains and losses.
Such valuation and determination shall be made by the Acquiring Fund in cooperation with the
Target Fund and shall be confirmed by the Acquiring Fund to the Target Fund. The net asset value per share of the Acquiring Fund Common Shares and the liquidation preference (including accumulated and unpaid dividends) per share of the Acquiring
Fund VMTP Shares shall be determined in accordance with such procedures.
For purposes of determining the net asset value per
share of Target Fund Common Shares and the Acquiring Fund Common Shares, the value of the securities held by the applicable Fund plus any cash or other assets (including interest accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding Target Fund VMTP Shares or Acquiring Fund VMTP Shares, as the case may be, shall be divided by the total number of Target Fund Common Shares or Acquiring Fund Common Shares, as the
case may be, outstanding at such time.
(d) The Acquiring Fund shall issue to each Target Fund
Common Shareholder book-entry interests for the Acquiring Fund Common Shares registered in the name of such Target Fund Common Shareholder on the basis of each such holders proportionate interest in the aggregate net asset value of the
Target Fund Common Shares.
(e) The Acquiring Fund shall issue to each Target Fund VMTP Holder
book-entry interests for the Acquiring Fund VMTP Shares registered in the name of such Target Fund VMTP Holder on a one-for-one basis for each holders holdings of
the Target Fund VMTP Shares. The Target Fund VMTP Holders shall not receive, or be entitled to, any payment or other consideration in connection with or as a result of the Reorganization other than as provided in this Agreement. In connection with
such issuance, the Acquiring Fund shall amend the Acquiring Fund VMTP Shares Statement of Preferences of Variable Rate Muni Term Preferred Shares (the Statement of Preferences), share certificates representing such Acquiring
Fund VMTP Shares, and such other agreements, instruments or documents relating to the Acquiring Fund VMTP Shares, in each case as of the Closing Date and only to the extent necessary or applicable to such agreement, instrument or document, to
reflect the authorization and issuance of additional Acquiring Fund VMTP Shares in connection with the Reorganization.
(f) No fractional shares of Acquiring Fund Common Shares will be issued to holders of Target Fund Common Shares
unless such shares are held in a Dividend Reinvestment Plan account. In lieu thereof, the Acquiring Funds transfer agent will aggregate all fractional Acquiring Fund Common Shares to be issued in connection with the Reorganization (other than
those issued to a Dividend Reinvestment Plan account) and sell the resulting full shares on the New York Stock Exchange at the current market price for Acquiring Fund Common Shares for the account of all holders of such fractional interests, and
each such holder will receive such holders pro rata share of the proceeds of such sale upon issuance of book-entry interests representing Acquiring Fund Common Shares.
5. PAYMENT OF EXPENSES.
(a) The
Target Fund and the Acquiring Fund will bear expenses incurred in connection with the Reorganization, including but not limited to, costs related to the preparation and distribution of materials distributed to each Funds Board of Trustees (the
Board), expenses incurred in connection with the preparation of this Agreement, the preparation and filing of any documents required by such Funds state of organization, the preparation and filing of the N-14 Registration Statement and the Preferred Shares Proxy Statement with the U.S. Securities and Exchange Commission (SEC), the printing and distribution of the Joint Proxy Statement/Prospectus,
the Preferred Shares Proxy Statement and any other materials required to be distributed to shareholders, the SEC, state securities commission and secretary of state filing fees and legal and audit fees in connection with the Reorganization, fees
incurred in obtaining the requisite consents of rating agencies, counterparties or service providers to the preferred shares, legal fees incurred in connection with amending the
A-10
transaction documents for the preferred shares, which may include the legal fees of counterparties and service providers to the extent applicable, [fees and expenses incurred in connection with
the Target Fund VRDP Refinancing,]31 legal fees incurred
preparing each Funds board materials, attending each Funds board meetings and preparing the minutes, rating agency fees associated with the ratings of the preferred shares in connection with the Reorganization, audit fees associated with
each Funds financial statements, stock exchange fees, transfer agency fees, rating agency fees, portfolio transfer taxes (if any) and any similar expenses incurred in connection with the Reorganization, which will be borne directly by the
respective Fund incurring the expense or allocated among the Funds based upon any reasonable methodology approved by the Boards of the Funds, provided, that the Acquiring Funds investment adviser may bear all or a portion of the reorganization
expenses of each Fund as set forth in the N-14 Registration Statement. Neither the Funds nor the investment adviser will pay any expenses of shareholders arising out of or in connection with the
Reorganization.
(b) If for any reason the Reorganization is not consummated, no party shall be
liable to any other party for any damages resulting therefrom, including, without limitation, consequential damages, and each Fund shall be responsible, on a proportionate total assets basis, for all expenses incurred in connection with the
Reorganization.
6. COVENANTS OF THE FUNDS.
(a) COVENANTS OF EACH FUND.
(i) Each Fund covenants to operate its business as presently conducted between the date hereof and
the Closing Date, except to the extent that the Target Fund is required or permitted to dispose of assets prior to the Closing Date pursuant to Section 3(b) of this Agreement.
(ii) Each of the Funds agrees that by the Closing Date all of its U.S. federal and other tax
returns and reports required to be filed on or before such date shall have been filed and all taxes shown as due on said returns either have been paid or adequate liability reserves have been provided for the payment of such taxes.
(iii) The intention of the parties is that the transaction contemplated by this Agreement will
qualify as a reorganization within the meaning of Section 368(a) of the Code. Neither the Acquiring Fund nor the Target Fund shall take any action or cause any action to be taken (including, without limitation, the filing of
any tax return) that is inconsistent with such treatment or results in the failure of the transaction to qualify as a reorganization within the meaning of Section 368(a) of the Code. At or prior to the Closing Date, the Acquiring Fund and the
Target Fund will take such action, or cause such action to be taken, as is reasonably necessary to enable Willkie Farr & Gallagher LLP (Willkie), counsel to the Funds, to render the tax opinion required herein (including,
without limitation, each partys execution of representations reasonably requested by and addressed to Willkie).
(iv) In connection with this covenant, the Funds agree to cooperate with each other in filing any tax return, amended return or claim for refund, determining a liability for taxes
or a right to a refund of taxes or participating in or conducting any audit or other proceeding in respect of taxes. The Acquiring Fund agrees to retain for a period of ten (10) years following the Closing Date all returns, schedules and work
papers and all material records or other documents relating to tax matters of the Target Fund for each of such Funds taxable periods ending on or before the Closing Date.
(v) The Acquiring Fund VMTP Shares to be transferred to the Target Fund for distribution to the
Target Fund VMTP Holders on the Closing Date shall only be distributed to the Target Fund VMTP Holders in accordance with an available exemption from registration under the 1933 Act, in a manner not involving any public offering within the meaning
of Section 4(a)(2) of the 1933 Act.
(vi) Each Fund shall use reasonable efforts to
obtain all requisite consents and approvals necessary to consummate the Reorganization.
A-11
(b) COVENANTS OF THE ACQUIRING FUND.
(i) The Acquiring Fund will file the N-14 Registration
Statement and the Preferred Shares Proxy Statement with the SEC and will use its best efforts to provide that the N-14 Registration Statement becomes effective as promptly as practicable. Each Fund agrees to
cooperate fully with the other, and each will furnish to the other the information relating to itself to be set forth in the N-14 Registration Statement and the Preferred Shares Proxy Statement as required by
the 1933 Act, the 1934 Act and the 1940 Act, and the rules and regulations thereunder and the state securities laws.
(ii) The Acquiring Fund has no plan or intention to sell or otherwise dispose of the Target Fund Investments, except for dispositions made in the ordinary course of business.
(iii) Following the consummation of the Reorganization, the Acquiring Fund will
continue its business as a diversified, closed-end management investment company registered under the 1940 Act.
(iv) The Acquiring Fund shall use reasonable efforts to cause the Acquiring Fund Common Shares to be issued in the Reorganization to be approved for listing on the New York Stock
Exchange prior to the Closing Date.
(v) The Acquiring Fund agrees to mail to its
shareholders of record entitled to vote at the special meeting of shareholders at which action is to be considered regarding this Agreement, in sufficient time to comply with requirements as to notice thereof, the Joint Proxy Statement/Prospectus
(but only to the Acquiring Fund Common Shareholders) and the Preferred Shares Proxy Statement (but only to the Acquiring Fund VMTP Holders), each of which complies in all material respects with the applicable provisions of Section 14(a) of the
1934 Act and Section 20(a) of the 1940 Act, and the rules and regulations, respectively, thereunder.
(vi) The Acquiring Fund shall use reasonable efforts to cause the Acquiring Fund VMTP Shares to be
issued in connection with the Reorganization to be rated no lower than the rating assigned to the Acquiring Fund VMTP Shares immediately prior to the Closing Date by the rating agencies then rating the Acquiring Fund VMTP Shares.
(vii) The Acquiring Fund shall use reasonable efforts to amend the following documents to reflect
the authorization and issuance of additional Acquiring Fund VMTP Shares in connection with the Reorganization: (1) the Statement of Preferences; (2) share certificates representing Acquiring Fund VMTP Shares; (3) the Redemption and
Paying Agent Agreement for the Acquiring Fund VMTP Shares; and (4) such other agreements, instruments or documents relating to the Acquiring Fund VMTP Shares, in each case by the Closing Date and only to the extent necessary or applicable to
such agreement, instrument or document.
(c) COVENANTS OF THE TARGET FUND.
(i) The Target Fund agrees that following the consummation of the
Reorganization, following the payment of any portion of the UNII Distribution to be paid to Target Fund Common Shareholders by the Target Fund in accordance with Sections 3(c) and 9(l) hereof following the Closing, it will dissolve in accordance
with the [DTSA]32 [laws of the Commonwealth of
Massachusetts applicable to business trusts]33 and any other applicable law, it will not make any distributions of any Acquiring Fund Common Shares other than to
its shareholders and without first paying or adequately providing for the payment of all of its respective liabilities not assumed by the Acquiring Fund, and on and after the Closing Date it shall not conduct any business except in connection
with its termination.
(ii) The Target Fund undertakes that if the Reorganization
is consummated, it will file an application pursuant to Section 8(f) of the 1940 Act for an order declaring that the Target Fund has ceased to be a registered investment company.
32
|
[Applies to BSD and BBF.]
|
A-12
(iii) The Target Fund agrees
to mail to its shareholders of record entitled to vote at the special meeting of shareholders at which action is to be considered regarding this Agreement, in sufficient time to comply with requirements as to notice thereof, the Joint Proxy
Statement/Prospectus (but only to the Target Fund Common Shareholders) and the Preferred Shares Proxy Statement (but only to the Target Fund [VRDP]34[VMTP]35 Holders), each of which complies in all material respects with the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act,
and the rules and regulations, respectively, thereunder.
(iv) After the Closing
Date, the Target Fund shall prepare, or cause its agents to prepare, any U.S. federal, state or local tax returns required to be filed by such Target Fund with respect to its final taxable
year ending with its complete liquidation and dissolution and for any prior periods or taxable years and further shall cause such tax
returns to be duly filed with the appropriate taxing authorities. Notwithstanding the aforementioned provisions of this subsection, any expenses incurred by the Target Fund (other than for payment of taxes) in connection with the preparation and
filing of said tax returns after the Closing Date shall be borne by such Target Fund to the extent such expenses have been accrued by such Target Fund in the ordinary course without regard to the Reorganization; any excess expenses shall be paid
from a liability reserve established to provide for the payment of such expenses.
(v) Upon the request of the Acquiring Fund, the Target Fund shall use reasonable efforts to perform
the following actions by the Closing Date or such later time as may be agreed to by the Acquiring Fund: (a) terminate the Redemption and Paying Agent Agreement and such other agreements, instruments or documents related to the Target Fund VMTP
Shares, (b) withdraw the ratings assigned to the Target Fund VMTP Shares, (c) cancel the share certificates representing Target Fund VMTP Shares, and (d) withdraw or deregister the Target Fund VMTP Shares from The Depository Trust
Company.
(vi) [Upon the approval of this Agreement by the requisite shareholders of
the Funds, the Target Fund agrees to use reasonable efforts to consummate the Target Fund VRDP Refinancing prior to the Closing Date.]36
7. CLOSING DATE.
(a) The closing of
the Reorganization (the Closing) shall occur prior to the opening of the NYSE at the offices of Willkie, 787 Seventh Avenue, New York, New York 10019, or at such other time or location as may be mutually agreed to by the Funds, on
the next full business day following the Valuation Time to occur after the satisfaction or waiver of all of the conditions set forth in Sections 8 and 9 of this Agreement (other than the conditions that relate to actions to be taken, or documents to
be delivered at the Closing, it being understood that the occurrence of the Closing shall remain subject to the satisfaction or waiver of such conditions at Closing), or at such other time and date as may be mutually agreed to by the Funds (such
date, the Closing Date).
(b) On the Closing Date, the Target Fund shall deliver
the Target Fund Investments to the Acquiring Fund, and the Acquiring Fund shall issue the Acquiring Fund Shares as provided in this Agreement. To the extent that any Target Fund Investments, for any reason, are not transferable on the
Closing Date, the Target Fund shall cause such Target Fund Investments to be transferred to the Acquiring Funds account with its custodian at the earliest practicable date thereafter.
(c) The Target Fund will deliver to the Acquiring Fund on the Closing Date confirmation or other adequate evidence
as to the tax basis of the Target Fund Investments delivered to the Acquiring Fund hereunder.
35
|
[Applies to BSD and MFT.]
|
A-13
(d) On the Closing Date, the Target Fund shall deliver or
make available to (including by electronic format) the Acquiring Fund a list of the names and addresses of all of the Target Fund Shareholders of record immediately prior to the Closing Date and the number of Target Fund Common Shares and
Target Fund VMTP Shares owned by each such Target Fund Shareholder, certified to the best of its knowledge and belief by the transfer agent for the Target Fund Common Shares and Target Fund VMTP Shares or by the Target Funds Chief Executive
Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, or Secretary or any Assistant Secretary.
8. CONDITIONS OF THE TARGET FUND.
The obligations of the
Target Fund hereunder shall be subject to the following conditions:
(a) That
this Agreement shall have been approved by at least [eighty percent]37 [two-thirds]38 of the members of the Board of the Target Fund and by the
affirmative vote of the Target Fund Common Shareholders and the Target Fund [VRDP]39
[VMTP]40 Holders, voting as a single class, representing a majority of the outstanding shares entitled to vote on this
Agreement, and by the affirmative vote of the Target Fund [VRDP]41
[VMTP]42 Holders, voting as a separate class, representing a 1940 Act Majority (as defined below) of the outstanding
[VRDP]43 [VMTP]44 Shares entitled to vote on this Agreement. A 1940 Act Majority means the affirmative vote of either (i) 67% or more of the class or classes of
Target Fund Shares entitled to vote on such proposal present at the Target Funds shareholder meeting where this Agreement shall be approved, if the holders of more than 50% of the outstanding class or classes of Target Fund Shares entitled to
vote on such proposal are present or represented by proxy or (ii) more than 50% of the outstanding class or classes of Target Fund Shares entitled to vote on such proposal, whichever is less.
(b) That the Acquiring Fund shall have delivered (including in electronic format) to the Target Fund (i) a
copy of the resolutions approving this Agreement and the issuance of additional Acquiring Fund Shares in connection with the Reorganization adopted by the Board of the Acquiring Fund, (ii) a certificate setting forth the vote of the Acquiring
Fund VMTP Holders, voting as a separate class, approving this Agreement and amendments to the Statement of Preferences in connection with the issuance of additional Acquiring Fund VMTP Shares in the Reorganization, and the vote of the Acquiring Fund
Common Shareholders and the Acquiring Fund VMTP Holders, voting as a single class, approving the issuance of additional Acquiring Fund Common Shares in connection with the Reorganization, and (iii) a certificate certifying that the Acquiring
Fund has received all requisite consents and approvals necessary to consummate the Reorganization, each certified by the Acquiring Funds Secretary or any Assistant Secretary.
(c) That the Acquiring Fund shall have provided or made available (including by electronic format) to the Target
Fund the Acquiring Fund Closing Financial Statements, together with a schedule of the Acquiring Funds investments, all as of the Valuation Time, certified on the Acquiring Funds behalf by its Chief Executive Officer, President, any Vice
President, Chief Financial Officer, Treasurer or any Assistant Treasurer, and a certificate signed by the Acquiring Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer,
dated as of the Closing Date, certifying that as of the Valuation Time and as of the Closing Date there has been no material adverse change in the financial position of the Acquiring Fund since the date of the Acquiring Funds most recent
Annual or Semi-Annual Report, as
37
|
[Applies to BSD and BBF.]
|
40
|
[Applies to BSD and MFT.]
|
42
|
[Applies to BSD and MFT.]
|
44
|
[Applies to BSD and MFT.]
|
A-14
applicable, other than changes in its portfolio securities since that date or changes in the market value of its portfolio securities.
(d) That the Acquiring Fund shall have furnished to the Target Fund a certificate signed by the Acquiring
Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, dated as of the Closing Date, certifying that, as of the Valuation Time and as of the Closing Date, all
representations and warranties of the Acquiring Fund made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates, and that the Acquiring Fund has complied with all of the agreements
and satisfied all of the conditions on its part to be performed or satisfied at or prior to each of such dates.
(e) That there shall not be any material litigation pending with respect to the matters contemplated by this
Agreement.
(f) That the Target Fund shall have received the opinion of Morris, Nichols,
Arsht & Tunnell LLP, special Delaware counsel to the Acquiring Fund, dated as of the Closing Date, addressed to the Target Fund, that substantively provides the following:
(i) The Acquiring Fund is validly existing as a statutory trust in good standing under the DSTA and
has the statutory trust power to conduct its business as described in the definitive Joint Proxy Statement/Prospectus filed with the SEC pursuant to Rule 497 under the 1933 Act.
(ii) The Acquiring Fund has the statutory trust power and authority to execute, deliver and perform
all of the obligations under the Agreement under the DSTA. The execution and delivery of the Agreement and the consummation by the Acquiring Fund of the transactions contemplated hereby have been duly authorized by all requisite action on the part
of the Acquiring Fund under the DSTA and the Acquiring Funds Agreement and Declaration of Trust.
(iii) The execution and delivery by the Acquiring Fund of this Agreement and the performance of the
Acquiring Funds obligations under the Agreement do not violate the Acquiring Funds Agreement and Declaration of Trust or By-laws.
(iv) Neither the execution, delivery or performance by the Acquiring Fund of the Agreement nor the
compliance by the Acquiring Fund with the terms and provisions thereof will violate any provision of law of the State of Delaware applicable to the Acquiring Fund.
(v) Assuming that the Acquiring Fund Shares will be issued in accordance with the terms of this
Agreement, the Acquiring Fund Shares to be issued and delivered to the Target Fund Shareholders as provided by this Agreement are duly authorized and upon such delivery will be validly issued and fully paid and
non-assessable (except as provided in the last sentence of Section 3.8 of the Acquiring Funds Agreement and Declaration of Trust) by the Acquiring Fund, and no shareholder of the Acquiring Fund has,
as such holder, any preemptive rights to acquire, purchase or subscribe for any securities of the Acquiring Fund under the Acquiring Funds Agreement and Declaration of Trust, By-laws or the laws of the
State of Delaware.
(g) That the Target Fund shall have received the opinion of Willkie, counsel to the
Acquiring Fund, dated as of the Closing Date, addressed to the Target Fund, that substantively provides the following:
(i) The Acquiring Fund is registered with the SEC as a closed-end management investment company under the 1940 Act;
(ii) To the best of such counsels knowledge, no governmental approval, which has not been
obtained and is not in full force and effect, is required to authorize, or is required in connection with, the execution or delivery of the Agreement by the Acquiring Fund, or the enforceability of the Agreement against the Acquiring Fund.
A-15
(iii) Neither the execution, delivery or performance
by the Acquiring Fund of the Agreement nor the compliance by the Acquiring Fund with the terms and provisions thereof will contravene any provision of applicable federal securities law of the United States of America.
(h) That the Target Fund shall have obtained an opinion from counsel for the Acquiring Fund, dated as of the
Closing Date, addressed to the Target Fund, that the consummation of the transactions set forth in this Agreement complies with the requirements of a reorganization as described in Section 368(a) of the Code.
(i) That all proceedings taken by the Acquiring Fund and its counsel in connection with the Reorganization and all
documents incidental thereto shall be satisfactory in form and substance to the Target Fund.
(j) That
the N-14 Registration Statement shall have become effective under the 1933 Act, and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of the Acquiring Fund, be
contemplated by the SEC.
(k) [That the liquidity provider for the Target Fund VRDP Shares shall
have consented to this Agreement.]45
(l) [That the Target Fund VRDP Refinancing shall have been consummated prior to the Closing Date.]46
9.
|
CONDITIONS OF THE ACQUIRING FUND.
|
The obligations of the Acquiring Fund hereunder shall be subject to the following conditions:
(a) That this Agreement and amendments to the Statement of Preferences in connection with the issuance of additional Acquiring Fund VMTP Shares in the Reorganization shall have been
approved by the Board of the Acquiring Fund and by the affirmative vote of the Acquiring Fund VMTP Holders, voting as a separate class, of a 662/3 percent of the outstanding Acquiring Fund VMTP Shares.
(b) That the issuance of additional Acquiring Fund Common Shares in connection with the Reorganization shall have
been approved by the Board of the Acquiring Fund and by the affirmative vote of the Acquiring Fund Common Shareholders and the Acquiring Fund VMTP Holders, voting as a single class, of a majority of the outstanding shares
entitled to vote on such issuance.
(c) The Target Fund shall have delivered
(including in electronic format) to the Acquiring Fund (i) a copy of the resolutions approving this Agreement adopted by the Board of the Target Fund, (ii) a certificate setting forth the vote of the Target Fund Common Shareholders and the
Target Fund [VRDP]47 [VMTP]48 Holders, voting as a single class, approving this Agreement, and the vote of the Target Fund [VRDP]49 [VMTP]50 Holders, voting as a separate class, approving this Agreement, and (iii) a certificate certifying that the Target Fund has received all requisite consents and
approvals necessary to consummate the Reorganization, each certified by the Target Funds Secretary or any Assistant Secretary.
(d) That the Target Fund shall have provided or made available (including by electronic format) to the Acquiring Fund the Target Fund Closing Financial Statements, together with a
schedule of the Target Funds
46
|
[Applies to the reorganization of BBF into BLE.]
|
48
|
[Applies to BSD and MFT.]
|
50
|
[Applies to BSD and MFT.]
|
A-16
investments with their respective dates of acquisition and tax costs, all as of the Valuation Time, certified on the Target Funds behalf by its Chief Executive Officer, President, any Vice
President, Chief Financial Officer, Treasurer or any Assistant Treasurer, and a certificate signed the Target Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, dated as
of the Closing Date, certifying that as of the Valuation Time and as of the Closing Date there has been no material adverse change in the financial position of the Target Fund since the date of the Target Funds most recent Annual Report or
Semi-Annual Report, as applicable, other than changes in the Target Fund Investments since that date or changes in the market value of the Target Fund Investments.
(e) That the Target Fund shall have furnished to the Acquiring Fund a certificate signed by the Target Funds Chief Executive Officer, President, any Vice President, Chief
Financial Officer, Treasurer or any Assistant Treasurer, dated as of the Closing Date, certifying that as of the Valuation Time and as of the Closing Date all representations and warranties of the Target Fund made in this Agreement are true and
correct in all material respects with the same effect as if made at and as of such dates and the Target Fund has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to such
dates.
(f) That there shall not be any material litigation pending with respect to the matters
contemplated by this Agreement.
(g) That the Acquiring Fund shall have
received the opinion of [Morris, Nichols, Arsht & Tunnell LLP, special Delaware counsel]51 [Morgan, Lewis & Bockius LLP, special Massachusetts
counsel]52 to the Target Fund, dated as of the Closing Date, addressed to the Acquiring Fund, that substantively provides the
following:
(i) The Target Fund is validly existing [under the laws of the Commonwealth
of Massachusetts]53 and is in good standing [under
the DSTA]54 [with the office of the
Secretary of the Commonwealth of Massachusetts]55.
(ii) The Target Fund has the [statutory
trust]56 power and authority [under its Declaration of Trust and the
laws of the Commonwealth of Massachusetts applicable to business trusts]57 to execute and deliver the Agreement and perform all of its obligations under the Agreement under the [DSTA]58. The execution and delivery of the Agreement and the consummation by
the Target Fund of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Target Fund under the [DSTA]59 [laws of the Commonwealth of Massachusetts applicable to business trusts]60 and the Target Funds [Agreement and Declaration of Trust]61 [Declaration of Trust]62.
(iii) The Agreement has been duly executed and delivered by the Target Fund.
51
|
[Applies to BSD and BBF.]
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54
|
[Applies to BSD and BBF.]
|
56
|
[Applies to BSD and BBF.]
|
58
|
[Applies to BSD and BBF.]
|
59
|
[Applies to BSD and BBF.]
|
61
|
[Applies to BSD and BBF.]
|
A-17
(iv) The execution and
delivery by the Target Fund of the Agreement did not, and the performance of the Target Funds obligations under the Agreement, will not violate the [Agreement and Declaration of Trust]63 [Declaration of Trust]64 or the By-laws of the Target Fund.
(v) Neither the execution, delivery or performance by the Target Fund of the Agreement nor the compliance by the Target Fund with the terms and provisions thereof will violate any
provision of any applicable law of the [State of Delaware]65 [Commonwealth of Massachusetts applicable to business
trusts]66.
(h) That the Target Fund shall have received the opinion of Willkie, counsel to the Acquiring Fund, dated as of
the Closing Date, addressed to the Target Fund, that substantively provides the following:
(i) The Target Fund is registered with the SEC as a
closed-end management investment company under the 1940 Act.
(ii) To the best of such counsels knowledge, no governmental approval, which has not been obtained and is not in full force and effect, is required to authorize, or is
required in connection with, the execution or delivery of the Agreement by the Target Fund, or the enforceability of the Agreement against the Target Fund.
(iii) Neither the execution, delivery or performance by the Target Fund of the Agreement nor the compliance by the Target Fund with the terms and provisions thereof will contravene
any provision of applicable federal securities law of the United States of America.
(i) That the
Acquiring Fund shall have obtained an opinion from counsel for the Target Fund, dated as of the Closing Date, addressed to the Acquiring Fund, that the consummation of the transactions set forth in this Agreement complies with the requirements of a
reorganization as described in Section 368(a) of the Code.
(j) That all proceedings taken by the
Target Fund and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to the Acquiring Fund.
(k) That the N-14 Registration Statement shall have become effective under the 1933 Act and no stop order suspending such effectiveness shall
have been instituted or, to the knowledge of the Target Fund, be contemplated by the SEC.
(l) That
prior to the Closing Date, the Target Fund shall have declared a dividend or dividends which, together with all such previous dividends, shall have the effect of distributing to the Target Fund Common Shareholders entitled to such dividends
(i) all of its investment company taxable income to and including the Closing Date, if any (computed without regard to any deduction for dividends paid), (ii) all of its net capital gain, if any, recognized to and including the Closing Date and
(iii) the excess of its interest income excludable from gross income under Section 103(a) of the Code, if any, over its deductions disallowed under Sections 265 and 171(a)(2) of the Code for the period to and including the Closing Date.
Target Fund may pay amounts in respect of such UNII Distributions in one or more distributions to Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing Date. In addition, the Acquiring Fund may pay
amounts in respect of such UNII Distributions on behalf of the Target Fund to the Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing Date as an agent out of cash or other short-term liquid assets maturing
prior to the payment date of the UNII Distributions acquired from the Target Fund in the Reorganization, segregated for this purpose and maintained in an amount at least equal to the remaining payment obligations in respect of the UNII
Distributions.
63
|
[Applies to BSD and BBF.]
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65
|
[Applies to BSD and BBF.]
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A-18
(m) That the redemption and paying agent and the rating agencies for
the Acquiring Fund VMTP Shares shall have consented to any amendments to the Statement of Preferences, share certificates representing Acquiring Fund VMTP Shares and such other agreements, instruments or documents relating to the Acquiring Fund VMTP
Shares that are necessary to reflect the issuance of additional Acquiring Fund VMTP Shares in connection with the Reorganization, but only to the extent such consent is required under the Related Documents (as defined in the Statement of
Preferences).
(n) [That the Target Fund VRDP Refinancing shall have been consummated prior to the
Closing Date.]67
10. TERMINATION, POSTPONEMENT AND WAIVERS.
(a) Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and the
Reorganization abandoned at any time (whether before or after adoption thereof by the shareholders of the Target Fund and the Acquiring Fund) prior to the Closing Date, or the Closing Date may be postponed, (i) by mutual consent of the Boards
of the Acquiring Fund and the Target Fund; (ii) by the Board of the Target Fund if any condition of the Target Funds obligations set forth in Section 8 of this Agreement has not been fulfilled or waived by such Board; and
(iii) by the Board of the Acquiring Fund if any condition of the Acquiring Funds obligations set forth in Section 9 of this Agreement has not been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not been consummated by [●], 2021, this
Agreement automatically shall terminate on that date, unless a later date is mutually agreed to by the Boards of the Acquiring Fund and the Target Fund.
(c) In the event of termination of this Agreement pursuant to the provisions hereof, the same shall become void and have no further effect, and there shall not be any liability on
the part of any Fund or its respective directors, trustees, officers, agents or shareholders in respect of this Agreement other than with respect to Section 11 and payment by each Fund of its respective expenses incurred in connection with the
Reorganization.
(d) At any time prior to the Closing Date, any of the terms or conditions of this
Agreement may be waived by the Board of the Acquiring Fund or the Target Fund (whichever is entitled to the benefit thereof), if, in the judgment of such Board after consultation with its counsel, such action or waiver will not have a material
adverse effect on the benefits intended under this Agreement to the shareholders of their respective Fund, on behalf of which such action is taken.
(e) The respective representations and warranties contained in Sections 1 and 2 of this Agreement shall expire with, and be terminated by, the consummation of the Reorganization,
and neither the Funds, nor any of their respective officers, directors, trustees, agents or shareholders shall have any liability with respect to such representations or warranties after the Closing Date. This provision shall not protect any
officer, director, trustee, agent or shareholder of either of the Funds against any liability to the entity for which that officer, director, trustee, agent or shareholder so acts or to its shareholders, to which that officer, director, trustee,
agent or shareholder otherwise would be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of his or her duties in the conduct of such office.
(f) If any order or orders of the SEC with respect to this Agreement shall be issued prior to the Closing Date and
shall impose any terms or conditions which are determined by action of the Boards of the Acquiring Fund and the Target Fund to be acceptable, such terms and conditions shall be binding as if a part of this Agreement without further vote or approval
of the Target Fund Shareholders and the Acquiring Fund Shareholders unless such terms and conditions shall result in a change in the method of computing the number of Acquiring Fund Shares to be issued to the Target Fund Shareholders, in which
event, unless such terms and
67
|
[Applies to the reorganization of BBF into BLE.]
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A-19
conditions shall have been included in the proxy solicitation materials furnished to the Target Fund Shareholders prior to the meeting at which the Reorganization shall have been approved, this
Agreement shall not be consummated and shall terminate unless the Target Fund promptly shall call a special meeting of the Target Fund Shareholders at which such conditions so imposed shall be submitted for approval.
11. INDEMNIFICATION.
(a) Each party (an Indemnitor) shall indemnify and hold the other and its officers, directors, trustees, agents and persons controlled by or controlling any of
them (each an Indemnified Party) harmless from and against any and all losses, damages, liabilities, claims, demands, judgments, settlements, deficiencies, taxes, assessments, charges, costs and expenses of any nature whatsoever
(including reasonable attorneys fees) including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees reasonably incurred by such Indemnified Party in connection with the defense or disposition of
any claim, action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which such Indemnified Party may be or may have been involved as a party or otherwise or with which such Indemnified
Party may be or may have been threatened (collectively, the Losses) arising out of or related to any claim of a breach of any representation, warranty or covenant made herein by the Indemnitor; provided, however,
that no Indemnified Party shall be indemnified hereunder against any Losses arising directly from such Indemnified Partys (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless disregard of the
duties involved in the conduct of such Indemnified Partys position.
(b) The Indemnified Party
shall use its best efforts to minimize any liabilities, damages, deficiencies, claims, judgments, assessments, costs and expenses in respect of which indemnity may be sought hereunder. The Indemnified Party shall give written notice to Indemnitor
within the earlier of ten (10) days of receipt of written notice to the Indemnified Party or thirty (30) days from discovery by the Indemnified Party of any matters which may give rise to a claim for indemnification or reimbursement under
this Agreement. The failure to give such notice shall not affect the right of the Indemnified Party to indemnity hereunder unless such failure has materially and adversely affected the rights of the Indemnitor. At any time after ten (10) days
from the giving of such notice, the Indemnified Party may, at its option, resist, settle or otherwise compromise, or pay such claim unless it shall have received notice from the Indemnitor that the Indemnitor intends, at the Indemnitors sole
cost and expense, to assume the defense of any such matter, in which case the Indemnified Party shall have the right, at no cost or expense to the Indemnitor, to participate in such defense. If the Indemnitor does not assume the defense of such
matter, and in any event until the Indemnitor states in writing that it will assume the defense, the Indemnitor shall pay all costs of the Indemnified Party arising out of the defense until the defense is assumed; provided, however,
that the Indemnified Party shall consult with the Indemnitor and obtain indemnitors prior written consent to any payment or settlement of any such claim. The Indemnitor shall keep the Indemnified Party fully apprised at all times as to the
status of the defense. If the Indemnitor does not assume the defense, the Indemnified Party shall keep the Indemnitor apprised at all times as to the status of the defense. Following indemnification as provided for hereunder, the Indemnitor shall be
subrogated to all rights of the Indemnified Party with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made.
12. OTHER MATTERS.
(a) All
covenants, agreements, representations and warranties made under this Agreement and any certificates delivered pursuant to this Agreement shall be deemed to have been material and relied upon by each of the parties, notwithstanding any investigation
made by them or on their behalf.
(b) All notices hereunder shall be sufficiently given for all
purposes hereunder if in writing and delivered personally or sent by registered mail or certified mail, postage prepaid. Notice to the Target Fund shall be addressed to [Target Fund] c/o BlackRock Advisors, LLC, 40 East 52nd Street, New York,
New York 10022, Attention: Janey Ahn, Secretary of the Target Fund or at such other address as the Target Fund may designate by written notice to the Acquiring Fund. Notice to the Acquiring Fund shall be addressed to BlackRock Municipal
A-20
Income Trust II c/o BlackRock Advisors, LLC, 40 East 52nd Street New York, New York 10022, Attention: Janey Ahn, Secretary of the Acquiring Fund, or at such other address and to the attention of
such other person as the Acquiring Fund may designate by written notice to the Target Fund. Any notice shall be deemed to have been served or given as of the date such notice is delivered personally or mailed.
(c) This Agreement supersedes all previous correspondence and oral communications between the Funds regarding the
Reorganization, constitutes the only understanding with respect to the Reorganization, may not be changed except by a letter of agreement signed by each Fund and shall be governed by and construed in accordance with the laws of the State of New York
applicable to agreements made and to be performed in said state.
(d) This Agreement may be amended or
modified by the parties hereto prior to the Closing Date, by action taken or authorized by their respective Boards at any time before or after adoption of this Agreement and approval of the Reorganization by the Target Fund Shareholders or the
Acquiring Fund Shareholders, but, after any such adoption and approval, no amendment or modification shall be made which by law requires further approval by shareholders without such further approval. This Agreement may not be amended or modified
except by an instrument in writing signed on behalf of each of the Funds.
(e) This Agreement is not
intended to confer upon any person other than the parties hereto (or their respective successors and assigns) any rights, remedies, obligations or liabilities hereunder. If any provision of this Agreement shall be held or made invalid by statute
rule, regulation, decision of a tribunal or otherwise, the remainder of this Agreement shall not be affected thereby and, to such extent, the provisions of this Agreement shall be deemed severable provided that this Agreement shall be deemed
modified to give effect to the fullest extent permitted under applicable law to the intentions of the party as reflected by this Agreement prior to the invalidity of such provision.
(f) It is expressly agreed that the obligations of the Funds hereunder shall not be binding upon any of their
respective directors, trustees, shareholders, nominees, officers, agents, or employees personally, but shall bind only the property of the respective Fund. The execution and delivery of this Agreement has been authorized by the Boards of the
Acquiring Fund and the Target Fund and signed by an authorized officer of each of the Acquiring Fund and the Target Fund, acting as such, and neither such authorization by such Board nor such execution and delivery by such officer shall be deemed to
have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the property of each Fund.
(g) [The names BlackRock MuniYield Investment Quality Fund and the Trustees of BlackRock MuniYield Investment Quality Fund refer respectively to the Target
Fund created and the Board of Trustees, as trustees but not individually or personally, acting from time to time under the Target Funds Declaration of Trust dated August 24,1992 which is hereby referred to and a copy of which is on file
at the office of the State Secretary of The Commonwealth of Massachusetts and at the principal office of the Target Fund. The obligations of BlackRock MuniYield Investment Quality Fund entered into in the name or on behalf thereof by any
of the Trustees, officers, representatives or agents are made not individually, but in such capacities, and are not binding upon any of the Trustees of the Target Fund, Target Fund shareholders, officers, representatives or agents of the Target Fund
personally, but bind only the Target Fund property, and all persons dealing with any class of shares of the Target Fund must look solely to the Target Fund property belonging to such class for the enforcement of any claims against the Target Fund.
The execution and delivery of this Agreement have been authorized by the Board of Trustees with respect to the Target Fund hereunder, and signed by authorized officers of the Target Fund, acting as such. Neither the authorization by the Board of
Trustees nor the execution and delivery by such officers shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the property of the Target Fund as provided in the
Target Funds charter documents.]68
A-21
(h) This Agreement may be executed in
any number of counterparts, each of which, when executed and delivered, shall be deemed to be an original but all such counterparts together shall constitute but one instrument.
[Remainder of Page Intentionally Left Blank]
A-22
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be executed and
delivered by their duly authorized officers as of the day and year first written above.
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BLACKROCK MUNICIPAL INCOME TRUST II
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By:
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Name:
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Title:
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[TARGET FUND]
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By:
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Name:
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Title
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APPENDIX B
FUNDAMENTAL AND NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
Acquiring Fund
The following are fundamental investment restrictions of the Acquiring Fund and may not be changed without the approval of the holders of
a majority of the Acquiring Funds outstanding shares of beneficial interest, $0.001 par value (Acquiring Fund Common Shares) and outstanding preferred shares of beneficial interests of the Acquiring Fund, and including the VMTP
Shares (Acquiring Fund Preferred Shares), voting together as a single class, and a majority of the outstanding Acquiring Fund Preferred Shares, voting as a separate class (which for this purpose and under the 1940 Act means the lesser of
(i) 67% of the shares of each class of shares represented at a meeting at which more than 50% of the outstanding shares of each class of shares are represented or (ii) more than 50% of the outstanding shares of each class of shares). The
Acquiring Fund may not:
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1.
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invest 25% or more of the value of its Managed Assets in any one industry, provided that this limitation does not apply to Municipal Bonds
other than those Municipal Bonds backed only by assets and revenues of non-governmental issuers;
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2.
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with respect to 75% of its Managed Assets, invest more than 5% of the value of its Managed Assets in the securities of any single issuer or
purchase more than 10% of the outstanding securities of any one issuer;
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3.
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issue senior securities or borrow money other than as permitted by the 1940 Act or pledge its assets other than to secure such issuances or in
connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies;
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4.
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make loans of money or property to any person, except through loans of portfolio securities, the purchase of fixed income securities
consistent with the Funds investment objective and policies or the entry into repurchase agreements;
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5.
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underwrite the securities of other issuers, except to the extent that in connection with the disposition of portfolio securities or the sale
of its own securities the Fund may be deemed to be an underwriter;
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6.
|
purchase or sell real estate or interests therein other than Municipal Bonds secured by real estate or interests therein; provided that the
Fund may hold and sell any real estate acquired in connection with its investment in portfolio securities; or
|
|
7.
|
purchase or sell commodities or commodity contracts for any purposes except as, and to the extent, permitted by applicable law without the
Fund becoming subject to registration with the Commodity Futures Trading Commission (the CFTC) as a commodity pool.
|
For purposes of applying the limitation set forth in subparagraph (1) above, securities of the U.S. government, its agencies, or instrumentalities, and securities backed by the credit of a
governmental entity are not considered to represent industries. However, obligations backed only by the assets and revenues of non- governmental issuers may for this purpose be deemed to be issued by such non-governmental issuers. Thus, the 25% limitation would apply to such obligations. It is nonetheless possible that the Acquiring Fund may invest more than 25% of its Managed Assets in a broader economic sector of
the market for Municipal Bonds, such as revenue obligations of hospitals and other health care facilities or electrical utility revenue obligations. The Acquiring Fund reserves the right to invest more than 25% of its Managed Assets in industrial
development bonds and private activity securities.
For the purpose of applying the limitation set forth in subparagraph
(1) above, a non-governmental issuer shall be deemed the sole issuer of a security when its assets and revenues are separate from other governmental entities and its securities are backed only by its
assets and revenues. Similarly, in the case of a non-governmental
B-1
issuer, such as an industrial corporation or a privately owned or operated hospital, if the security is backed only by the assets and revenues of the
non-governmental issuer, then such non-governmental issuer would be deemed to be the sole issuer. Where a security is also backed by the enforceable obligation of a
superior or unrelated governmental or other entity (other than a bond insurer), it shall also be included in the computation of securities owned that are issued by such governmental or other entity. Where a security is guaranteed by a governmental
entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity or bank. When a Municipal
Bond is insured by bond insurance, it shall not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such Municipal Bond will be determined in accordance with the principles set forth above. The foregoing
restrictions do not limit the percentage of the Acquiring Funds assets that may be invested in Municipal Bonds insured by any given insurer.
As a fundamental policy, under normal market conditions, the Acquiring Fund will invest at least 80% of its Managed Assets in Municipal Bonds, the interest of which is exempt from regular federal income
tax (except that the interest may be subject to the federal alternative minimum tax).
In addition to the
foregoing fundamental investment policies, the Acquiring Fund is also subject to the following non- fundamental restrictions and policies, which may be changed by the board of trustees. The Acquiring Fund may
not:
|
a)
|
make any short sale of securities except in conformity with applicable laws, rules and regulations and unless, after giving effect to such
sale, the market value of all securities sold short does not exceed 25% of the value of the Acquiring Funds Managed Assets and the Acquiring Funds aggregate short sales of a particular class of securities does not exceed 25% of the then
outstanding securities of that class. The Acquiring Fund may also make short sales against the box without respect to such limitations. In this type of short sale, at the time of the sale, the Acquiring Fund owns or has the immediate and
unconditional right to acquire at no additional cost the identical security;
|
|
b)
|
purchase securities of open-end or closed-end investment
companies except in compliance with the 1940 Act or any exemptive relief obtained thereunder; or
|
|
c)
|
purchase securities of companies for the purpose of exercising control.
|
If a percentage restriction on the investment policies or the investment or use of assets set forth above is adhered to at the time a
transaction is effected, later changes in percentage resulting from changing values will not be considered a violation.
BSD
The following are fundamental investment restrictions of BSD and may not be changed without the approval of the
holders of a majority of BSDs outstanding shares of beneficial interest, $0.001 par value (BSD Common Shares) and outstanding preferred shares of beneficial interests of BSD, and including the VMTP Shares ( BSD Preferred
Shares), voting together as a single class, and a majority of the outstanding BSD Preferred Shares, voting as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the shares of each class of shares
represented at a meeting at which more than 50% of the outstanding shares of each class of shares are represented or (ii) more than 50% of the outstanding shares of each class of shares). BSD may not:
|
1.
|
invest 25% or more of the value of its total assets in any one industry, provided that this limitation does not apply to Municipal Bonds other
than those Municipal Bonds backed only by assets and revenues of non-governmental issuers;
|
|
2.
|
issue senior securities or borrow money other than as permitted by the 1940 Act;
|
B-2
|
3.
|
make loans of money or property to any person, except through loans of portfolio securities, the purchase of fixed income securities
consistent with the Funds investment objective and policies or the entry into repurchase agreements;
|
|
4.
|
underwrite the securities of other issuers, except to the extent that in connection with the disposition of portfolio securities or the sale
of its own securities the Fund may be deemed to be an underwriter;
|
|
5.
|
purchase or sell real estate or interests therein other than Municipal Bonds secured by real estate or interests therein; provided that the
Fund may hold and sell any real estate acquired in connection with its investment in portfolio securities; or
|
|
6.
|
purchase or sell commodities or commodity contracts for any purposes except as, and to the extent, permitted by applicable law without the
Fund becoming subject to registration with the Commodity Futures Trading Commission as a commodity pool.
|
For purposes of applying the limitation set forth in subparagraph (1) above, securities of the U.S. government, its agencies, or
instrumentalities, and securities backed by the credit of a governmental entity are not considered to represent industries. However, obligations backed only by the assets and revenues of non- governmental
issuers may for this purpose be deemed to be issued by such non-governmental issuers. Thus, the 25% limitation would apply to such obligations. It is nonetheless possible that BSD may invest more than 25% of
its total assets in a broader economic sector of the market for Municipal Bonds, such as revenue obligations of hospitals and other health care facilities or electrical utility revenue obligations. BSD reserves the right to invest more than 25% of
its assets in industrial development bonds and private activity securities.
For the purpose of applying the limitation set
forth in subparagraph (1) above, a non-governmental issuer shall be deemed the sole issuer of a security when its assets and revenues are separate from other governmental entities and its securities are
backed only by its assets and revenues. Similarly, in the case of a non-governmental issuer, such as an industrial corporation or a privately owned or operated hospital, if the security is backed only by the
assets and revenues of the non-governmental issuer, then such non-governmental issuer would be deemed to be the sole issuer. Where a security is also backed by the
enforceable obligation of a superior or unrelated governmental or other entity (other than a bond insurer), it shall also be included in the computation of securities owned that are issued by such governmental or other entity. Where a security is
guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity
or bank. When a Municipal Bond is insured by bond insurance, it shall not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such Municipal Bond will be determined in accordance with the principles set forth
above. The foregoing restrictions do not limit the percentage of BSDs assets that may be invested in Municipal Bonds insured by any given insurer.
In addition to the foregoing fundamental investment policies, BSD is also subject to the following non- fundamental restrictions and policies, which may be changed
by the board of trustees. BSD may not:
|
1.
|
make any short sale of securities except in conformity with applicable laws, rules and regulations and unless, after giving effect to such
sale, the market value of all securities sold short does not exceed 25% of the value of BSDs total assets and BSDs aggregate short sales of a particular class of securities does not exceed 25% of the then outstanding securities of that
class. BSD may also make short sales against the box without respect to such limitations. In this type of short sale, at the time of the sale, BSD owns or has the immediate and unconditional right to acquire at no additional cost the
identical security;
|
|
2.
|
purchase securities of open-end or closed-end investment
companies except in compliance with the 1940 Act or any exemptive relief obtained thereunder;
|
|
3.
|
purchase securities of companies for the purpose of exercising control; or
|
B-3
|
4.
|
Invest more than 5% of total BSD assets in securities of any one issuer, except that this limitation does not apply to bonds issued by the
United States Government, its agencies and instrumentalities or to the investment of 25% of BSDs total assets.
|
If a percentage restriction on the investment policies or the investment or use of assets set forth above is adhered to at the time a transaction is effected, later changes in percentage resulting from
changing values will not be considered a violation.
MFT
The following are fundamental investment restrictions of MFT and may not be changed without the approval of the holders of a majority of
MFTs outstanding common shares of beneficial interest $0.10 par value (MFT Common Shares) and outstanding preferred shares of beneficial interests of MFT, and including VMTP Shares (MFT Preferred Shares), voting together as a
single class, and a majority of the outstanding MFT Preferred Shares, voting as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the shares of each class of beneficial interest represented at a meeting
at which more than 50% of the outstanding shares of each class of beneficial interest are represented or (ii) more than 50% of the outstanding shares of each class of beneficial interest). MFT may not:
|
1.
|
Make investments for the purpose of exercising control or management.
|
|
2.
|
Purchase securities of other investment companies, except (i) in connection with a merger, consolidation, acquisition or reorganization,
(ii) by purchase of shares of tax-exempt money market funds advised by the Investment Advisor or its affiliates (as defined in the 1940 Act) to the extent permitted by an exemptive order issued to the
Fund by the Securities and Exchange Commission, or (iii) by purchase in the open market of securities of closed-end investment companies and only if immediately thereafter not more than 10% of the
Funds total assets would be invested in such securities.
|
|
3.
|
Purchase or sell real estate, real estate limited partnerships, commodities or commodity contracts; provided that the Fund may invest
in securities secured by real estate or interests therein or issued by companies that invest in real estate or interests therein and the Fund may purchase and sell financial futures contracts and options thereon.
|
|
4.
|
Issue senior securities other than preferred shares or borrow in excess of 5% of its total assets taken at market value; provided,
however, that the Fund is authorized to borrow money in excess of 5% of the value of its total assets for the purpose of repurchasing shares of beneficial interest or redeeming shares of preferred shares.
|
|
5.
|
Underwrite securities of other issuers except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933, as amended,
in selling portfolio securities.
|
|
6.
|
Make loans to other persons, except that the Fund may purchase Municipal Bonds and other debt securities in accordance with its investment
objective, policies and limitations.
|
|
7.
|
Purchase any securities on margin, except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities (the deposit or payment by the Fund of initial or variation margin in connection with financial futures contracts and options thereon is not considered the purchase of a security on margin).
|
|
8.
|
Make short sales of securities or maintain a short position or invest in put, call, straddle or spread options, except that the Fund may
write, purchase and sell options and futures on Municipal Bonds, U.S. Government obligations and related indices or otherwise in connection with bona fide hedging activities.
|
|
9.
|
Invest more than 25% of its total assets (taken at market value at the time of each investment) in securities of issuers in a single industry;
provided that, for purposes of this restriction, states municipalities and their political subdivisions are not considered to be part of any industry.
|
B-4
For purposes of fundamental investment restriction (4) above, MFT may borrow moneys in
excess of 5% of the value of its total assets to the extent permitted by Section 18 of the 1940 Act or otherwise as permitted by applicable law for the purpose of repurchasing shares of beneficial interest or redeeming shares of preferred
shares. For purposes of fundamental investment restriction (9) above, the exception for states, municipalities and their political subdivisions applies only to tax-exempt securities issued by such
entities.
Additional investment restrictions adopted by MFT, which may be changed by the Board of Trustees without
shareholder approval, provide that MFT may not mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or held by MFT except as may be necessary in connection with borrowings mentioned in
investment restriction (4) above or except as may be necessary in connection with transactions in financial futures contracts and options thereon.
If a percentage restriction on the investment policies or the investment or use of assets set forth above is adhered to at the time a transaction is effected, later changes in percentage resulting from
changing values will not be considered a violation.
BBF
The following are fundamental investment restrictions of BBF and may not be changed without the approval of the holders of a majority of
BBFs outstanding common shares of beneficial interest, ($0.001 par value) (BBF Common Shares) and outstanding preferred shares of BBF, and including the VRDP Shares (BBF Preferred Shares), voting together as a single
class, and a majority of the outstanding BBF Preferred Shares, voting as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the shares of each class of shares represented at a meeting at which more than
50% of the outstanding shares of each class of shares are represented or (ii) more than 50% of the outstanding shares of each class of shares). BBF may not:
|
1.
|
invest 25% or more of the value of its total assets in any one industry, provided that this limitation does not apply to municipal bonds other
than those municipal bonds backed only by assets and revenues of non-governmental issuers;
|
|
2.
|
issue senior securities or borrow money other than as permitted by the 1940 Act or pledge its assets other than to secure such issuances or in
connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies;
|
|
3.
|
make loans of money or property to any person, except through loans of portfolio securities, the purchase of fixed income securities
consistent with the Funds investment objective and policies or the entry into repurchase agreements;
|
|
4.
|
underwrite the securities of other issuers, except to the extent that in connection with the disposition of portfolio securities or the sale
of its own securities the Fund may be deemed to be an underwriter;
|
|
5.
|
purchase or sell real estate or interests therein other than municipal bonds secured by real estate or interests therein; provided that the
Fund may hold and sell any real estate acquired in connection with its investment in portfolio securities; or
|
|
6.
|
purchase or sell commodities or commodity contracts for any purposes except as, and to the extent, permitted by applicable law without the
Fund becoming subject to registration with the Commodity Futures Trading Commission (the CFTC) as a commodity pool.
|
For purposes of applying the limitation set forth in subparagraph (1) above, securities of the U.S. government, its agencies, or instrumentalities, and securities backed by the credit of a
governmental entity are not considered to represent industries. However, obligations backed only by the assets and revenues of non-governmental issuers may for this purpose be deemed to be issued by such non-governmental issuers. Thus, the 25% limitation would apply to such obligations. It is nonetheless possible that BBF may invest more than
B-5
25% of its total assets in a broader economic sector of the market for municipal bonds, such as revenue obligations of hospitals and other health care facilities or electrical utility revenue
obligations. BBF reserves the right to invest more than 25% of its assets in industrial development bonds and private activity securities.
For the purpose of applying the limitation set forth in subparagraph (1) above, a non- governmental issuer will be deemed the sole issuer of a security when
its assets and revenues are separate from other governmental entities and its securities are backed only by its assets and revenues. Similarly, in the case of a non-governmental issuer, such as an industrial
corporation or a privately owned or operated hospital, if the security is backed only by the assets and revenues of the non-governmental issuer, then such
non-governmental issuer would be deemed to be the sole issuer. Where a security is also backed by the enforceable obligation of a superior or unrelated governmental or other entity (other than a bond insurer),
it will also be included in the computation of securities owned that are issued by such governmental or other entity. Where a security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such
a guarantee or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity or bank. When a municipal bond is insured by bond insurance, it will not be considered a security that is
issued or guaranteed by the insurer; instead, the issuer of such municipal bond will be determined in accordance with the principles set forth above. The foregoing restrictions do not limit the percentage of BBFs assets that may be invested in
municipal bonds insured by any given insurer.
In addition to the foregoing fundamental investment policies, BBF is also
subject to the following non-fundamental restrictions and policies, which may be changed by the Board. BBF may not:
|
1.
|
make any short sale of securities except in conformity with applicable laws, rules and regulations and unless, after giving effect to such
sale, the market value of all securities sold short does not exceed 25% of the value of BBFs total assets and BBFs aggregate short sales of a particular class of securities does not exceed 25% of the then outstanding securities of that
class. BBF may also make short sales against the box without respect to such limitations. In this type of short sale, at the time of the sale, BBF owns or has the immediate and unconditional right to acquire at no additional cost the
identical security;
|
|
2.
|
purchase securities of open-end or closed-end investment
companies except in compliance with the 1940 Act or any exemptive relief obtained thereunder; or
|
|
3.
|
purchase securities of companies for the purpose of exercising control.
|
If a percentage restriction on the investment policies or the investment or use of assets set forth above is adhered to at the time a
transaction is effected, later changes in percentage resulting from changing values will not be considered a violation.
B-6
APPENDIX C
FORM OF AMENDMENT TO BLE STATEMENT OF PREFERENCES
BLACKROCK MUNICIPAL INCOME TRUST II
AMENDMENT TO
STATEMENT OF PREFERENCES OF
VARIABLE RATE MUNI TERM PREFERRED SHARES (VMTP SHARES)
DATED
DECEMBER 15, 2011
(THE STATEMENT OF PREFERENCES)
The undersigned officer of BlackRock Municipal Income Trust II (the Trust), a Delaware statutory trust, hereby certifies as
follows:
1. The Board of Trustees of the Trust (with the consent of the Holders (as defined in the
Statement of Preferences) of the VMTP Shares required under Section 5 of the Statement of Preferences) has adopted resolutions to amend the Statement of Preferences as follows:
a. The Statement of Preferences of the Trust is hereby amended by deleting the recitals in their
entirety and replacing them with the following as of [●], 2020:
FIRST: Pursuant to authority expressly vested in the
Board of Trustees of the Trust by Article VI of the Trusts Agreement and Declaration of Trust (the Charter), the Board of Trustees of the Trust, by resolution duly adopted on December 14, 2011, approved the issuance of 1,513
preferred shares of beneficial interest in the Trust, par value $0.001 per share, as Variable Rate Muni Term Preferred Shares (together with any Variable Rate Muni Term Preferred Shares approved and issued after December 14, 2011, the
VMTP Preferred Shares). The VMTP Preferred Shares may be issued in one or more series, as designated and authorized by the Board of Trustees or a duly authorized committee thereof from time to time ( each series of VMTP Preferred Shares
that may be authorized and issued, a Series).
SECOND: Pursuant to authority expressly vested in the Board of
Trustees of the Trust by Article VI of the Charter, the Board of Trustees of the Trust, by resolution duly adopted on June 16, 2020, and the Executive Committee of the Board of Trustees of the Trust, by resolution duly adopted on [●],
2020, approved the issuance of 1,514 additional VMTP Preferred Shares.
THIRD: The preferences (including liquidation
preference), voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption, of the shares of each Series of VMTP Preferred Shares are as follows or as set forth in an amendment to these Statement of
Preferences or otherwise in the Charter (each such Series being referred to herein as a Series of VMTP Preferred Shares):
b. The Statement of Preferences of the Trust is hereby amended by deleting Designation in its entirety and replacing it with the following as of [●], 2020:
DESIGNATION
Series W-7: A series of preferred shares of beneficial interest in the Trust, par value $0.001 per share, liquidation preference $100,000 per share, was previously
authorized and designated Series W-7 VMTP Preferred Shares. The number of Series W-7 VMTP Preferred Shares approved for issuance is 3,027. Each Series W-7 VMTP Preferred Share shall be issued on a date or dates determined by the Board of Trustees of the Trust or pursuant to their delegated authority; have an Applicable Rate commencing on [●], 2021equal to
the sum of 0.77% per annum plus 75% of the one-month LIBOR Rate (as defined herein); and have such other preferences, voting powers, restrictions, limitations as to
C-1
dividends and distributions, qualifications and terms and conditions of redemption, required by Applicable Law and that are expressly set forth in this Statement of Preferences and the
Declaration of Trust. The Series W-7 VMTP Preferred Shares shall constitute a separate series of preferred shares of beneficial interest in the Trust and, except as otherwise provided herein, each Series W-7 VMTP Preferred Share shall be identical. Except as otherwise provided with respect to any additional Series of VMTP Preferred Shares or unless the context requires otherwise, the terms and conditions of this
Statement of Preferences apply to each Series of VMTP Preferred Shares and each share of each Series.
c. The Statement of Preferences of the Trust is hereby amended by deleting the definitions of
Date of Original Issue, Dividend Period, Registration Rights Agreement and Statement of Preferences and replacing them with the following definitions as of [●], 2020:
Date of Original Issue means, with respect to each share of a Series of VMTP Preferred Shares, the date on which the Trust
issued such VMTP Preferred Share.
Dividend Period means, with respect to the Series
W-7 VMTP Preferred Shares, in the case of the first Dividend Period for the shares of such Series issued on [●], 2021, the period beginning on [●], 2021 and ending on and including [●], 2021
for each subsequent Dividend Period for all shares of such Series, the period beginning on and including the first calendar day of the month following the month in which the previous Dividend Period ended and ending on and including the last
calendar day of such month.
Registration Rights Agreement means the registration rights agreement dated as of the
Closing Date between the Trust and the JPMorgan Chase Bank, N.A, as amended, modified or supplemented from time to time.
Statement of Preferences means this Statement of Preferences of the VMTP Preferred Shares, as amended, modified or
supplemented from time to time.
d. The Statement of Preferences of the Trust is hereby
amended by deleting Section 1 in its entirety and replacing it with the following as of [●], 2020:
1. Number of Authorized Shares.
(a) Authorized Shares. The number of authorized shares of VMTP Preferred Shares is [●].
(b) Capitalization. So long as any VMTP Preferred Shares are Outstanding, the Trust shall not, issue (i) any class or series of shares ranking prior to or on a parity with
VMTP Preferred Shares with respect to the payment of dividends or the distribution of assets upon dissolution, liquidation or winding up of the affairs, or (ii) any other senior security (as defined in the 1940 Act as of the Date of
Original Issue) of the Trust other than the Trusts use of tender option bonds, futures, forwards, swaps and other derivative transactions, except as may be issued in connection with any issuance of preferred shares or other senior securities
some or all of the proceeds from which issuance are used to redeem all of the Outstanding VMTP Preferred Shares (provided that the Trust delivers the proceeds from such issuance necessary to redeem all of the Outstanding VMTP Preferred Shares to the
Redemption and Paying Agent for investment in Deposit Securities for the purpose of redeeming such VMTP Preferred Shares and issues a Notice of Redemption and redeems such VMTP Preferred Shares as soon as practicable in accordance with the terms of
this Statement of Preferences). For the avoidance of doubt, the foregoing restrictions on issuance set forth in this paragraph (b) shall not apply to the issuance of any shares of any Series of VMTP Preferred Shares.
2. Except as amended hereby, the Statement of Preferences remains in full force and effect.
3. An original copy of this amendment shall be lodged with the records of the Trust and filed in such places as
the Trustees deem appropriate.
[Signature Page Follows]
C-2
IN WITNESS WHEREOF, BlackRock Municipal Income Trust II has caused these presents to be
signed as of , 2020 in its name and on its behalf by its Vice President and attested by its Secretary. Said officers of the Trust have
executed this amendment as officers and not individually, and the obligations and rights set forth in this amendment are not binding upon any such officers, or the trustees or shareholders of the Trust, individually, but are binding only upon the
assets and property of the Trust.
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|
|
BLACKROCK MUNICIPAL INCOME TRUST II
|
|
|
By:
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|
|
|
|
Name:
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|
|
Title: Vice President
|
ATTEST:
|
|
|
By:
|
|
|
|
|
Name:
|
|
|
Title: Secretary
|
[Signature Page BLE Amendment to Statement of Preferences]
APPENDIX D
RATINGS OF INVESTMENTS
A Description of Moodys Investors Service, Inc.s (Moodys) Global Rating Scales
Ratings assigned on Moodys global long-term and short-term rating scales are forward-looking opinions of the relative credit risks
of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector entities. Long-term ratings are assigned to issuers
or obligations with an original maturity of one year or more and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default. Short-term ratings are assigned to
obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of default.
Description of Moodys Long-Term Obligation Ratings
|
|
|
Aaa
|
|
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
|
|
|
Aa
|
|
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
|
|
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A
|
|
Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
|
|
|
Baa
|
|
Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
|
|
|
Ba
|
|
Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
|
|
|
B
|
|
Obligations rated B are considered speculative and are subject to high credit risk.
|
|
|
Caa
|
|
Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
|
|
|
Ca
|
|
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
|
|
|
C
|
|
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
|
Note: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in
the lower end of that generic rating category.
Hybrid Indicator (hyb)
The hybrid indicator (hyb) is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities
firms. By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually
allowable write-downs of principal that could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
Description of Short-Term Obligation Ratings
Moodys employs the following designations to indicate the relative repayment ability of rated issuers:
P-1
|
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
|
D-1
P-2
|
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
|
P-3
|
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
|
NP
|
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
|
Description of Moodys US Municipal Short-Term Obligation Ratings
The
Municipal Investment Grade (MIG) scale is used to rate US municipal bond anticipation notes of up to three years maturity. Municipal notes rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG ratings expire at the maturity of the obligation, and the issuers long-term rating is only one consideration in assigning the MIG rating. MIG ratings are
divided into three levelsMIG 1 through MIG 3while speculative grade short-term obligations are designated SG.
MIG 1
|
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market
for refinancing.
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MIG 2
|
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
|
MIG 3
|
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
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SG
|
This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
|
Description of Moodys Demand Obligation Ratings
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned: a long or short-term debt rating and a demand obligation
rating. The first element represents Moodys evaluation of risk associated with scheduled principal and interest payments. The second element represents Moodys evaluation of risk associated with the ability to receive purchase price upon
demand (demand feature). The second element uses a rating from a variation of the MIG scale called the Variable Municipal Investment Grade (VMIG) scale.
VMIG 1
|
This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that
ensure the timely payment of purchase price upon demand.
|
VMIG 2
|
This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure
the timely payment of purchase price upon demand.
|
VMIG 3
|
This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections
that ensure the timely payment of purchase price upon demand.
|
SG
|
This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term
rating or may lack the structural and/or legal protections necessary to ensure the timely payment of purchase price upon demand.
|
D-2
Description of S&P Global Ratings (S&P), a Division of S&P Global Inc., Issue
Credit Ratings
A S&P issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with
respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness
of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects S&Ps view of the obligors capacity and willingness to
meet its financial commitments as they come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered
short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 daysincluding commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
Issue credit ratings
are based, in varying degrees, on S&Ps analysis of the following considerations:
|
|
|
Likelihood of paymentcapacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of
the obligation;
|
|
|
|
Nature of and provisions of the obligation, and the promise we impute;
|
|
|
|
Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors rights.
|
Long-Term Issue Credit Ratings*
|
|
|
AAA
|
|
An obligation rated AAA has the highest rating assigned by S&P. The obligors capacity to meet its financial commitment on the obligation is extremely
strong.
|
|
|
AA
|
|
An obligation rated AA differs from the highest-rated obligations only to a small degree. The obligors capacity to meet its financial commitment on the obligation
is very strong.
|
|
|
A
|
|
An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated
categories. However, the obligors capacity to meet its financial commitment on the obligation is still strong.
|
|
|
BBB
|
|
An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
|
|
|
BB; B; CCC; CC; and C
|
|
Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB
indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse
conditions.
|
|
|
BB
|
|
An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions, which could lead to the obligors inadequate capacity to meet its financial commitment on the obligation.
|
|
|
B
|
|
An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitment on the
obligation.
|
D-3
|
|
|
CCC
|
|
An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its
financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
|
|
|
CC
|
|
An obligation rated CC is currently highly vulnerable to nonpayment. The CC rating is used when a default has not yet occurred, but S&P expects default
to be a virtual certainty, regardless of the anticipated time to default.
|
|
|
C
|
|
An obligation rated C is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared
to obligations that are rated higher.
|
|
|
D
|
|
An obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D
rating category is used when payments on an obligation are not made on the date due, unless S&P believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace
period or 30 calendar days. The D rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions.
An obligations rating is lowered to D if it is subject to a distressed exchange offer.
|
|
|
NR
|
|
This indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or that S&P does not rate a particular obligation as a
matter of policy.
|
*
|
The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing
within the major rating categories.
|
Short-Term Issue Credit Ratings
A-1
|
A short-term obligation rated A-1 is rated in the highest category by S&P. The obligors capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligors capacity to meet its financial commitment on these obligations is extremely strong.
|
A-2
|
A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligors capacity to meet its financial commitment on the obligation is satisfactory.
|
A-3
|
A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
|
B
|
A short-term obligation rated B is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments;
however, it faces major ongoing uncertainties which could lead to the obligors inadequate capacity to meet its financial commitments.
|
C
|
A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its
financial commitment on the obligation.
|
D
|
A short-term obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D
rating category is used when payments on an obligation are not made on the date due, unless S&P believes that such payments will be made within any
|
D-4
|
stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The D rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligations rating is lowered to D if it is subject to a distressed
exchange offer.
|
Description of S&Ps Municipal Short-Term Note Ratings
A S&P U.S. municipal note rating reflects S&Ps opinion about the liquidity factors and market access risks unique to the
notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign,
S&Ps analysis will review the following considerations:
|
|
|
Amortization schedulethe larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
|
|
|
|
Source of paymentthe more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
|
S&Ps municipal short-term note rating symbols are as follows:
SP-1
|
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
|
SP-2
|
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
|
SP-3
|
Speculative capacity to pay principal and interest.
|
Description of
Fitch Ratings (Fitchs) Credit Ratings Scales
Fitchs credit ratings provide an opinion on the
relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. Credit ratings are used by investors as indications of the likelihood of
receiving the money owed to them in accordance with the terms on which they invested.
Fitchs credit ratings do not
directly address any risk other than credit risk. In particular, ratings do not deal with the risk of a market value loss on a rated security due to changes in interest rates, liquidity and other market considerations. However, in terms of payment
obligation on the rated liability, market risk may be considered to the extent that it influences the ability of an issuer to pay upon a commitment. Ratings nonetheless do not reflect market risk to the extent that they influence the size or
other conditionality of the obligation to pay upon a commitment (for example, in the case of index-linked bonds).
In
the default components of ratings assigned to individual obligations or instruments, the agency typically rates to the likelihood of non-payment or default in accordance with the terms of that
instruments documentation. In limited cases, Fitch may include additional considerations (i.e., rate to a higher or lower standard than that implied in the obligations documentation). In such cases, the agency will make clear the
assumptions underlying the agencys opinion in the accompanying rating commentary.
The terms investment
grade and speculative grade have established themselves over time as shorthand to describe the categories AAA to BBB (investment grade) and BB to D (speculative grade). The terms
investment grade and speculative grade are market conventions, and do not imply any recommendation or endorsement of a specific security for investment purposes. Investment grade categories indicate relatively low
to moderate credit risk, while ratings in the speculative categories either signal a higher level of credit risk or that a default has already occurred.
D-5
A designation of Not Rated or NR is used to denote securities not rated by Fitch where Fitch
has rated some, but not all, securities comprising an issuance capital structure.
Description of Fitchs Long-Term Corporate Finance
Obligations Rating Scales
Fitch long-term obligations rating scales are as follows:
AAA
|
Highest credit quality. AAA ratings denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong capacity for payment of financial
commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
|
AA
|
Very high credit quality. AA ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
|
A
|
High credit quality. A ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be
more vulnerable to adverse business or economic conditions than is the case for higher ratings.
|
BBB
|
Good credit quality. BBB ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse
business or economic conditions are more likely to impair this capacity.
|
BB
|
Speculative. BB ratings indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes in business or economic conditions over time; however,
business or financial alternatives may be available to allow financial commitments to be met.
|
B
|
Highly speculative. B ratings indicate that material credit risk is present.
|
CCC
|
Substantial credit risk. CCC ratings indicate that substantial credit risk is present.
|
CC
|
Very high levels of credit risk. CC ratings indicate very high levels of credit risk.
|
C
|
Exceptionally high levels of credit risk. C indicates exceptionally high levels of credit risk.
|
Defaulted obligations typically are not assigned RD or D ratings, but are instead rated in the B to
C rating categories, depending upon their recovery prospects and other relevant characteristics. This approach better aligns obligations that have comparable overall expected loss but varying vulnerability to default and loss.
Notes: The modifiers + or - may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the AAA obligation rating category, or to corporate finance obligation ratings in the categories below CCC.
The subscript emr is appended to a rating to denote embedded market risk which is beyond the scope of the rating. The
designation is intended to make clear that the rating solely addresses the counterparty risk of the issuing bank. It is not meant to indicate any limitation in the analysis of the counterparty risk, which in all other respects follows published
Fitch criteria for analyzing the issuing financial institution. Fitch does not rate these instruments where the principal is to any degree subject to market risk.
Description of Fitchs Short-Term Ratings
A short-term issuer or
obligation rating is based in all cases on the short-term vulnerability to default of the rated entity or security stream and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant
obligation. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as short-term based on market convention. Typically, this means up to 13 months for corporate, sovereign, and structured obligations and up to 36
months for obligations in U.S. public finance markets.
D-6
Fitch short-term ratings are as follows:
F1
|
Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added + to denote any exceptionally strong
credit feature.
|
F2
|
Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments.
|
F3
|
Fair short-term credit quality. The intrinsic capacity for timely payment of financial commitments is adequate.
|
B
|
Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic
conditions.
|
C
|
High short-term default risk. Default is a real possibility.
|
RD
|
Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Typically applicable to entity
ratings only.
|
D
|
Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.
|
D-7
EVERY SHAREHOLDERS VOTE IS IMPORTANT!
EASY
VOTING OPTIONS:
VOTE ON THE INTERNET
Log on to:
www.proxy-direct.com
or scan the QR code
Follow the on-screen instructions
available 24 hours
VOTE BY TELEPHONE
Call 1-800-337-3503
Follow the recorded instructions
available 24 hours
VOTE BY MAIL
Vote, sign and date your
Proxy Card and return it in the
postage-paid envelope
VIRTUAL MEETING
at the following Website: www.meetingcenter.io/295614271,
on December 15 at 10:30 a.m.
Eastern Time
To participate in the Virtual Meeting, enter the 14-digit control number from the shaded box on this card.
The Password for this meeting is BLK2020
PROXY THE BLACKROCK STRATEGIC MUNICIPAL TRUST
JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 15, 2020
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
PREFERRED SHARES
The undersigned hereby appoints Jay M. Fife and Paul Mickle, and each of them, as proxies, each with the power to appoint his or her substitute, and hereby
authorizes them to represent and to vote, as designated on the reverse side hereof, all of the preferred shares of The BlackRock Strategic Municipal Trust (BSD) that the undersigned is entitled to vote at the Joint Special Meeting of
Shareholders of BSD to be held on Tuesday, December 15, 2020 at 10:30 a.m. (Eastern time) (the Fund Joint Special Meeting), and any adjournment(s) or postponement(s) thereof, to cast on behalf of the undersigned all votes that the
undersigned is entitled to cast at the Fund Joint Special Meeting and otherwise to represent the undersigned at the Fund Joint Special Meeting with all powers possessed by the undersigned if personally present at the Fund Joint Special Meeting.
Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Fund Joint Special Meeting will be held in a virtual meeting format only, at the following Website:
www.meetingcenter.io/295614271. To attend and participate in the virtual Fund Joint Special Meeting enter the 14-digit control number from the shaded box on this card. The Password for this meeting is BLK2020.
The validity of this proxy is governed by Delaware law. This proxy does not revoke any prior powers of attorney except for prior proxies given in connection with the Fund Joint Special Meeting. The undersigned hereby acknowledges receipt of the
Proxy Statement, the terms of which are incorporated herein by reference, and revokes any proxy heretofore given with respect to the Fund Joint Special Meeting.
THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE PROPOSALS.
VOTE VIA THE INTERNET: www.proxy-direct.com
VOTE VIA THE TELEPHONE: 1-800-337-3503
BSD_31540_102120_Pref
xxxxxxxxxxxxxx
code
TO VOTE MARK BLOCKS BELOW IN BLUE OR BLACK INK AS SHOWN IN THIS EXAMPLE: X
A Proposals THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD. THE BOARD RECOMMENDS VOTING FOR THE PROPOSALS.
1A. The common shareholders and holders of Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP Holders) of The BlackRock
Strategic Municipal Trust (BSD) are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between BSD and BlackRock Municipal Income Trust II (the Acquiring Fund and such
Agreement and Plan of Reorganization, the BSD Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of BSDs assets and the assumption by
the Acquiring Fund of substantially all of BSDs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu
of fractional common shares) and VMTP Holders, respectively, of BSD, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and
the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by BSD of its registration under the Investment Company Act of 1940, as amended, and the liquidation, dissolution and termination of BSD
in accordance with its Agreement and Declaration of Trust and Delaware law (the BSD Reorganization).
1B. The VMTP Holders of BSD, are being asked to
vote as a separate class on a proposal to approve the BSD Reorganization Agreement and the BSD Reorganization.
Important Notice Regarding the Availability of Proxy
Materials for the
Joint Special Meeting of Shareholders on December 15, 2020.
The Proxy Statement and Proxy card for this meeting are available at:
https://www.proxy-direct.com/blk-31540
B Authorized Signatures This section must be completed for your vote to be counted.
Sign and Date Below
Note: Please sign exactly as your name(s) appear(s) on this Proxy Card, and date it. When shares are held jointly, each holder should
sign. When signing as attorney, executor, guardian, administrator, trustee, officer of corporation or other entity or in another representative capacity, please give the full title under the signature.
Date (mm/dd/yyyy) Please print date below Signature 1 Please keep signature within the box Signature 2 Please keep signature within the box
Scanner bar code
xxxxxxxxxxxxxx
BSD 31540
M xxxxxxxx
FOR AGAINST ABSTAIN
FOR AGAINST ABSTAIN
EVERY SHAREHOLDERS VOTE IS IMPORTANT!
EASY
VOTING OPTIONS:
VOTE ON THE INTERNET
Log on to:
www.proxy-direct.com
or scan the QR code
Follow the on-screen instructions
available 24 hours
VOTE BY TELEPHONE
Call 1-800-337-3503
Follow the recorded instructions
available 24 hours
VOTE BY MAIL
Vote, sign and date your
Proxy Card and return it in the
postage-paid envelope
VIRTUAL MEETING
at the following Website: www.meetingcenter.io/295614271,
on December 15 at 10:30 a.m.
Eastern Time
To participate in the Virtual Meeting, enter the 14-digit control number from the shaded box on this card.
The Password for this meeting is BLK2020
PROXY BLACKROCK MUNIYIELD INVESTMENT QUALITY FUND
JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 15, 2020
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
PREFERRED SHARES
The undersigned hereby appoints Jay M. Fife and Paul Mickle, and each of them, as proxies, each with the power to appoint his or her substitute, and hereby
authorizes them to represent and to vote, as designated on the reverse side hereof, all of the preferred shares of BlackRock MuniYield Investment Quality Fund (MFT) that the undersigned is entitled to vote at the Joint Special Meeting of
Shareholders of MFT to be held on Tuesday, December 15, 2020 at 10:30 a.m. (Eastern time) (the Fund Joint Special Meeting), and any adjournment(s) or postponement(s) thereof, to cast on behalf of the undersigned all votes that the
undersigned is entitled to cast at the Fund Joint Special Meeting and otherwise to represent the undersigned at the Fund Joint Special Meeting with all powers possessed by the undersigned if personally present at the Fund Joint Special Meeting.
Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Fund Joint Special Meeting will be held in a virtual meeting format only, at the following Website:
www.meetingcenter.io/295614271. To attend and participate in the virtual Fund Joint Special Meeting enter the 14-digit control number from the shaded box on this card. The Password for this meeting is BLK2020.
The validity of this proxy is governed by Massachusetts law. This proxy does not revoke any prior powers of attorney except for prior proxies given in connection with the Fund Joint Special Meeting. The undersigned hereby acknowledges receipt of the
Proxy Statement, the terms of which are incorporated herein by reference, and revokes any proxy heretofore given with respect to the Fund Joint Special Meeting.
THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE PROPOSALS.
VOTE VIA THE INTERNET: www.proxy-direct.com
VOTE VIA THE TELEPHONE: 1-800-337-3503
MFT_31540_102120_Pref
xxxxxxxxxxxxxx code
TO VOTE MARK BLOCKS BELOW IN BLUE OR BLACK INK AS SHOWN IN THIS EXAMPLE: X
A Proposals THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD. THE BOARD RECOMMENDS VOTING FOR THE PROPOSALS.
1C. The common shareholders and holders of Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP Holders) of BlackRock
MuniYield Investment Quality Fund (MFT) are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between MFT and BlackRock Municipal Income Trust II (the Acquiring Fund and
such Agreement and Plan of Reorganization, the MFT Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of MFTs assets and the assumption
by the Acquiring Fund of substantially all of MFTs liabilities in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in
lieu of fractional common shares) and VMTP Holders, respectively, of MFT, and which shall constitute the sole consideration to be distributed or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares)
and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by MFT of its registration under the Investment Company Act of 1940, as amended, and the liquidation, dissolution and termination of
MFT in accordance with its Declaration of Trust and Massachusetts law (the MFT Reorganization).
1D. The VMTP Holders of MFT, are being asked to vote as
a separate class on a proposal to approve the MFT Reorganization Agreement and the MFT Reorganization.
Important Notice Regarding the Availability of Proxy
Materials for the
Joint Special Meeting of Shareholders on December 15, 2020.
The Proxy Statement and Proxy card for this meeting are available at:
https://www.proxy-direct.com/blk-31540
B Authorized Signatures This section must be completed for your vote to be counted.
Sign and Date Below
Note: Please sign exactly as your name(s) appear(s) on this Proxy Card, and date it. When shares are held jointly, each holder should
sign. When signing as attorney, executor, guardian, administrator, trustee, officer of corporation or other entity or in another representative capacity, please give the full title under the signature.
Date (mm/dd/yyyy) Please print date below Signature 1 Please keep signature within the box Signature 2 Please keep signature within the box
Scanner bar code
xxxxxxxxxxxxxx MFT 31540 M xxxxxxxx
FOR AGAINST ABSTAIN
FOR AGAINST ABSTAIN
EVERY SHAREHOLDERS VOTE IS IMPORTANT!
EASY
VOTING OPTIONS:
VOTE ON THE INTERNET
Log on to:
www.proxy-direct.com
or scan the QR code
Follow the on-screen instructions
available 24 hours
VOTE BY TELEPHONE
Call 1-800-337-3503
Follow the recorded instructions
available 24 hours
VOTE BY MAIL
Vote, sign and date your
Proxy Card and return it in the
postage-paid envelope
VIRTUAL MEETING
at the following Website: www.meetingcenter.io/295614271,
on December 15 at 10:30 a.m.
Eastern Time
To participate in the Virtual Meeting, enter the 14-digit control number from the shaded box on this card.
The Password for this meeting is BLK2020
DO NOT TEAR
PROXY BLACKROCK MUNICIPAL INCOME INVESTMENT TRUST
JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 15, 2020
PROXY SOLICITED ON BEHALF OF THE BOARD
OF TRUSTEES
PREFERRED SHARES
The undersigned hereby appoints Jay M. Fife and
Paul Mickle, and each of them, as proxies, each with the power to appoint his or her substitute, and hereby authorizes them to represent and to vote, as designated on the reverse side hereof, all of the preferred shares of BlackRock Municipal Income
Investment Trust (BBF) that the undersigned is entitled to vote at the Joint Special Meeting of Shareholders of BBF to be held on Tuesday, December 15, 2020 at 10:30 a.m. (Eastern time) (the Fund Joint Special Meeting),
and any adjournment(s) or postponement(s) thereof, to cast on behalf of the undersigned all votes that the undersigned is entitled to cast at the Fund Joint Special Meeting and otherwise to represent the undersigned at the Fund Joint Special Meeting
with all powers possessed by the undersigned if personally present at the Fund Joint Special Meeting. Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Fund Joint Special
Meeting will be held in a virtual meeting format only, at the following Website: www.meetingcenter.io/295614271. To attend and participate in the virtual Fund Joint Special Meeting enter the 14-digit control
number from the shaded box on this card. The Password for this meeting is BLK2020. The validity of this proxy is governed by Delaware law. This proxy does not revoke any prior powers of attorney except for prior proxies given in connection with the
Fund Joint Special Meeting. The undersigned hereby acknowledges receipt of the Proxy Statement, the terms of which are incorporated herein by reference, and revokes any proxy heretofore given with respect to the Fund Joint Special Meeting.
THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE PROPOSALS.
VOTE VIA THE INTERNET: www.proxy-direct.com
VOTE VIA THE TELEPHONE: 1-800-337-3503
BBF_31540_102120_Pref xxxxxxxxxxxxxx code
TO VOTE MARK BLOCKS BELOW IN BLUE OR BLACK INK AS SHOWN IN THIS EXAMPLE: X
A Proposals THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD. THE BOARD RECOMMENDS VOTING FOR THE PROPOSALS.
1E. The common shareholders and holders of Variable Rate Demand Preferred Shares (VRDP Shares and the holders thereof, VRDP Holders) of BlackRock Municipal
Income Investment Trust (BBF) are being asked to vote as a single class on a proposal to approve an Agreement and Plan of Reorganization between BBF and BlackRock Municipal Income Trust II (the Acquiring Fund and such
Agreement and Plan of Reorganization, the BBF Reorganization Agreement) and the transactions contemplated therein, including (i) the acquisition by the Acquiring Fund of substantially all of BBFs assets and the assumption by
the Acquiring Fund of substantially all of BBFs liabilities in exchange solely for newly issued common shares and Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP Holders) of the
Acquiring Fund, which will be distributed to the common shareholders (although cash may be distributed in lieu of fractional common shares) and VMTP Holders, respectively, of BBF, and which shall constitute the sole consideration to be distributed
or paid to the common shareholders (although cash may be distributed in lieu of fractional common shares) and the VMTP Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by BBF of its registration
under the Investment Company Act of 1940, as amended, and the liquidation, dissolution and termination of BBF in accordance with its Agreement and Declaration of Trust and Delaware law (the BBF Reorganization).
1F. The VRDP Holders of BBF are being asked to vote as a separate class on a proposal to approve the BBF Reorganization Agreement and the BBF Reorganization.
Important Notice Regarding the Availability of Proxy Materials for the
Joint Special Meeting
of Shareholders on December 15, 2020.
The Proxy Statement and Proxy card for this meeting are available at:
https://www.proxy-direct.com/blk-31540
B Authorized Signatures This section must be completed for your vote to be
counted. Sign and Date Below
Note: Please sign exactly as your name(s) appear(s) on this Proxy Card, and date it. When shares are held jointly, each holder
should sign. When signing as attorney, executor, guardian, administrator, trustee, officer of corporation or other entity or in another representative capacity, please give the full title under the signature.
Date (mm/dd/yyyy) Please print date below Signature 1 Please keep signature within the box Signature 2 Please keep signature within the box
Scanner bar code
xxxxxxxxxxxxxx BBF 31540 Mxxxxxxxx
FOR AGAINST ABSTAIN
FOR AGAINST ABSTAIN
EVERY SHAREHOLDERS VOTE IS IMPORTANT!
EASY
VOTING OPTIONS:
PROXY BLACKROCK MUNICIPAL INCOME TRUST II
VOTE ON THE
INTERNET
Log on to:
www.proxy-direct.com
or scan the QR code
Follow the on-screen instructions
available 24 hours
VOTE BY TELEPHONE
Call 1-800-337-3503
Follow the recorded instructions
available 24 hours
VOTE BY MAIL
Vote, sign and date your
Proxy Card and return it in the
postage-paid envelope
VIRTUAL MEETING
at the following Website: www.meetingcenter.io/295614271,
on December 15 at 10:30 a.m.
Eastern Time
To participate in the Virtual Meeting, enter the 14-digit
control number from the shaded box on this card.
The Password for this meeting is BLK2020
DO NOT TEAR
JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 15, 2020
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
PREFERRED SHARES
The undersigned hereby appoints Jay M. Fife and Paul Mickle,
and each of them, as proxies, each with the power to appoint his or her substitute, and hereby authorizes them to represent and to vote, as designated on the reverse side hereof, all of the preferred shares of BlackRock Municipal Income Trust II
(BLE) that the undersigned is entitled to vote at the Joint Special Meeting of Shareholders of BLE to be held on Tuesday, December 15, 2020 at 10:30 a.m. (Eastern time) (the Fund Joint Special Meeting), and any
adjournment(s) or postponement(s) thereof, to cast on behalf of the undersigned all votes that the undersigned is entitled to cast at the Fund Joint Special Meeting and otherwise to represent the undersigned at the Fund Joint Special Meeting with
all powers possessed by the undersigned if personally present at the Fund Joint Special Meeting. Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Fund Joint Special Meeting
will be held in a virtual meeting format only, at the following Website: www.meetingcenter.io/295614271. To attend and participate in the virtual Fund Joint Special Meeting enter the 14-digit control number
from the shaded box on this card. The Password for this meeting is BLK2020. The validity of this proxy is governed by Delaware law. This proxy does not revoke any prior powers of attorney except for prior proxies given in connection with the Fund
Joint Special Meeting. The undersigned hereby acknowledges receipt of the Proxy Statement, the terms of which are incorporated herein by reference, and revokes any proxy heretofore given with respect to the Fund Joint Special Meeting.
THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE
PROPOSALS.
VOTE VIA THE INTERNET: www.proxy-direct.com
VOTE VIA THE
TELEPHONE: 1-800-337-3503
BLE_31540_102120_Pref
xxxxxxxxxxxxxx code
TO VOTE MARK BLOCKS BELOW IN BLUE OR BLACK INK AS SHOWN IN THIS EXAMPLE: X
A Proposals THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD. THE BOARD RECOMMENDS VOTING FOR THE PROPOSALS.
1G. The holders of Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP Holders) of BlackRock Municipal Income Trust II (the
Acquiring Fund) are being asked to vote as a separate class on a proposal to approve an Agreement and Plan of Reorganization between The BlackRock Strategic Municipal Trust and the Acquiring Fund (the BSD Reorganization
Agreement) and the transactions contemplated therein, including amendments to the Statement of Preferences of Variable Rate Muni Term Preferred Shares of the Acquiring Fund (the BLE Statement of Preferences) in connection with the
issuance of additional Acquiring Fund VMTP Shares.
1H. The VMTP Holders of the Acquiring Fund are being asked to vote as a separate class on a proposal to approve
an Agreement and Plan of Reorganization between BlackRock MuniYield Investment Quality Fund and the Acquiring Fund (the MFT Reorganization Agreement) and the transactions contemplated therein, including amendments to the BLE Statement of
Preferences in connection with the issuance of additional Acquiring Fund VMTP Shares.
1I. The VMTP Holders of the Acquiring Fund are being asked to vote as a
separate class on a proposal to approve an Agreement and Plan of Reorganization between BlackRock Municipal Income Investment Trust and the Acquiring Fund (the BBF Reorganization Agreement) and the transactions contemplated therein,
including amendments to the BLE Statement of Preferences in connection with the issuance of additional Acquiring Fund VMTP Shares.
2A. The common shareholders and
holders of Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP Holders) of BlackRock Municipal Income Trust II (the Acquiring Fund) are being asked to vote as a single class on a
proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with an Agreement and Plan of Reorganization between The BlackRock Strategic Municipal Trust and the Acquiring Fund.
2B. The common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of
the Acquiring Fund in connection with an Agreement and Plan of Reorganization between BlackRock MuniYield Investment Quality Fund and the Acquiring Fund.
2C. The
common shareholders and VMTP Holders of the Acquiring Fund are being asked to vote as a single class on a proposal to approve the issuance of additional common shares of the Acquiring Fund in connection with an Agreement and Plan of Reorganization
between BlackRock Municipal Income Investment Trust and the Acquiring Fund.
Important Notice Regarding the Availability of Proxy Materials for the
Joint Special Meeting of Shareholders on December 15, 2020.
The Proxy Statement and Proxy
card for this meeting are available at:
https://www.proxy-direct.com/blk-31540
B Authorized Signatures This section must be completed for your vote to be counted. Sign and Date Below
Note: Please sign exactly as your name(s) appear(s) on this Proxy Card, and date it. When shares are held jointly, each holder should sign. When signing as attorney, executor,
guardian, administrator, trustee, officer of corporation or other entity or in another representative capacity, please give the full title under the signature.
Date (mm/dd/yyyy) Please print date below Signature 1 Please keep signature within the box Signature 2 Please keep signature within the box
Scanner bar code
xxxxxxxxxxxxxx BLE 31540 M xxxxxxxx
FOR AGAINST ABSTAIN
FOR AGAINST ABSTAIN
FOR AGAINST ABSTAIN
FOR AGAINST ABSTAIN
FOR AGAINST ABSTAIN
FOR AGAINST ABSTAIN