MHF Western Asset Municipal High Income Fund Inc

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-CSR

 

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-05497

 

 

Western Asset Municipal High Income Fund Inc.

Exact name of registrant as specified in charter)

 

 

620 Eighth Avenue, 47th Floor, New York, NY 10018

(Address of principal executive offices) (Zip code)

 

 

George P. Hoyt

Franklin Templeton

100 First Stamford Place

Stamford, CT 06902

(Name and address of agent for service)

 

 

Registrant’s telephone number, including area code: 1-888-777-0102

Date of fiscal year end: October 31

Date of reporting period: October 31, 2023

 

 

 

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ITEM 1.

REPORT TO STOCKHOLDERS.

The Annual Report to Stockholders is filed herewith.

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Annual Report		October 31, 2023

WESTERN ASSET

MUNICIPAL HIGH INCOME FUND INC. (MHF)

 

 

 

 

 

 

 

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

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What’s inside
Letter from the chairman			III
Fund overview			1
Fund at a glance			6
Fund performance			7
Schedule of investments			9
Statement of assets and liabilities			27
Statement of operations			28
Statements of changes in net assets			29
Financial highlights			30
Notes to financial statements			31
Report of independent registered public accounting firm			38
Board approval of management and subadvisory agreements			39
Additional information			45
Annual chief executive officer and principal financial officer certifications			51
Other shareholder communications regarding accounting matters			52
Summary of information regarding the Fund			53
Dividend reinvestment plan			68
Important tax information			70

Fund objective

The Fund seeks high current income exempt from federal income taxes.

The Fund seeks to achieve its investment objective by investing primarily in intermediate-and long-term municipal debt securities issued by state and local governments (“municipal obligations”). However, the Fund may invest in municipal obligations of any maturity. The Fund may invest up to 100% of its assets in municipal obligations rated below investment grade (commonly referred to as “junk bonds”).

 

II		Western Asset Municipal High Income Fund Inc.

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Letter from the chairman

 

Dear Shareholder,

We are pleased to provide the annual report of Western Asset Municipal High Income Fund Inc. for the twelve-month reporting period ended October 31, 2023. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.

As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.franklintempleton.com. Here you can gain immediate access to market and investment information, including:

 

•

Fund prices and performance,

 

•

Market insights and commentaries from our portfolio managers, and

 

•

A host of educational resources.

We look forward to helping you meet your financial goals.

Sincerely,

 

Jane Trust, CFA

Chairman, President and Chief Executive Officer

November 30, 2023

 

Western Asset Municipal High Income Fund Inc.		III

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Fund overview

 

Q. What is the Fund’s investment strategy?

A. The Fund seeks high current income exempt from federal income taxes. The Fund invests primarily in intermediate- and long-term municipal debt securities issued by state and local governments including U.S. territories and possessions, political sub-divisions, agencies and public authorities (“municipal obligations”). However, the Fund may invest in municipal obligations of any maturity. The Fund may invest up to 100% of its assets in municipal obligations rated below investment grade (commonly referred to as “junk bonds”). Investment grade securities are those rated in the Baa/BBB categories or above by at least one National Recognized Statistical Rating Organization (“NRSRO”) that provides such a rating or unrated securities that we determined to be of comparable credit quality. The Fund may invest in non-publicly traded municipal securities, zero-coupon municipal obligations and non-appropriation or other municipal lease obligations. The Fund may hold securities or use investment techniques that provide for payments based or “derived” from the performance of an underlying asset, index or other economic benchmark.

At Western Asset Management Company, LLC (“Western Asset”), the Fund’s subadviser, we utilize a fixed income team approach, with decisions derived from interaction among various investment management sector specialists. The sector teams are comprised of Western Asset’s senior portfolio management personnel, research analysts and an in-house economist. Under this team approach, management of client fixed income portfolios will reflect a consensus of interdisciplinary views within the Western Asset organization. The individuals responsible for development of investment strategy, day-to-day portfolio management, oversight and coordination of the Fund are S. Kenneth Leech, Robert E. Amodeo, David T. Fare and John Mooney.

Q. What were the overall market conditions during the Fund’s reporting period?

A. The overall U.S. fixed income market experienced periods of volatility and generated a modest gain over the twelve-month reporting period ended October 31, 2023. The market was driven by several factors, including elevated and persistent inflation, aggressive Federal Reserve Board (the “Fed”) monetary policy tightening, repercussions from the war in Ukraine, unrest in the banking industry, and several geopolitical issues.

Short-term U.S. Treasury yields moved higher as the Fed aggressively raised interest rates in an attempt to rein in elevated inflation. The yield for the two-year Treasury note began the reporting period at 4.51% and ended the period at 5.07%. The low of 3.75% took place on May 4, 2023, and the high of 5.19% occurred on October 17 and 18, 2023. Long-term U.S. Treasury yields also moved higher given stubbornly high inflation and Fed monetary policy tightening. The yield for the ten-year Treasury note began the reporting period at 4.10% and ended the period at 4.88%. The low of 3.30% occurred on April 5 and 6, 2023, and the high of 4.98% occurred on October 19, 2023.

The municipal bond market produced a positive absolute return and outperformed its taxable bond counterpart during the twelve-month reporting period. Over that time, the Bloomberg Municipal Bond Indexi and the Bloomberg U.S. Aggregate Indexii returned 2.64% and 0.36%, respectively. Both the taxable and tax-free bond markets were negatively impacted by rising interest rates.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					1

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Fund overview (cont’d)

 

Q. How did we respond to these changing market conditions?

A. There were several adjustments made to the Fund during the reporting period. The Fund materially increased its duration overweight to moderate the effects of inflation and capitalize on economic conditions. Additionally, the Fund increased its exposure to twenty-and thirty-year rates to take advantage of higher long-term yields. The Fund also put cash equivalents to work by increasing its exposures to the industrial revenue and transportation sectors, while reducing its underweight to the special tax obligation and state general obligation sectors. Looking at the Fund’s quality biases, we increased its allocation to securities rated A, while reducing exposure to securities rated AA.

Performance review

For the twelve months ended October 31, 2023, Western Asset Municipal High Income Fund Inc. returned 2.52% based on its net asset value (“NAV”)ⁱⁱⁱ and -0.37% based on its New York Stock Exchange (“NYSE”) market price per share. The Fund’s unmanaged benchmark, the Bloomberg Municipal Bond Index, returned 2.64% for the same period.

Certain investors may be subject to the federal alternative minimum tax, and state and local taxes will apply. Capital gains, if any, are fully taxable. Please consult your personal tax or legal adviser.

The Fund has a practice of seeking to maintain a relatively stable level of distributions to shareholders. This practice has no impact on the Fund’s investment strategy and may reduce the Fund’s NAV. The Fund’s manager believes the practice helps maintain the Fund’s competitiveness and may benefit the Fund’s market price and premium/discount to the Fund’s NAV.

During the twelve-month period, the Fund made distributions to shareholders totaling $0.24 per share.* The performance table shows the Fund’s twelve-month total return based on its NAV and market price as of October 31, 2023. Past performance is no guarantee of future results.

 

Performance Snapshot as of October 31, 2023
Price Per Share		12-Month Total Return**
$6.75 (NAV)			2.52	%†
$6.01 (Market Price)			-0.37	%‡

All figures represent past performance and are not a guarantee of future results.

 

*	For the tax character of distributions paid during the fiscal year ended October 31, 2023, please refer to page 37 of this report.

 

2				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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** Total returns are based on changes in NAV or market price, respectively. Returns reflect the deduction of all Fund expenses, including management fees, operating expenses, and other Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares.

† Total return assumes the reinvestment of all distributions at NAV.

‡ Total return assumes the reinvestment of all distributions in additional shares in accordance with the Fund’s Dividend Reinvestment Plan.

Q. What were the leading contributors to performance?

A. Security selection was the largest contributor over the reporting period. In particular, selection within the special tax obligation and leasing sectors was beneficial, as was selection within securities rated A and AA. From an allocation perspective, an overweight to lower investment-grade securities in the BBB and A ratings cohorts contributed to returns. Elsewhere, an overweight to higher beta (risk) revenue sectors was beneficial for performance, particularly industrial revenue, as was an underweight to general obligation sectors, particularly state general obligations.

Q. What were the leading detractors from performance?

A. The largest detractor was an overweight to duration, as yields experienced volatility but ultimately rose by the end of October 2023. Additionally, certain security selection decisions detracted from returns. In particular, selection within the health care and housing sectors detracted from returns. An overweight to pre-refunded securities was also a headwind for performance.

Looking for additional information?

The Fund is traded under the symbol “MHF” and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available online under the symbol “XMHFX” on most financial websites. Barron’s and The Wall Street Journal’s Monday edition both carry closed-end fund tables that provide additional information. In addition, the Fund issues a quarterly press release that can be found on most major financial websites as well as www.franklintempleton.com.

In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Time, for the Fund’s current NAV, market price and other information.

Thank you for your investment in the Western Asset Municipal High Income Fund Inc. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.

Sincerely,

Western Asset Management Company, LLC

November 14, 2023

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					3

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Fund overview (cont’d)

 

RISKS: The Fund is a diversified closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the Fund will achieve its investment objective. The Fund’s common stock is traded on the New York Stock Exchange. Similar to stocks, the Fund’s share price will fluctuate with market conditions and, at the time of sale, may be worth more or less than the original investment. Shares of closed-end funds often trade at a discount to their net asset value. Diversification does not assure against market loss. The Fund’s investments are subject to a number of risks, such as credit risk, inflation risk and interest rate risk. High yield bonds, known as “junk bonds,” involve greater credit and liquidity risks than investment grade bonds. As interest rates rise, bond prices fall, reducing the value of the Fund’s holdings. Municipal securities purchased by the Fund may be adversely affected by changes in the financial condition of municipal issuers and insurers, regulatory and political developments, uncertainties and public perceptions, and other factors. The Fund may invest in securities of other investment companies. To the extent it does, Fund stockholders will indirectly pay a portion of the operating costs of such companies, in addition to the expenses that the Fund bears directly in connection with its own operation. Investing in securities issued by other investment companies, including exchange-traded funds (“ETFs”) that invest primarily in municipal securities, involves risks similar to those of investing directly in the securities in which those investment companies invest. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. The market values of securities or other assets will fluctuate, sometimes sharply and unpredictably, due to changes in general market conditions, overall economic trends or events, governmental actions or intervention, actions taken by the U.S. Federal Reserve or foreign central banks, market disruptions caused by trade disputes or other factors, political developments, armed conflicts, economic sanctions and countermeasures in response to sanctions, major cybersecurity events, investor sentiment, the global and domestic effects of a pandemic, and other factors that may or may not be related to the issuer of the security or other asset. The Fund may also invest in money market funds, including funds affiliated with the Fund’s manager and subadviser. For more information on Fund risks, see Summary of information regarding the Fund -Principal Risk Factors in this report.

The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. Portfolio holdings are subject to change at any time and may not be representative of the portfolio managers’ current or future investments. The Fund’s portfolio composition is subject to change at any time.

All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

 

4				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.

 

 

 

i	The Bloomberg Municipal Bond Index is a market value weighted index of investment grade municipal bonds with maturities of one year or more.

 

ii	The Bloomberg U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage-and asset-backed issues, rated investment grade or higher, and having at least one year to maturity.

 

iii

Net asset value (“NAV”) is calculated by subtracting total liabilities, including liabilities associated with financial leverage (if any), from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets) by the total number of the common shares outstanding. The NAV fluctuates with changes in the market prices of securities in which the Fund has invested. However, the price at which an investor may buy or sell shares of the Fund is the Fund’s market price as determined by supply of and demand for the Fund’s shares.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					5

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Fund at a glance^† (unaudited)

 

Investment breakdown (%) as a percent of total investments

 

 

†	The bar graph above represents the composition of the Fund’s investments as of October 31, 2023 and October 31, 2022. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time.

 

6				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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Fund performance (unaudited)

 

Net Asset Value
Average annual total returns1
Twelve Months Ended 10/31/23			2.52	%
Five Years Ended 10/31/23			0.95
Ten Years Ended 10/31/23			2.75
Cumulative total returns1
10/31/13 through 10/31/23			31.12	%

 

Market Price
Average annual total returns2
Twelve Months Ended 10/31/23			-0.37	%
Five Years Ended 10/31/23			0.90
Ten Years Ended 10/31/23			2.80
Cumulative total returns2
10/31/13 through 10/31/23			31.79	%

All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower.

 

1	Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value.

 

2	Assumes the reinvestment of all distributions, including returns of capital, if any, in additional shares in accordance with the Fund’s Dividend Reinvestment Plan.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report				7

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Fund performance (unaudited) (cont’d)

 

Historical performance

Value of $10,000 invested in

Western Asset Municipal High Income Fund Inc. vs. Bloomberg Municipal Bond Index† — October 2013 - October 2023

 

All figures represent past performance and are not a guarantee of future results. Returns reflect the deduction of all Fund expenses, including management fees, operating expenses, and other Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares.

 

†

Hypothetical illustration of $10,000 invested in the Western Asset Municipal High Income Fund Inc. on October 31, 2013, assuming the reinvestment of all distributions, including returns of capital, if any, at net asset value and also assuming the reinvestment of all distributions, including returns of capital, if any, in additional shares in accordance with the Fund’s Dividend Reinvestment Plan through October 31, 2023. The hypothetical illustration also assumes a $10,000 investment in the Bloomberg Municipal Bond Index. The Bloomberg Municipal Bond Index (the “Index”) is a market value weighted index of investment grade municipal bonds with maturities of one year or more. The Index is unmanaged and is not subject to the same management and trading expenses of a regular mutual fund. Please note that an investor cannot invest directly in an index.

 

8				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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Schedule of investments

October 31, 2023

 

Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
Municipal Bonds — 97.9%
Alabama — 5.8%
Alabama State Corrections Institution Finance Authority Revenue, Series A			5.250	%			7/1/52			$	500,000			$	505,186
Black Belt Energy Gas District, AL, Gas Project Revenue Bonds, Series D-1, Refunding			5.500	%			2/1/29				200,000				202,529	(a)(b)
Jefferson County, AL, Sewer Revenue:
Convertible CAB, Subordinated Lien, Warrants, Series F, Refunding			7.900	%			10/1/50				3,020,000				3,175,356
Senior Lien, Warrants, Series A, Refunding, AGM			5.500	%			10/1/53				400,000				400,615
Subordinated Lien, Warrants, Series D, Refunding			6.000	%			10/1/42				1,120,000				1,152,372
Subordinated Lien, Warrants, Series D, Refunding			6.500	%			10/1/53				3,000,000				3,116,829
Total Alabama															8,552,887
Alaska — 0.8%
Anchorage, AK, Port Revenue, Series A			5.000	%			12/1/50				250,000				225,176	(c)
Northern Tobacco Securitization Corp., AK, Tobacco Settlement Revenue:
Asset Backed Senior Bonds, Class 1, Series A			4.000	%			6/1/36				400,000				373,841
Asset Backed Senior Bonds, Class 1, Series A, Refunding			4.000	%			6/1/50				250,000				200,301
Asset Backed Senior Bonds, Class 2, Series B-1			4.000	%			6/1/50				385,000				342,719
Total Alaska															1,142,037
Arizona — 4.4%
Arizona, AZ, IDA Revenue, Doral Academy Of Northern Nevada Project, Series A, Refunding			4.000	%			7/15/51				500,000				335,117	(d)
Chandler, AZ, IDA Revenue:
Intel Corp. Project			3.800	%			6/15/28				800,000				780,055	(a)(b)
Intel Corp. Project			4.100	%			6/15/28				250,000				243,204	(a)(b)(c)
La Paz County, AZ, IDA Revenue, Charter School Solutions, Harmony Public School Project, Series A			5.000	%			2/15/36				1,000,000				954,029	(d)
Maricopa County, AZ, IDA Revenue, Legacy Traditional Schools Project, Series 2019, Refunding			5.000	%			7/1/49				500,000				419,656	(d)
Navajo Nation, AZ, Revenue, Series A, Refunding			5.500	%			12/1/30				190,000				192,861	(d)
Phoenix, AZ, IDA Revenue:
Basis School Inc., Refunding			5.000	%			7/1/35				1,000,000				949,040	(d)

 

See Notes to Financial Statements.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					9

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Schedule of investments (cont’d)

October 31, 2023

 

Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
Arizona — continued
Great Hearts Academies, Refunding			5.000	%			7/1/41			$	1,200,000			$	1,070,360
Salt Verde, AZ, Financial Corp., Natural Gas Revenue, Series 2007			5.000	%			12/1/37				1,500,000				1,456,103
Total Arizona															6,400,425
California — 10.6%
Alameda, CA, Corridor Transportation Authority Revenue:
Convertible CAB, Series C, Refunding, AGM			5.000	%			10/1/52				600,000				600,040
Second Subordinated Lien, Series B, Refunding			5.000	%			10/1/34				500,000				500,354
Anaheim, CA, Public Financing Authority, Lease Revenue, Series A, Refunding			5.000	%			5/1/46				2,000,000				2,012,640	(e)
California State Community Choice Financing Authority Revenue, Clean Energy Project, Green Bonds, Series B-1			5.000	%			8/1/29				500,000				498,692	(a)(b)
California State Community Housing Agency, Essential Housing Revenue, Stoneridge Apartments, Series A			4.000	%			2/1/56				500,000				333,570	(d)
California State MFA Revenue, Senior Lien, LINXS APM Project, Series A			5.000	%			12/31/43				700,000				662,344	(c)
California State PCFA Water Furnishing Revenue, San Diego County Water Authority Desalination Project, Refunding			5.000	%			7/1/39				700,000				690,977	(d)
California State Public Finance Authority, Senior Living Revenue:
Enso Village Project, Green Bond, Series A			5.000	%			11/15/36				250,000				228,452
Enso Village Project, Green Bond, Series B-3, Refunding			2.125	%			11/15/27				250,000				237,436	(d)
California Statewide CDA Revenue:
Provident Group-Pomona Properties LLC, Series A			5.600	%			1/15/36				500,000				469,239	(d)
Provident Group-Pomona Properties LLC, Series A			5.750	%			1/15/45				360,000				327,969	(d)
Inland Valley, CA, Development Agency, Successor Agency Tax Allocation Revenue, Series A, Refunding			5.000	%			9/1/44				500,000				479,355
Mountain House Public Financing Authority, CA, Utility Systems Revenue, Green Bond, Series A, BAM			4.000	%			12/1/45				750,000				644,333
M-S-R Energy Authority, CA, Natural Gas Revenue:
Series B			6.500	%			11/1/39				1,000,000				1,126,332

 

See Notes to Financial Statements.

 

10				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
California — continued
Series C			7.000	%			11/1/34			$	2,000,000			$	2,328,625
Series C			6.500	%			11/1/39				2,000,000				2,252,664
Redding, CA, Redevelopment Agency, Tax Allocation, Shastec Redevelopment Project			5.000	%			9/1/29				600,000				600,553
River Islands, CA, Public Financing Authority, Special Tax Revenue, Community Facilities District No 2003-1, Series A-1, Refunding, AGM			5.250	%			9/1/52				300,000				307,703
San Francisco, CA, City & County Airport Commission, International Airport Revenue, Second Series A, Refunding			5.000	%			5/1/47				1,000,000				946,303	(c)
Tobacco Securitization Authority of Southern California Revenue, Asset Backed Refunding, San Diego County Tobacco Asset Securitization Corporation, Class 1, Series A			5.000	%			6/1/48				200,000				197,290
Total California															15,444,871
Colorado — 1.9%
Aristation Metropolitan District, CO, GO, Convertible Unlimited & Special Revenue, Refunding and Improvements			5.000	%			12/1/38				500,000				450,829
Colorado State Health Facilities Authority Revenue, Commonspirit Health Initiatives, Series B-2			5.000	%			8/1/26				250,000				252,338	(a)(b)
Colorado State High Performance Transportation Enterprise Revenue, C-470 Express Lanes			5.000	%			12/31/51				150,000				136,914
North Range, CO, Metropolitan District No 2, GO, Series A, Refunding			5.625	%			12/1/37				500,000				488,812
Public Authority for Colorado Energy, Natural Gas Purchase Revenue, Series 2008			6.125	%			11/15/23				955,000				955,487
Village Metropolitan District, CO, Limited & Special Revenue, Series 2020, Refunding and Improvements			5.000	%			12/1/40				500,000				445,823
Total Colorado															2,730,203
Connecticut — 0.7%
Connecticut State Special Tax Revenue, Transportation Infrastructure, Series A			5.000	%			1/1/37				500,000				512,725
Connecticut State, GO, Series A			4.000	%			4/15/37				600,000				568,168
Total Connecticut															1,080,893
Florida — 5.9%
Broward County, FL, Port Facilities Revenue:
Senior Bonds, Series B			4.000	%			9/1/49				2,500,000				2,004,556	(c)
Series 2022			5.500	%			9/1/52				1,000,000				1,000,089	(c)

 

See Notes to Financial Statements.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					11

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Schedule of investments (cont’d)

October 31, 2023

 

Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
Florida — continued
Florida State Development Finance Corp., Educational Facilities Revenue:
Mater Academy Projects, Series A			5.000	%			6/15/40			$	650,000			$	619,406
Renaissance Charter School Inc. Projects, Series A			6.000	%			6/15/35				250,000				245,072	(d)
Renaissance Charter School Inc. Projects, Series A			6.125	%			6/15/46				215,000				200,448	(d)
Florida State Mid-Bay Bridge Authority Revenue, Series A, Refunding			5.000	%			10/1/28				500,000				501,140
Fort Pierce, FL, Utilities Authority Revenue, Series A, Refunding, AGM			4.000	%			10/1/52				150,000				119,932
Miami-Dade County, FL, Aviation Revenue, Series A, Refunding			5.000	%			10/1/49				650,000				605,411	(c)
Miami-Dade County, FL, Seaport Revenue, Senior Bonds, Series A, Refunding			5.250	%			10/1/52				750,000				722,085	(c)
Orange County, FL, Health Facilities Authority Revenue, Orlando Health Inc., Series A			5.000	%			10/1/53				250,000				234,162
Palm Beach County, FL, Health Facilities Authority Hospital Revenue:
Jupiter Medical Center Project, Series A			5.000	%			11/1/39				350,000				328,792
Jupiter Medical Center Project, Series A			5.000	%			11/1/47				1,515,000				1,379,763
Palm Beach County, FL, Health Facilities Authority Revenue:
Toby & Leon Cooperman Sinai Residences of Boca Raton Expansion, Refunding			4.000	%			6/1/41				100,000				73,856
Toby & Leon Cooperman Sinai Residences of Boca Raton Expansion, Series A			5.000	%			6/1/55				350,000				273,762
Reunion, FL, East Community Development District, Special Assessment Bond, Series A-2			7.375	%			5/1/33				285,000				3	*(f)
Wildwood, FL, Village Community Development District No 15, Special Assessment Revenue			5.000	%			5/1/43				350,000				326,454	(d)
Total Florida															8,634,931
Georgia — 1.0%
Georgia State Municipal Electric Authority, Power Revenue:
Plant Vogtle Units 3&4, Project M, Series A			5.250	%			7/1/64				350,000				337,386
Plant Vogtle Units 3&4, Project P, Series A			5.000	%			1/1/56				250,000				227,680
Plant Vogtle Units 3&4, Project P, Series A			5.500	%			7/1/64				250,000				241,280
Project One, Subordinated, Series A, Refunding			5.000	%			1/1/45				250,000				243,747

 

See Notes to Financial Statements.

 

12				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
Georgia — continued
Main Street Natural Gas Inc., GA, Gas Project Revenue:
Series A			5.000	%			5/15/43			$	150,000			$	141,049
Series C			5.000	%			9/1/30				250,000				248,393	(a)(b)
Total Georgia															1,439,535
Illinois — 16.0%
Chicago, IL, Board of Education, Dedicated Capital Improvement, Special Tax Revenue, Series 2018			5.000	%			4/1/42				1,000,000				917,706
Chicago, IL, Board of Education, GO:
Dedicated, Series H			5.000	%			12/1/46				1,000,000				880,188
Series A			5.000	%			12/1/39				1,250,000				1,148,729
Series C, Refunding, AGM			5.000	%			12/1/32				1,750,000				1,757,656
Chicago, IL, GO:
Chicago Works, Series A			5.500	%			1/1/39				550,000				556,702
Series A			5.000	%			1/1/44				500,000				472,101
Series A, Refunding			5.000	%			1/1/28				500,000				509,366
Series A, Refunding			6.000	%			1/1/38				300,000				307,357
Series C, Refunding			5.000	%			1/1/25				500,000				502,661
Chicago, IL, O’Hare International Airport Revenue:
General Senior Lien, Series C, Refunding			5.000	%			1/1/44				500,000				477,940	(c)
Senior Lien, Series G			5.000	%			1/1/42				500,000				485,303	(c)
Series A, Refunding			5.000	%			1/1/31				1,500,000				1,487,313	(c)
Chicago, IL, Transit Authority, Sales Tax Receipts Revenue:
Second Lien			5.000	%			12/1/51				1,000,000				946,753
Second Lien, Series A, Refunding			5.000	%			12/1/45				500,000				489,589
Chicago, IL, Wastewater Transmission Revenue:
Second Lien, Series A, Refunding			5.000	%			1/1/47				300,000				281,376
Second Lien, Series B, Refunding			5.000	%			1/1/38				500,000				486,841
Chicago, IL, Waterworks Revenue:
Second Lien, Series 2017, Refunding			5.000	%			11/1/29				500,000				510,420
Second Lien, Series 2017-2, Refunding, AGM			5.000	%			11/1/32				1,260,000				1,286,511
Illinois State Sports Facilities Authority Revenue, Sport Facilities Project, Series 2019, Refunding, BAM			5.000	%			6/15/29				250,000				251,624
Illinois State University, Auxiliary Facilities System Revenue, Series A, Refunding, AGM			5.000	%			4/1/28				100,000				103,725
Illinois State, GO:
Series 2016, Refunding			5.000	%			2/1/29				300,000				305,419

 

See Notes to Financial Statements.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					13

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Schedule of investments (cont’d)

October 31, 2023

 

Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
Illinois — continued
Series A			5.000	%			3/1/37			$	1,250,000			$	1,252,787
Series A			5.000	%			3/1/46				500,000				469,947
Series A, Refunding			5.000	%			10/1/29				1,100,000				1,129,403
Series A, Refunding			5.000	%			10/1/30				550,000				562,376
Series B, Refunding			5.000	%			9/1/27				400,000				409,550
Series D			5.000	%			11/1/27				1,150,000				1,178,653
Metropolitan Pier & Exposition Authority, IL, Revenue:
McCormick Place Expansion Project, Series A			5.000	%			6/15/57				350,000				320,234
McCormick Place Expansion Project, Series A, Refunding			4.000	%			12/15/42				750,000				622,483
McCormick Place Expansion Project, Series A, Refunding			4.000	%			12/15/47				1,000,000				792,753
McCormick Place Expansion Project, Series A, Refunding			5.000	%			6/15/50				250,000				232,476
McCormick Place Expansion Project, Series B, Refunding			5.000	%			6/15/42				1,250,000				1,208,404
Regional Transportation Authority, IL, GO, Series A, Refunding, NATL			6.000	%			7/1/29				930,000				999,507
Total Illinois															23,343,853
Indiana — 1.5%
Indiana State Finance Authority Revenue:
BHI Senior Living Inc., Series A, Refunding			4.000	%			11/15/41				500,000				392,104
Marion General Hospital, Series A			4.000	%			7/1/45				200,000				159,605
Midwestern Disaster Relief, Ohio Valley Electric Corp. Project, Series A			4.250	%			11/1/30				200,000				191,917
Wastewater Utility, First Lien, CWA Authority Project, Series A, Refunding			5.000	%			10/1/45				1,000,000				961,245	(g)
Valparaiso, IN, Exempt Facilities Revenue, Pratt Paper LLC Project			7.000	%			1/1/44				500,000				500,980	(c)
Total Indiana															2,205,851
Iowa — 1.0%
Iowa State Finance Authority Revenue:
Midwestern Disaster Area, Iowa Fertilizer Co. Project, Refunding			5.000	%			12/1/42				750,000				682,876	(a)(b)

 

See Notes to Financial Statements.

 

14				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

---

 

 

Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
Iowa — continued
Midwestern Disaster Area, Iowa Fertilizer Co. Project, Refunding			5.000	%			12/1/50			$	700,000			$	621,330
Iowa State Tobacco Settlement Authority Revenue, Asset Backed Senior Bonds, Class 1, Series A-2, Refunding			4.000	%			6/1/49				150,000				122,854
Total Iowa															1,427,060
Kentucky — 1.9%
Kentucky State PEA, Gas Supply Revenue:
Series A			4.000	%			6/1/26				1,500,000				1,459,310	(a)(b)
Series C			4.000	%			6/1/25				1,400,000				1,375,822	(a)(b)
Total Kentucky															2,835,132
Louisiana — 1.2%
Louisiana State PFA, Lease Revenue:
Provident Group, Flagship Properties			5.000	%			7/1/42				700,000				681,524
Provident Group, Flagship Properties, Series A			4.000	%			7/1/49				500,000				397,090
St. John the Baptist Parish, LA, State Revenue:
Marathon Oil Corp. Project, Series A-3, Refunding			2.200	%			7/1/26				400,000				373,891	(a)(b)
Marathon Oil Corp. Project, Series B-2, Refunding			2.375	%			7/1/26				250,000				233,458	(a)(b)
Total Louisiana															1,685,963
Maryland — 0.6%
Maryland State EDC Revenue:
Morgan State University Project			4.250	%			7/1/50				350,000				283,707
Seagirt Marine Terminal Project, Series A			5.000	%			6/1/44				400,000				378,348	(c)
Maryland State Health & Higher EFA Revenue, Frederick Health System			4.000	%			7/1/40				300,000				260,392
Total Maryland															922,447
Massachusetts — 0.7%
Massachusetts State DFA Revenue:
Boston Medical Center, Sustainability Bonds, Series G, Refunding			5.250	%			7/1/52				500,000				476,539
Northeastern University Issue, Refunding			5.000	%			10/1/44				500,000				514,583
Total Massachusetts															991,122
Michigan — 1.1%
Detroit, MI, Downtown Development Authority Revenue, Catalyst Development, Series A, Refunding, AGM			5.000	%			7/1/48				250,000				232,915
Detroit, MI, GO, Unlimited Tax, Series C			6.000	%			5/1/43				700,000				727,088

 

See Notes to Financial Statements.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					15

---

Schedule of investments (cont’d)

October 31, 2023

 

Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
Michigan — continued
Michigan State Finance Authority Revenue:
Henry Ford Health System, Series A			4.000	%			11/15/50			$	400,000			$	313,477
Tobacco Settlement Asset Backed Senior Bonds, Series B-1, Refunding			5.000	%			6/1/49				55,000				53,909
Michigan State Strategic Fund Limited Obligation Revenue, I-75 Improvement Project			5.000	%			12/31/43				250,000				231,931	(c)
Total Michigan															1,559,320
Missouri — 1.8%
Missouri State HEFA Revenue, Senior Living Facilities, Lutheran Senior Services, Refunding			5.000	%			2/1/44				750,000				658,704
St. Louis County, MO, IDA, Senior Living Facilities Revenue, Friendship Village of Sunset Hills, Series A			5.875	%			9/1/43				2,000,000				1,904,310
Total Missouri															2,563,014
Nebraska — 0.3%
Omaha, NE, Public Power District, Electric System Revenue, Series B, Refunding			4.000	%			2/1/46				500,000				429,709
Nevada — 0.5%
State of Nevada Department of Business & Industry Revenue:
Charter School Lease Revenue, Somerset Academy, Series A			5.000	%			12/15/35				300,000				279,791	(d)
Charter School Lease Revenue, Somerset Academy, Series A			5.125	%			12/15/45				500,000				425,602	(d)
Total Nevada															705,393
New Hampshire — 0.2%
National Finance Authority, NH, Revenue, Presbyterian Senior Living Project, Series A			5.250	%			7/1/48				350,000				316,816
New Jersey — 6.7%
Gloucester County, NJ, PCFA Revenue, Keystone Urban Renewal, Logan Generating, Series A, Refunding			5.000	%			12/1/24				145,000				145,247	(c)(h)
New Jersey State EDA Revenue:
Private Activity-The Goethals Bridge Replacement Project			5.375	%			1/1/43				1,500,000				1,457,092	(c)
Special Facility, Port Newark Container Terminal LLC Project, Refunding			5.000	%			10/1/37				125,000				120,383	(c)
New Jersey State Health Care Facilities Financing Authority Revenue, Hackensack Meridian Health, Series A, Refunding			5.000	%			7/1/38				100,000				101,097

 

See Notes to Financial Statements.

 

16				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

---

 

 

Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
New Jersey — continued
New Jersey State Higher Education, Student Assistance Authority Revenue, Subordinated, Series B-1			5.000	%			12/1/44			$	640,000			$	548,278	(c)
New Jersey State Transportation Trust Fund Authority Revenue:
Transportation Program, Series AA			5.250	%			6/15/32				4,720,000				4,767,822
Transportation Program, Series BB			5.000	%			6/15/44				1,000,000				991,520
New Jersey State, GO, COVID-19 Emergency, Series A			5.000	%			6/1/28				1,250,000				1,313,399
Salem County, NJ, PCFA Revenue, Chambers Project, Series A, Refunding			5.000	%			12/1/23				265,000				265,171	(c)(h)
Tobacco Settlement Financing Corp., NJ, Revenue, Series A, Refunding			5.250	%			6/1/46				150,000				147,461
Total New Jersey															9,857,470
New Mexico — 0.1%
Santa Fe, NM, Retirement Facilities Revenue, EL Castillo Retirement Residences Project, Series A			5.000	%			5/15/49				250,000				187,554
New York — 8.0%
Brookhaven, NY, Local Development Corp., Long Island Community Hospital Project, Series A			5.000	%			10/1/34				735,000				753,072
Build NYC Resource Corp., NY, Revenue, East Harlem Scholars Academy Charter School Project			5.750	%			6/1/62				300,000				276,588	(d)
MTA, NY, Transportation Revenue:
Green Bonds, Series E, Refunding			5.000	%			11/15/30				250,000				256,898
Green Bonds, Series E, Refunding			4.000	%			11/15/45				250,000				206,793
Series A-2			5.000	%			5/15/30				400,000				408,249	(a)(b)
New York City, NY, GO, Subseries A-1			4.000	%			8/1/40				750,000				666,413
New York City, NY, Industrial Development Agency Revenue, Yankee Stadium Project, Refunding			4.000	%			3/1/45				300,000				237,575
New York City, NY, TFA Revenue, Future Tax Secured, Subordinated, Series F, Subseries F-2			5.000	%			2/1/47				2,250,000				2,257,931	(g)
New York State Dormitory Authority Revenue, Non-State Supported Debt, Memorial Sloan- Kettering Cancer Center, Series B-1			4.000	%			7/1/51				500,000				414,805
New York State Liberty Development Corp., Liberty Revenue, 7 World Trade Center Project, Class 3, Refunding			3.500	%			9/15/52				700,000				465,655
New York State Liberty Development Corp., Revenue, 3 World Trade Center Project, Class 1, Refunding			5.000	%			11/15/44				1,205,000				1,079,259	(d)

 

See Notes to Financial Statements.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					17

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Schedule of investments (cont’d)

October 31, 2023

 

Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
New York — continued
New York State Thruway Authority General Revenue, Junior Indebtedness Obligations, Junior Lien, Series B			4.000	%			1/1/45			$	750,000			$	630,704
New York State Transportation Development Corp., Special Facilities Revenue:
Delta Air Lines Inc., LaGuardia Airport Terminals C and D Redevelopment Project			5.000	%			1/1/33				750,000				726,552	(c)
Delta Air Lines Inc., LaGuardia Airport Terminals C and D Redevelopment Project, Series 2020			4.375	%			10/1/45				250,000				206,653	(c)
Delta Air Lines Inc., LaGuardia Airport Terminals C and D Redevelopment Project, Series 2023			6.000	%			4/1/35				400,000				414,474	(c)(g)
Delta Air Lines Inc., LaGuardia Airport Terminals C and D Redevelopment Project, Series 2023			5.625	%			4/1/40				300,000				298,870	(c)(g)
John F. Kennedy International Airport Terminal 4 Project, Series C, Refunding			4.000	%			12/1/42				500,000				427,249
LaGuardia Airport Terminal B Redevelopment Project, Series A			5.000	%			7/1/41				300,000				284,885	(c)
LaGuardia Airport Terminal B Redevelopment Project, Series A			5.000	%			7/1/46				500,000				460,426	(c)
Port Authority of New York & New Jersey Revenue, Consolidated Series 221			4.000	%			7/15/45				1,000,000				813,805	(c)
Troy Capital Resource Corp., NY, Revenue, Rensselaer Polytechnic Institute Project, Series A, Refunding			4.000	%			9/1/40				500,000				416,795
Total New York															11,703,651
North Carolina — 0.3%
North Carolina State Turnpike Authority, Monroe Expressway Toll Revenue, Series A, Refunding			5.000	%			7/1/47				500,000				474,299
North Dakota — 0.3%
Grand Forks, ND, Health Care System Revenue, Altru Health System, Refunding, AGM			3.000	%			12/1/46				600,000				386,526
Ohio — 1.1%
Buckeye, OH, Tobacco Settlement Financing Authority Revenue, Senior Bonds, Series B-2, Refunding			5.000	%			6/1/55				800,000				655,356

 

See Notes to Financial Statements.

 

18				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
Ohio — continued
Ohio State Air Quality Development Authority Revenue, American Electric Co. Project, Series B, Refunding			2.500	%			10/1/29			$	350,000			$	289,859	(a)(b)(c)
Ohio State Private Activity Revenue, Portsmouth Bypass Project			5.000	%			6/30/53				700,000				636,362	(c)
Total Ohio															1,581,577
Oklahoma — 0.3%
Tulsa County, OK, Industrial Authority, Senior Living Community Revenue, Montereau Inc. Project, Refunding			5.250	%			11/15/37				500,000				471,534
Oregon — 0.3%
Clackamas County, OR, Hospital Facility Authority Revenue, Senior Living, Willamette View Project, Refunding			5.000	%			11/15/37				500,000				448,616
Pennsylvania — 6.2%
Allegheny County, PA, HDA Revenue, University Pittsburgh Medical Center, Series A, Refunding			4.000	%			7/15/39				350,000				303,910
Cumberland County, PA, Municipal Authority Revenue:
Diakon Lutheran Social Ministries 2015, Refunding			5.000	%			1/1/28				45,000				45,493	(e)
Diakon Lutheran Social Ministries 2015, Refunding			5.000	%			1/1/28				105,000				106,151	(e)
Diakon Lutheran Social Ministries 2015, Refunding			5.000	%			1/1/28				200,000				198,801
Erie County, PA, Convention Center Authority Guaranteed Hotel Revenue, County Guaranty, Refunding			5.000	%			1/15/36				750,000				753,185
Lancaster County, PA:
Convention Center Authority Revenue, Hotel Room Rental Tax, County Guaranty, Series B, Refunding			4.750	%			5/1/57				500,000				427,367
IDA Revenue, Willow Valley Communities Project			5.000	%			12/1/49				500,000				450,285
Pennsylvania State Economic Development Financing Authority Revenue, Tax-Exempt Private Activity, The Penndot Major Bridges Package One Project			5.250	%			6/30/53				2,600,000				2,461,173	(c)
Pennsylvania State Turnpike Commission Revenue, Subordinated, Series B, Refunding			5.000	%			6/1/39				3,170,000				3,178,328

 

See Notes to Financial Statements.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					19

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Schedule of investments (cont’d)

October 31, 2023

 

Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
Pennsylvania — continued
Philadelphia, PA, Authority for IDR:
Charter School Revenue, A String Theory Charter School Project			5.000	%			6/15/40			$	400,000			$	360,994
City Service Agreement Revenue, Rebuild Project			5.000	%			5/1/38				500,000				505,019
Lease Revenue, Refunding			5.000	%			10/1/30				250,000				265,586
Total Pennsylvania															9,056,292
Puerto Rico — 4.0%
Puerto Rico Commonwealth Highway & Transportation Authority Revenue:
CAB, Restructured, Series B			0.000	%			7/1/32				145,000				92,619
Restructured, Series A			5.000	%			7/1/62				160,000				158,000
Puerto Rico Sales Tax Financing Corp., Sales Tax Revenue:
CAB, Restructured, Series A-1			0.000	%			7/1/27				240,000				203,051
CAB, Restructured, Series A-1			0.000	%			7/1/46				1,220,000				303,934
Restructured, Series A-1			4.550	%			7/1/40				50,000				44,506
Restructured, Series A-1			4.750	%			7/1/53				3,020,000				2,558,305
Restructured, Series A-1			5.000	%			7/1/58				880,000				770,447
Restructured, Series A-2			4.329	%			7/1/40				530,000				459,153
Restructured, Series A-2A			4.550	%			7/1/40				1,380,000				1,228,359
Total Puerto Rico															5,818,374
South Carolina — 0.2%
South Carolina State Jobs-EDA Hospital Facilities Revenue, Bon Secours Mercy Health Inc., Series A, Refunding			4.000	%			12/1/44				400,000				332,967
Tennessee — 0.8%
Clarksville, TN, Water, Sewer & Gas Revenue, Series A			4.000	%			2/1/51				500,000				419,432
Metropolitan Government of Nashville & Davidson County, TN, Sports Authority Revenue, Series A, AGM			5.250	%			7/1/53				350,000				357,682
Tennessee State Energy Acquisition Corp., Natural Gas Revenue, Series 2018			4.000	%			11/1/25				400,000				391,378	(a)(b)
Total Tennessee															1,168,492
Texas — 6.1%
Arlington, TX, Higher Education Finance Corp., Education Revenue, Uplift Education, Series A			5.000	%			12/1/46				200,000				179,043
Arlington, TX, Special Tax Revenue, Subordinated Lien, Series C, BAM			5.000	%			2/15/41				500,000				497,151

 

See Notes to Financial Statements.

 

20				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
Texas — continued
Austin, TX, Airport System Revenue:
Series 2022			5.000	%			11/15/52			$	300,000			$	280,862	(c)
Series B			5.000	%			11/15/39				600,000				585,291	(c)
Central Texas Regional Mobility Authority Revenue, Senior Lien, Series B			4.000	%			1/1/51				500,000				405,834
Gulf Coast, TX, IDA, Solid Waste Disposal Revenue, Citgo Petroleum Corp. Project			4.875	%			5/1/25				1,000,000				988,177	(c)
Love Field, TX, Airport Modernization Corp., General Airport Revenue:
Series 2017			5.000	%			11/1/33				20,000				19,952	(c)
Series 2017			5.000	%			11/1/36				20,000				19,624	(c)
New Hope Cultural Education Facilities Finance Corp., TX, Retirement Facility Revenue:
MRC Crestview, Refunding			5.000	%			11/15/36				550,000				565,369	(e)
Westminster Manor Project			4.000	%			11/1/49				400,000				292,827
Westminster Manor Project, Refunding			5.000	%			11/1/40				1,000,000				926,488
New Hope Cultural Education Facilities Finance Corp., TX, Student Housing Revenue, Collegiate Housing Stephenville II LLC, Tartleton State University Project, Series A			5.000	%			4/1/39				1,165,000				1,169,145	(e)
Newark, TX, Higher Education Finance Corp., Education Revenue, TLC Academy, Series A			4.000	%			8/15/56				350,000				230,182
Tarrant County, TX, Cultural Education Facilities Finance Corp., Retirement Facility Revenue, Buckner Retirement Services Inc. Project, Refunding			5.000	%			11/15/37				700,000				642,053
Texas State, Municipal Gas Acquisition & Supply Corp. I, Gas Supply Revenue, Senior Lien, Series D			6.250	%			12/15/26				550,000				560,689
Texas State Private Activity Bond Surface Transportation Corp. Revenue:
Senior Lien, Blueridge Transportation Group LLC			5.000	%			12/31/40				1,000,000				922,572	(c)
Senior Lien, Blueridge Transportation Group LLC			5.000	%			12/31/50				500,000				444,693	(c)
Willacy County, TX, Jail Public Facilities Corp. Project Revenue			7.500	%			11/1/25				210,000				192,787
Total Texas															8,922,739
Utah — 1.4%
Salt Lake City, UT, Airport Revenue, Salt Lake City International Airport, Series A			5.250	%			7/1/53				1,000,000				977,658	(c)

 

See Notes to Financial Statements.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					21

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Schedule of investments (cont’d)

October 31, 2023

 

Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
Utah — continued
Utah State Charter School Finance Authority, Charter School Revenue:
Summit Academy Inc., Series A, Refunding, UT CSCE			5.000	%			4/15/39			$	350,000			$	343,074
Syracuse Arts Academy Project, UT CSCE			5.000	%			4/15/42				250,000				237,773
Utah State Infrastructure Agency, Telecommunications Revenue, Series A			5.250	%			10/15/33				550,000				552,901
Total Utah															2,111,406
Virginia — 1.5%
Virginia State Port Authority, Port Facilities Revenue:
Series B, Refunding			5.000	%			7/1/41				250,000				241,284	(c)
Series B, Refunding			5.000	%			7/1/45				300,000				287,203	(c)
Virginia State Small Business Financing Authority Revenue:
National Senior Campuses, Inc., Series A, Refunding			5.000	%			1/1/34				200,000				200,681
Senior Lien, 95 Express Lanes LLC Project, Refunding			5.000	%			1/1/37				1,000,000				990,050	(c)
Senior Lien, I-495 HOT Lanes Project, Refunding			5.000	%			12/31/47				500,000				472,097	(c)
Total Virginia															2,191,315
Washington — 0.8%
Port of Seattle, WA, Intermediate Lien Revenue, Series 2022, Refunding			5.000	%			8/1/41				500,000				491,804	(c)
Washington State Health Care Facilities Authority Revenue:
Commonspirit Health, Series A-1, Refunding			4.000	%			8/1/44				535,000				431,235
Seattle Cancer Care Alliance			4.000	%			12/1/40				370,000				315,339
Total Washington															1,238,378
Wisconsin — 1.9%
Public Finance Authority, WI, Revenue:
Celanese Project, Series B, Refunding			5.000	%			12/1/25				550,000				548,368	(c)
Cone Health, Series A			5.000	%			10/1/52				300,000				284,268
Public Finance Authority, WI, Revenue Bonds, The Carmelite System, Inc. Obligated Group			5.000	%			1/1/45				100,000				86,801
Public Finance Authority, WI, Student Housing Revenue:
Appalachian State University Project, Series A, AGM			4.000	%			7/1/45				600,000				492,267

 

See Notes to Financial Statements.

 

22				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
Wisconsin — continued
CHF Wilmington LLC, University of North Carolina at Wilmington Project, AGM			5.000	%			7/1/53			$	1,000,000			$	940,056
University of Hawai’i Foundation Project, Green Bonds, Series A-1			4.000	%			7/1/51				280,000				198,403	(d)
Wisconsin State HEFA Revenue, Bellin Memorial Hospital Inc., Series A			5.500	%			12/1/52				250,000				250,511
Total Wisconsin															2,800,674
Total Municipal Bonds (Cost — $153,461,541)															143,163,326
Municipal Bonds Deposited in Tender Option Bond Trusts (i) — 3.3%
New York — 3.3%
New York City, NY, Municipal Water Finance Authority, Water & Sewer System Revenue, Second General Resolution Fiscal 2023, Subseries AA-1			5.250	%			6/15/52				1,440,000				1,479,813
New York State Dormitory Authority, State Personal Income Tax Revenue, Series A			4.000	%			3/15/45				1,740,000				1,507,367
New York State Urban Development Corp. Revenue, State Sales Tax, Series A			5.000	%			3/15/47				1,800,000				1,813,535
Total Municipal Bonds Deposited in Tender Option Bond Trusts (Cost — $5,086,242)															4,800,715
Total Investments before Short-Term Investments (Cost — $158,547,783)															147,964,041
Short-Term Investments — 0.7%
Municipal Bonds — 0.6%
Mississippi — 0.3%
Mississippi State Business Finance Corp., Gulf Opportunity Zone, IDR:
Chevron USA Inc. Project, Series B			3.950	%			12/1/30				250,000				250,000	(j)(k)
Chevron USA Inc. Project, Series G			3.950	%			11/1/35				175,000				175,000	(j)(k)
Total Mississippi															425,000
New York — 0.2%
New York City, NY, TFA, Future Tax Secured Revenue, Subseries A-4, Refunding, SPA - TD Bank N.A.			3.950	%			11/1/29				100,000				100,000	(j)(k)
New York State Housing Finance Agency Revenue, 350 West 43rd Street, Series A, LOC - Landesbank Hessen-Thueringen			4.030	%			11/1/34				150,000				150,000	(c)(j)(k)
Total New York															250,000
Ohio — 0.0%††
Ohio State, GO, Common Schools, Series C			4.000	%			6/15/26				100,000				100,000	(j)

 

See Notes to Financial Statements.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					23

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Schedule of investments (cont’d)

October 31, 2023

 

Western Asset Municipal High Income Fund Inc.

 

(Percentages shown based on Fund net assets)

 

Security		Rate				Maturity Date				Face Amount				Value
Pennsylvania — 0.1%
Lancaster County, PA, Hospital Authority Revenue, Masonic Homes Project, Series D, Refunding, LOC - JPMorgan Chase & Co.			4.050	%			7/1/34			$	100,000			$	100,000	(j)(k)
Total Municipal Bonds (Cost — $875,000)															875,000
										Shares
Money Market Funds — 0.1%
Western Asset Premier Institutional Government Reserves, Premium Shares (Cost — $99,818)			5.291	%							99,818				99,818	(l)(m)
Total Short-Term Investments (Cost — $974,818)															974,818
Total Investments — 101.9% (Cost — $159,522,601)															148,938,859
TOB Floating Rate Notes — (1.9)%															(2,730,000	)
Other Assets in Excess of Other Liabilities — 0.0%††															11,491
Total Net Assets — 100.0%														$	146,220,350

 

See Notes to Financial Statements.

 

24				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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Western Asset Municipal High Income Fund Inc.

 

††	Represents less than 0.1%.

 

*	Non-income producing security.

 

(a)	Maturity date shown represents the mandatory tender date.

 

(b)

Variable rate security. Interest rate disclosed is as of the most recent information available. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above.

 

(c)	Income from this issue is considered a preference item for purposes of calculating the alternative minimum tax (“AMT”).

 

(d)

Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Directors.

 

(e)	Pre-Refunded bonds are generally escrowed with U.S. government obligations and/or U.S. government agency securities.

 

(f)	The coupon payment on this security is currently in default as of October 31, 2023.

 

(g)	Securities traded on a when-issued or delayed delivery basis.

 

(h)	Bonds are generally escrowed to maturity by government securities and/or U.S. government agency securities.

 

(i)	Represents securities deposited into a special purpose entity, referred to as a Tender Option Bond (“TOB”) trust (Note 1).

 

(j)

Variable rate demand obligations (“VRDOs”) have a demand feature under which the Fund can tender them back to the issuer or liquidity provider on no more than 7 days notice. The interest rate generally resets on a daily or weekly basis and is determined on the specific interest rate reset date by the remarketing agent, pursuant to a formula specified in official documents for the VRDO, or set at the highest rate allowable as specified in official documents for the VRDO. VRDOs are benchmarked to the Securities Industry and Financial Markets Association (“SIFMA”) Municipal Swap Index. The SIFMA Municipal Swap Index is compiled from weekly interest rate resets of tax-exempt VRDOs reported to the Municipal Securities Rulemaking Board’s Short-term Obligation Rate Transparency System.

 

(k)	Maturity date shown is the final maturity date. The security may be sold back to the issuer before final maturity.

 

(l)	Rate shown is one-day yield as of the end of the reporting period.

 

(m)

In this instance, as defined in the Investment Company Act of 1940, an “Affiliated Company” represents Fund ownership of at least 5% of the outstanding voting securities of an issuer, or a company which is under common ownership or control with the Fund. At October 31, 2023, the total market value of investments in Affiliated Companies was $99,818 and the cost was $99,818 (Note 7).

 

See Notes to Financial Statements.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					25

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Schedule of investments (cont’d)

October 31, 2023

 

Western Asset Municipal High Income Fund Inc.

 

Abbreviation(s) used in this schedule:
AGM		— Assured Guaranty Municipal Corporation — Insured Bonds
BAM		— Build America Mutual — Insured Bonds
CAB		— Capital Appreciation Bonds
CDA		— Communities Development Authority
CSCE		— Charter School Credit Enhancement
CWA		— Clean Water Act
DFA		— Development Finance Agency
EDA		— Economic Development Authority
EDC		— Economic Development Corporation
EFA		— Educational Facilities Authority
GO		— General Obligation
HDA		— Housing Development Authority
HEFA		— Health & Educational Facilities Authority
IDA		— Industrial Development Authority
IDR		— Industrial Development Revenue
LOC		— Letter of Credit
MFA		— Municipal Finance Authority
MTA		— Metropolitan Transportation Authority
NATL		— National Public Finance Guarantee Corporation — Insured Bonds
PCFA		— Pollution Control Financing Authority
PEA		— Public Energy Authority
PFA		— Public Facilities Authority
SPA		— Standby Bond Purchase Agreement — Insured Bonds
TFA		— Transitional Finance Authority

 

See Notes to Financial Statements.

 

26				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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Statement of assets and liabilities

October 31, 2023

 

Assets:
Investments in unaffiliated securities, at value (Cost — $159,422,783)		$	148,839,041
Investments in affiliated securities, at value (Cost — $99,818)			99,818
Interest receivable			2,490,386
Receivable for securities sold			2,251,103
Dividends receivable from affiliated investments			178
Prepaid expenses			894
Total Assets			153,681,420
Liabilities:
Payable for securities purchased			4,047,414
TOB Floating Rate Notes (Note 1)			2,730,000
Distributions payable			450,345
Investment management fee payable			69,120
Interest expense payable			52,415
Directors’ fees payable			3,767
Accrued expenses			108,009
Total Liabilities			7,461,070
Total Net Assets		$	146,220,350
Net Assets:
Par value ($0.01 par value; 21,651,223 shares issued and outstanding; 500,000,000 shares authorized)		$	216,512
Paid-in capital in excess of par value			163,604,428
Total distributable earnings (loss)			(17,600,590)
Total Net Assets			$146,220,350
Shares Outstanding			21,651,223
Net Asset Value			$6.75

 

See Notes to Financial Statements.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					27

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Statement of operations

For the Year Ended October 31, 2023

 

Investment Income:
Interest		$	6,697,465
Dividends from affiliated investments			2,183
Total Investment Income			6,699,648
Expenses:
Investment management fee (Note 2)			848,143
Interest expense (Note 1)			68,680
Directors’ fees			49,172
Audit and tax fees			46,068
Transfer agent fees			42,257
Legal fees			39,554
Fund accounting fees			23,230
Stock exchange listing fees			12,623
Shareholder reports			9,968
Custody fees			2,345
Insurance			1,012
Miscellaneous expenses			6,017
Total Expenses			1,149,069
Less: Fee waivers and/or expense reimbursements (Note 2)			(38)
Net Expenses			1,149,031
Net Investment Income			5,550,617
Realized and Unrealized Loss on Investments (Notes 1 and 3):
Net Realized Loss From Unaffiliated Investment Transactions			(939,961)
Change in Net Unrealized Appreciation (Depreciation) From Unaffiliated Investments			(628,058)
Net Loss on Investments			(1,568,019)
Increase in Net Assets From Operations		$	3,982,598

 

See Notes to Financial Statements.

 

28				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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Statements of changes in net assets

 

For the Years Ended October 31,		2023				2022
Operations:
Net investment income		$	5,550,617			$	5,554,930
Net realized loss			(939,961)				(2,144,016)
Change in net unrealized appreciation (depreciation)			(628,058)				(24,192,774)
Increase (Decrease) in Net Assets From Operations			3,982,598				(20,781,860)
Distributions to Shareholders From (Note 1):
Total distributable earnings			(5,187,633)				(5,187,479)
Decrease in Net Assets From Distributions to Shareholders			(5,187,633)				(5,187,479)
Fund Share Transactions:
Reinvestment of distributions (0 and 7,553 shares issued, respectively)			—				60,893
Increase in Net Assets From Fund Share Transactions			—				60,893
Decrease in Net Assets			(1,205,035)				(25,908,446)
Net Assets:
Beginning of year			147,425,385				173,333,831
End of year		$	146,220,350			$	147,425,385

 

See Notes to Financial Statements.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					29

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Financial highlights

 

For a share of capital stock outstanding throughout each year ended October 31:
		20231				20221				20211				20201				20191
Net asset value, beginning of year			$6.81				$8.01				$7.86				$8.04				$7.66
Income (loss) from operations:
Net investment income			0.26				0.26				0.26				0.27				0.30
Net realized and unrealized gain (loss)			(0.08)				(1.22)				0.15				(0.16)				0.39
Total income (loss) from operations			0.18				(0.96)				0.41				0.11				0.69
Less distributions from:
Net investment income			(0.24)				(0.24)				(0.26)				(0.29)				(0.31)
Total distributions			(0.24)				(0.24)				(0.26)				(0.29)				(0.31)
Net asset value, end of year			$6.75				$6.81				$8.01				$7.86				$8.04
Market price, end of year			$6.01				$6.26				$8.44				$7.19				$7.64
Total return, based on NAV2,3			2.52	%			(12.20)	%			5.25	%			1.43	%			9.12	%
Total return, based on Market Price4			(0.37)	%			(23.25)	%			21.33	%			(2.15)	%			15.20	%
Net assets, end of year (millions)			$146				$147				$173				$170				$174
Ratios to average net assets:
Gross expenses			0.75	%			0.72	%			0.71	%			0.71	%			0.68	%
Net expenses			0.75	5,6			0.72	5,6			0.71	5,6			0.71	5			0.68
Net investment income			3.60				3.42				3.16				3.43				3.86
Portfolio turnover rate			14	%			25	%			14	%			27	%			16	%

 

1	Per share amounts have been calculated using the average shares method.

 

2	Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.

 

3	The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results.

 

4	The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no guarantee of future results.

 

5	Reflects fee waivers and/or expense reimbursements.

 

6	The manager has agreed to waive the Fund’s management fee to an extent sufficient to offset the net management fee payable in connection with any investment in an affiliated money market fund.

 

See Notes to Financial Statements.

 

30				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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Notes to financial statements

 

1. Organization and significant accounting policies

Western Asset Municipal High Income Fund Inc. (the “Fund”) was incorporated in Maryland and is registered as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund seeks high current income exempt from federal income taxes. The Fund seeks to achieve its investment objective by investing primarily in intermediate and long-term municipal debt securities issued by state and local governments. However, the Fund may invest in municipal obligations of any maturity. The Fund may invest up to 100% of its assets in municipal obligations rated below investment grade (commonly referred to as “junk bonds”). Investment grade securities are those rated in the Baa/BBB categories or above by at least one National Recognized Statistical Rating Organization that provides such a rating or unrated securities that the subadviser determined to be of comparable credit quality. For credit ratings purposes, pre-refunded bonds are deemed to be unrated. The subadviser determines the credit quality of pre-refunded bonds based on the quality of the escrowed collateral and such other factors as the subadviser deems appropriate.

The Fund follows the accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 946, Financial Services — Investment Companies (“ASC 946”). The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”), including, but not limited to, ASC 946. Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.

(a) Investment valuation. The valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services typically use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					31

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Notes to financial statements (cont’d)

 

Pursuant to policies adopted by the Board of Directors, the Fund’s manager has been designated as the valuation designee and is responsible for the oversight of the daily valuation process. The Fund’s manager is assisted by the Global Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Fund’s manager and the Board of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.

The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.

For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.

The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:

 

•

Level 1 — unadjusted quoted prices in active markets for identical investments

 

•

Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

 

•

Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

 

32				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used in valuing the Fund’s assets carried at fair value:

 

ASSETS
Description		Quoted Prices (Level 1)				Other Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
Long-Term Investments†:
Municipal Bonds			—			$	143,163,326				—			$	143,163,326
Municipal Bonds Deposited in Tender Option Bond Trusts			—				4,800,715				—				4,800,715
Total Long-Term Investments			—				147,964,041				—				147,964,041
Short-Term Investments†:
Municipal Bonds			—				875,000				—				875,000
Money Market Funds		$	99,818				—				—				99,818
Total Short-Term Investments			99,818				875,000				—				974,818
Total Investments		$	99,818			$	148,839,041				—			$	148,938,859

 

†	See Schedule of Investments for additional detailed categorizations.

(b) Tender option bonds. The Fund may enter into tender option bond (“TOB”) transactions and may invest in inverse floating rate instruments (“Inverse Floaters”) issued in TOB transactions. The Fund may participate either in structuring an Inverse Floater or purchasing an Inverse Floater in the secondary market. When structuring an Inverse Floater, the Fund deposits securities (typically municipal bonds or other municipal securities) (the “Underlying Bonds”) into a special purpose entity, referred to as a TOB trust. The TOB trust generally issues floating rate notes (“Floaters”) to third parties and residual interest, Inverse Floaters, to the Fund. The Floaters issued by the TOB trust have interest rates which reset weekly and provide the holders of the Floaters the option to tender their notes back to the TOB trust for redemption at par at each reset date. The net proceeds of the sale of the Floaters, after expenses, are received by the Fund and may be invested in additional securities. The Inverse Floaters are inverse floating rate debt instruments, as the return on those bonds is inversely related to changes in a specified interest rate. Distributions on any Inverse Floaters paid to the Fund will be reduced or, in the extreme, eliminated as short-term interest rates rise and will increase when such interest rates fall. Floaters issued by a TOB trust may be senior to the Inverse Floaters held by the Fund. The value and market for Inverse Floaters can be volatile, and Inverse Floaters can have limited liquidity.

An investment in an Inverse Floater structured by the Fund is accounted for as a secured borrowing. The Underlying Bonds deposited into the TOB trust are included in the Fund’s Schedule of Investments and a liability for Floaters (TOB floating rate notes) issued by the TOB trust is recognized in the Fund’s Statement of Assets and Liabilities. The carrying amount of the TOB trust’s floating rate note obligations as reported on the Statement of Assets and Liabilities approximates its fair value. Interest income, including amortization, on the Underlying Bonds is recognized in the Fund’s Statements of Operations. Interest paid

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					33

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Notes to financial statements (cont’d)

 

to holders of the Floaters, as well as other expenses related to administration, liquidity, remarketing and trustee services of the TOB trust, are recognized in Interest expense in the Fund’s Statement of Operations. For the year ended October 31, 2023, the average daily amount of floating rate notes outstanding was $1,801,726 and weighted average interest rate was 3.76%.

(c) Securities traded on a when-issued and delayed delivery basis. The Fund may trade securities on a when-issued or delayed delivery basis. In when-issued and delayed delivery transactions, the securities are purchased or sold by the Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction.

Purchasing such securities involves risk of loss if the value of the securities declines prior to settlement. These securities are subject to market fluctuations and their current value is determined in the same manner as for other securities.

(d) Credit and market risk. The Fund invests in high-yield instruments that are subject to certain credit and market risks. The yields of high-yield obligations reflect, among other things, perceived credit and market risks. The Fund’s investments in securities rated below investment grade typically involve risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading.

(e) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income (including interest income from payment-in-kind securities) is recorded on the accrual basis. Amortization of premiums and accretion of discounts on debt securities are recorded to interest income over the lives of the respective securities, except for premiums on certain callable debt securities which are amortized to the earliest call date. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.

(f) Distributions to shareholders. Distributions from net investment income of the Fund, if any, are declared quarterly and paid on a monthly basis. The Fund intends to satisfy conditions that will enable interest from municipal securities, which is exempt from federal and certain state income taxes, to retain such tax-exempt status when distributed to the shareholders of the Fund. Distributions of net realized gains, if any, are taxable and are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.

(g) Compensating balance arrangements. The Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.

(h) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute

 

34				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.

Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of October 31, 2023, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

(i) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. During the current year, the Fund had no reclassifications.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) (effective November 30, 2023, renamed Franklin Templeton Fund Adviser, LLC) is the Fund’s investment manager and Western Asset Management Company, LLC (“Western Asset”) is the Fund’s subadviser. LMPFA and Western Asset are indirect, wholly-owned subsidiaries of Franklin Resources, Inc. (“Franklin Resources”).

LMPFA provides administrative and certain oversight services to the Fund. The Fund pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.55% of the Fund’s average daily net assets.

LMPFA delegates to Western Asset the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset monthly 70% of the net management fee it receives from the Fund.

The manager has agreed to waive the Fund’s management fee to an extent sufficient to offset the net management fee payable in connection with any investment in an affiliated money market fund.

During the year ended October 31, 2023, fees waived and/or expenses reimbursed amounted to $38, all of which was an affiliated money market fund waiver.

All officers and one Director of the Fund are employees of Franklin Resources or its affiliates and do not receive compensation from the Fund.

The Fund is permitted to purchase or sell short-term variable rate demand obligations from or to certain other affiliated funds or portfolios under specified conditions outlined in procedures adopted by the Board of Directors. The procedures have been designed to provide assurance that any purchase or sale of securities by the Fund from or to another fund or portfolio that is, or could be considered, an affiliate by virtue of having a common investment manager or subadviser (or affiliated investment manager or subadviser), common Directors and/or common officers complies with Rule 17a-7 under the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. For the year ended October 31, 2023, such purchase and sale transactions (excluding accrued interest) were $11,575,000 and $12,050,000, respectively.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					35

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Notes to financial statements (cont’d)

 

3. Investments

During the year ended October 31, 2023, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:

 

Purchases		$	35,027,546
Sales			20,368,241

At October 31, 2023, the aggregate cost of investments and the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:

 

		Cost*				Gross Unrealized Appreciation				Gross Unrealized Depreciation				Net Unrealized Depreciation
Securities		$	156,880,332			$	1,337,582			$	(12,009,055)			$	(10,671,473)

 

*	Cost of investments for federal income tax purposes includes the value of Inverse Floaters issued in TOB transactions (Note 1).

4. Derivative instruments and hedging activities

During the year ended October 31, 2023, the Fund did not invest in derivative instruments.

5. Distributions subsequent to October 31, 2023

The following distributions have been declared by the Fund’s Board of Directors and are payable subsequent to the period end of this report:

 

Record Date		Payable Date				Amount
10/24/2023			11/1/2023			$	0.0208
11/22/2023			12/1/2023			$	0.0208
12/21/2023			12/29/2023			$	0.0220
1/24/2024			2/1/2024			$	0.0220
2/22/2024			3/1/2024			$	0.0220

6. Stock repurchase program

On November 16, 2015, the Fund announced that the Fund’s Board of Directors (the “Board”) had authorized the Fund to repurchase in the open market up to approximately 10% of the Fund’s outstanding common stock when the Fund’s shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such amounts as management reasonably believes may enhance stockholder value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts. During the years ended October 31, 2023 and October 31, 2022, the Fund did not repurchase any shares.

7. Transactions with affiliated company

As defined by the 1940 Act, an affiliated company is one in which the Fund owns 5% or more of the outstanding voting securities, or a company which is under common ownership or control with the Fund. The following company was considered an affiliated company for all or some portion of the year ended October 31, 2023. The following transactions were effected in such company for the year ended October 31, 2023.

 

36				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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		Affiliate Value at October 31,				Purchased								Sold
		2022				Cost				Shares				Proceeds				Shares
Western Asset Premier Institutional Government Reserves, Premium Shares		$	46,898			$	1,266,327				1,266,327			$	1,213,407				1,213,407

 

(cont’d)		Realized Gain (Loss)				Dividend Income				Net Increase (Decrease) in Unrealized Appreciation (Depreciation)				Affiliate Value at October 31, 2023
Western Asset Premier Institutional Government Reserves, Premium Shares			—			$	2,183				—			$	99,818

8. Income tax information and distributions to shareholders

The tax character of distributions paid during the fiscal years ended October 31, was as follows:

 

		2023				2022
Distributions paid from:
Tax-exempt income		$	5,180,946			$	5,172,232
Ordinary income			6,687				15,247
Total distributions paid		$	5,187,633			$	5,187,479

As of October 31, 2023, the components of distributable earnings (loss) on a tax basis were as follows:

 

Undistributed ordinary income — net		$	1,028,811
Deferred capital losses*			(7,446,719)
Other book/tax temporary differences(a)			(511,209)
Unrealized appreciation (depreciation)(b)			(10,671,473)
Total distributable earnings (loss) — net		$	(17,600,590)

 

*	These capital losses have been deferred in the current year as either short-term or long-term losses. The losses will be deemed to occur on the first day of the next taxable year in the same character as they were originally deferred and will be available to offset future taxable capital gains.

 

(a)	Other book/tax temporary differences are attributable to the difference between cash and accrual basis distributions paid, the deferral of certain late year losses for tax purposes and book/tax differences in the timing of the deductibility of various expenses.

 

(b)

The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable to the tax deferral of losses on wash sales, the difference between book and tax accretion methods for market discount on fixed income securities and book/tax differences in the accrual of interest income on securities in default.

 

Western Asset Municipal High Income Fund Inc. 2023 Annual Report					37

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Report of independent registered public accounting firm

 

To the Board of Directors and Shareholders of Western Asset Municipal High Income Fund Inc.

Opinion on the Financial Statements

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Western Asset Municipal High Income Fund Inc. (the “Fund”) as of October 31, 2023, the related statement of operations for the year ended October 31, 2023, the statement of changes in net assets for each of the two years in the period ended October 31, 2023, including the related notes, and the financial highlights for each of the five years in the period ended October 31, 2023 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of October 31, 2023, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended October 31, 2023 and the financial highlights for each of the five years in the period ended October 31, 2023 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of October 31, 2023 by correspondence with the custodian and brokers; when replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP

Baltimore, Maryland

December 20, 2023

We have served as the auditor of one or more investment companies in the Franklin Templeton Group of Funds since 1948.

 

38				Western Asset Municipal High Income Fund Inc. 2023 Annual Report

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Board approval of management and

subadvisory agreements (unaudited)

 

Background

The Investment Company Act of 1940, as amended (the “1940 Act”), requires that the Board of Directors (the “Board”) of Western Asset Municipal High Income Fund Inc. (the “Fund”), including a majority of its members who are not considered to be “interested persons” under the 1940 Act (the “Independent Directors”) voting separately, approve on an annual basis the continuation of the investment management agreement (the “Management Agreement”) between the Fund and the Fund’s manager, Legg Mason Partners Fund Advisor, LLC (the “Manager”), and the sub-advisory agreement (the “Sub-Advisory Agreement”) between the Manager and Western Asset Management Company, LLC (the “Sub-Adviser”), an affiliate of the Manager, with respect to the Fund.

At an in-person meeting (the “Contract Renewal Meeting”) held on May 9-10, 2023, the Board, including the Independent Directors, considered and approved the continuation of each of the Management Agreement and the Sub-Advisory Agreement for an additional one-year period. To assist in its consideration of the renewal of each of the Management Agreement and the Sub-Advisory Agreement, the Board received and considered extensive information (together with the information provided at the Contract Renewal Meeting, the “Contract Renewal Information”) about the Manager and the Sub-Adviser, as well as the management and sub-advisory arrangements for the Fund and the other closed-end funds in the same complex under the Board’s purview (the “Franklin Templeton/Legg Mason Closed-end Funds”), certain portions of which are discussed below.

A presentation made by the Manager and the Sub-Adviser to the Board at the Contract Renewal Meeting in connection with the Board’s evaluation of each of the Management Agreement and the Sub-Advisory Agreement encompassed the Fund and other Franklin Templeton/Legg Mason Closed-end Funds. In addition to the Contract Renewal Information, the Board received performance and other information throughout the year related to the respective services rendered by the Manager and the Sub-Adviser to the Fund. The Board’s evaluation took into account the information received throughout the year and also reflected the knowledge and experience gained as members of the Boards of the Fund and other Franklin Templeton/Legg Mason Closed-end Funds with respect to the services provided to the Fund by the Manager and the Sub-Adviser. The information received and considered by the Board (including its various committees) in conjunction with both the Contract Renewal Meeting and throughout the year was both written and oral. The contractual arrangements discussed below are the product of multiple years of review and negotiation and information received and considered by the Board during each of those years.

At a meeting held on April 18, 2023, the Independent Directors, in preparation for the Contract Renewal Meeting, met in a private session with their independent legal counsel to review the Contract Renewal Information regarding the Franklin Templeton/Legg Mason

 

Western Asset Municipal High Income Fund Inc.					39

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Board approval of management and

subadvisory agreements (unaudited) (cont’d)

 

Closed-end Funds, including the Fund, received to date. No representatives of the Manager or the Sub-Adviser participated in this meeting. Following the April 18, 2023 meeting, the Independent Directors submitted certain questions and requests for additional information to Fund management. The Independent Directors also met in private sessions with their independent legal counsel to consider the Contract Renewal Information and Fund management’s responses to the Independent Directors’ questions and requests for additional information in advance of and during the Contract Renewal Meeting. The discussion below reflects all of these reviews.

The Manager provides the Fund with investment advisory and administrative services pursuant to the Management Agreement and the Sub-Adviser provides the Fund with investment sub-advisory services pursuant to the Sub-Advisory Agreement. The discussion below covers both the advisory and administrative functions being rendered by the Manager, each such function being encompassed by the Management Agreement, and the investment sub-advisory functions being rendered by the Sub-Adviser pursuant to the Sub-Advisory Agreement.

Board Approval of Management Agreement and Sub-Advisory Agreement

The Independent Directors were advised by separate independent legal counsel throughout the process. Prior to voting, the Independent Directors received a memorandum discussing the legal standards for their consideration of the proposed continuation of the Management Agreement and the Sub-Advisory Agreement. The Independent Directors considered the Management Agreement and Sub-Advisory Agreement separately during the course of their review. In doing so, they noted the respective roles of the Manager and the Sub-Adviser in providing services to the Fund.

In approving the continuation of the Management Agreement and Sub-Advisory Agreement, the Board, including the Independent Directors, considered a variety of factors, including those factors discussed below. No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the continuation of the Management Agreement and the Sub-Advisory Agreement. Each Director may have attributed different weight to the various factors in evaluating the Management Agreement and the Sub-Advisory Agreement.

After considering all relevant factors and information, the Board, exercising its reasonable business judgment, determined that the continuation of the Management Agreement and Sub-Advisory Agreement were in the best interests of the Fund’s shareholders and approved the continuation of each such agreement for an additional one-year period.

 

40				Western Asset Municipal High Income Fund Inc.

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Nature, Extent and Quality of the Services under the Management Agreement and Sub-Advisory Agreement

The Board received and considered Contract Renewal Information regarding the nature, extent, and quality of services provided to the Fund by the Manager and the Sub-Adviser under the Management Agreement and the Sub-Advisory Agreement, respectively, during the past year. The Board noted information received at regular meetings throughout the year related to the services provided by the Manager in its management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Sub-Adviser and the Fund’s other service providers. The Board observed that the scope of services provided by the Manager and the Sub-Adviser, and of the undertakings required of the Manager and Sub-Adviser in connection with those services, including maintaining and monitoring their respective compliance programs as well as the Fund’s compliance programs, had expanded over time as a result of regulatory, market and other developments. The Board also noted that on a regular basis it received and reviewed information from the Manager and the Sub-Adviser regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the 1940 Act. The Board also considered the risks borne by the Manager, the Sub-Adviser and their respective affiliates on behalf of the Fund, including entrepreneurial, operational, reputational, litigation and regulatory risks, as well as the Manager’s and the Sub-Adviser’s risk management processes.

The Board reviewed the qualifications, backgrounds, and responsibilities of the Manager’s senior personnel and the Sub-Adviser’s portfolio management team primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered, based on its knowledge of the Manager and its affiliates, the financial resources of Franklin Resources, Inc., the parent organization of the Manager and the Sub-Adviser. The Board recognized the importance of having a fund manager with significant resources.

The Board considered the division of responsibilities between the Manager and the Sub-Adviser under the Management Agreement and the Sub-Advisory Agreement, respectively, including the Manager’s coordination and oversight of the services provided to the Fund by the Sub-Adviser and other fund service providers. The Management Agreement permits the Manager to delegate certain of its responsibilities, including its investment advisory duties thereunder, provided that the Manager, in each case, will supervise the activities of the delegee.

In reaching its determinations regarding continuation of the Management Agreement and the Sub-Advisory Agreement, the Board took into account that Fund stockholders, in pursuing their investment goals and objectives, may have purchased their shares of the Fund based upon the reputation and the investment style, philosophy and strategy of the Manager and the Sub-Adviser, as well as the resources available to the Manager and the Sub-Adviser.

 

Western Asset Municipal High Income Fund Inc.					41

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Board approval of management and

subadvisory agreements (unaudited) (cont’d)

 

The Board concluded that, overall, the nature, extent, and quality of the management and other services provided (and expected to be provided) to the Fund, under the Management Agreement and the Sub-Advisory Agreement were satisfactory.

Fund Performance

The Board received and considered information regarding Fund performance, including information and analyses (the “Broadridge Performance Information”) for the Fund, as well as for a group of comparable funds (the “Performance Universe”) selected by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent third-party provider of investment company data. The Board was provided with a description of the methodology Broadridge used to determine the similarity of the Fund with the funds included in the Performance Universe. It was noted that while the Board found the Broadridge Performance Information generally useful, they recognized its limitations, including that the data may vary depending on the end date selected, and that the results of the performance comparisons may vary depending on the selection of the peer group and its composition over time. The Board also noted that Board members had received and discussed with the Manager and the Sub-Adviser information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark and against the Fund’s peers. In addition, the Board considered the Fund’s performance in view of overall financial market conditions.

The Broadridge Performance Information comparing the Fund’s performance to that of its Performance Universe, consisting of the Fund and all closed-end high yield municipal debt funds classified by Broadridge, regardless of asset size, showed, among other data, that based on net asset value per share, the Fund’s performance was above the median for the 1-, 3-, 5- and 10-year periods ended December 31, 2022. The Board noted the explanations from the Manager and the Sub-Adviser regarding the Fund’s relative performance versus the Performance Universe for the various periods.

Based on the reviews and discussions of Fund performance and considering other relevant factors, including those noted above, the Board concluded, under the circumstances, that continuation of the Management Agreement and the Sub-Advisory Agreement for an additional one-year period would be consistent with the interests of the Fund and its stockholders.

Management and Sub-Advisory Fees and Expense Ratios

The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) and the actual management fee (the “Actual Management Fee”) payable by the Fund to the Manager under the Management Agreement and the sub-advisory fee (the “Sub-Advisory Fee”) payable by the Manager to the Sub-Adviser under the Sub-Advisory Agreement in view of the nature, extent and overall quality of the management, investment advisory and other services provided by the Manager and the Sub-Adviser, respectively. The Board noted that the Sub-Advisory Fee is paid by the Manager, not the Fund, and, accordingly, that the retention of the Sub-Adviser does not increase the fees or expenses otherwise incurred by the Fund’s stockholders.

 

42				Western Asset Municipal High Income Fund Inc.

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In addition, the Board received and considered information and analyses prepared by Broadridge (the “Broadridge Expense Information”) comparing the Contractual Management Fee and the Actual Management Fee and the Fund’s total actual expenses with those of funds in an expense group (the “Expense Group”), as well as a broader group of funds, each selected and provided by Broadridge. The comparison was based upon the constituent funds’ latest fiscal years. It was noted that while the Board found the Broadridge Expense Information generally useful, they recognized its limitations, including that the data may vary depending on the selection of the peer group.

The Broadridge Expense Information showed that the Fund’s Contractual Management Fee was below the median. The Broadridge Expense Information also showed that the Fund’s Actual Management Fee was below the median. The Broadridge Expense Information also showed that the Fund’s actual total expenses were below the median. The Board took into account management’s discussion of the Fund’s expenses and noted the limited size of the Expense Group.

The Board also reviewed Contract Renewal Information regarding fees charged by the Manager and/or the Sub-Adviser to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, institutional and separate accounts. The Manager reviewed with the Board the differences in services provided to these different types of accounts, noting that the Fund is provided with certain administrative services, office facilities, and Fund officers, and that the Fund is subject not only to heightened regulatory requirements relative to institutional clients but also to requirements for listing on the New York Stock Exchange, and that the Manager coordinates and oversees the provision of services to the Fund by other fund service providers. The Board considered the fee comparisons in view of the different services provided in managing these other types of clients and funds.

The Board considered the overall management fee, the fees of the Sub-Adviser and the amount of the management fee retained by the Manager after payment of the subadvisory fee in each case in view of the services rendered for those amounts. The Board also received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a framework of fees based on asset classes.

Taking all of the above into consideration, as well as the factors identified below, the Board determined that the management fee and the Sub-Advisory Fee were reasonable in view of the nature, extent and overall quality of the management, investment advisory and other services provided by the Manager and the Sub-Adviser to the Fund under the Management Agreement and the Sub-Advisory Agreement, respectively.

 

Western Asset Municipal High Income Fund Inc.					43

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Board approval of management and

subadvisory agreements (unaudited) (cont’d)

 

Manager Profitability

The Board, as part of the Contract Renewal Information, received an analysis of the profitability to the Manager and its affiliates in providing services to the Fund for the Manager’s fiscal years ended September 30, 2022 and September 30, 2021. The Board also received profitability information with respect to the Franklin Templeton/Legg Mason fund complex as a whole. In addition, the Board received Contract Renewal Information with respect to the Manager’s revenue and cost allocation methodologies used in preparing such profitability data. It was noted that the allocation methodologies had been reviewed by an outside consultant. The profitability to the Sub-Adviser was not considered to be a material factor in the Board’s considerations since the Sub-Advisory Fee is paid by the Manager, not the Fund, although the Board noted the affiliation of the Manager with the Sub-Adviser. The profitability of the Manager and its affiliates was considered by the Board to be reasonable in view of the nature, extent and quality of services provided to the Fund.

Economies of Scale

The Board received and discussed Contract Renewal Information concerning whether the Manager realizes economies of scale if the Fund’s assets grow. The Board noted that because the Fund is a closed-end fund it has limited ability to increase its assets. The Board determined that the management fee structure was appropriate under the circumstances. For similar reasons as stated above with respect to the Sub-Adviser’s profitability and the costs of the Sub-Adviser’s provision of services, the Board did not consider the potential for economies of scale in the Sub-Adviser’s management of the Fund to be a material factor in the Board’s consideration of the Sub-Advisory Agreement.

Other Benefits to the Manager and the Sub-Adviser

The Board considered other benefits received by the Manager, the Sub-Adviser and their affiliates as a result of their relationship with the Fund, including the opportunity to offer additional products and services to the Fund’s shareholders. In view of the costs of providing investment management and other services to the Fund and the ongoing commitment of the Manager and the Sub-Adviser to the Fund, the Board considered that the ancillary benefits that the Manager and its affiliates, including the Sub-Adviser, were reasonable.

 

44				Western Asset Municipal High Income Fund Inc.

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Additional information (unaudited)

 

Information about Directors and Officers

The business and affairs of Western Asset Municipal High Income Fund Inc. (the “Fund”) are conducted by management under the supervision and subject to the direction of its Board of Directors. The business address of each Director is c/o Jane Trust, Franklin Templeton, 280 Park Avenue, 8th Floor, New York, New York 10017.

Information pertaining to the Directors and officers of the Fund is set forth below. The Fund’s annual proxy statement includes additional information about Directors and is available, without charge, upon request by calling the Fund at 1-888-777-0102.

 

Independent Directors†
Robert D. Agdern
Year of birth		1950
Position(s) held with Fund1		Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, and Compliance Liaison, Class III
Term of office1 and length of time served		Since 2015
Principal occupation(s) during the past five years		Member of the Advisory Committee of the Dispute Resolution Research Center at the Kellogg Graduate School of Business, Northwestern University (2002 to 2016); formerly, Deputy General Counsel responsible for western hemisphere matters for BP PLC (1999 to 2001); Associate General Counsel at Amoco Corporation responsible for corporate, chemical, and refining and marketing matters and special assignments (1993 to 1998) (Amoco merged with British Petroleum in 1998 forming BP PLC)
Number of portfolios in fund complex overseen by Director (including the Fund)		18
Other board memberships held by Director during the past five years		None
Carol L. Colman
Year of birth		1946
Position(s) held with Fund1		Director and Member of Nominating, Audit and Compensation Committees, and Chair of Pricing and Valuation Committee, Class I
Term of office1 and length of time served		Since 2007
Principal occupation(s) during the past five years		President, Colman Consulting Company (consulting)
Number of portfolios in fund complex overseen by Director (including the Fund)		18
Other board memberships held by Director during the past five years		None

 

Western Asset Municipal High Income Fund Inc.					45

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Additional information (unaudited) (cont’d)

Information about Directors and Officers

 

Independent Directors† (cont’d)
Daniel P. Cronin
Year of birth		1946
Position(s) held with Fund1		Director and Member of Audit, Compensation and Pricing and Valuation Committees, and Chair of Nominating Committee, Class II
Term of office1 and length of time served		Since 2007
Principal occupation(s) during the past five years		Retired; formerly, Associate General Counsel, Pfizer Inc. (prior to and including 2004)
Number of portfolios in fund complex overseen by Director (including the Fund)		18
Other board memberships held by Director during the past five years		None
Paolo M. Cucchi
Year of birth		1941
Position(s) held with Fund1		Director and Member of Nominating, Audit, and Pricing and Valuation Committees, and Chair of Compensation Committee, Class II
Term of office1 and length of time served		Since 2007
Principal occupation(s) during the past five years		Emeritus Professor of French and Italian (since 2014) and formerly, Vice President and Dean of The College of Liberal Arts (1984 to 2009) and Professor of French and Italian (2009 to 2014) at Drew University
Number of portfolios in fund complex overseen by Director (including the Fund)		18
Other board memberships held by Director during the past five years		None

 

46				Western Asset Municipal High Income Fund Inc.

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Independent Directors† (cont’d)
Eileen A. Kamerick
Year of birth		1958
Position(s) held with Fund1		Lead Independent Director and Member of Nominating, Compensation, Pricing and Valuation and Audit Committees, Class III
Term of office1 and length of time served		Since 2013
Principal occupation(s) during the past five years		Chief Executive Officer, The Governance Partners, LLC (consulting firm) (since 2015); National Association of Corporate Directors Board Leadership Fellow (since 2016, with Directorship Certification since 2019) and NACD 2022 Directorship 100 honoree; Adjunct Professor, Georgetown University Law Center (since 2021); Adjunct Professor, The University of Chicago Law School (since 2018); Adjunct Professor, University of Iowa College of Law (since 2007); formerly, Chief Financial Officer, Press Ganey Associates (health care informatics company) (2012 to 2014); Managing Director and Chief Financial Officer, Houlihan Lokey (international investment bank) and President, Houlihan Lokey Foundation (2010 to 2012)
Number of portfolios in fund complex overseen by Director (including the Fund)		18
Other board memberships held by Director during the past five years		Director, VALIC Company I (since October 2022); Director of ACV Auctions Inc. (since 2021); formerly, Director of Hochschild Mining plc (precious metals company) (2017 to 2023); Director of Associated Banc-Corp (financial services company) (since 2007); formerly Trustee of AIG Funds and Anchor Series Trust (2018 to 2021)
Nisha Kumar
Year of birth		1970
Position(s) held with Fund1		Director and Member of Nominating, Compensation and Pricing and Valuation Committees, and Chair of the Audit Committee, Class II
Term of office1 and length of time served		Since 2019
Principal occupation(s) during the past five years		Formerly, Managing Director and the Chief Financial Officer and Chief Compliance Officer of Greenbriar Equity Group, LP (2011 to 2021); formerly, Chief Financial Officer and Chief Administrative Officer of Rent the Runway, Inc. (2011); Executive Vice President and Chief Financial Officer of AOL LLC, a subsidiary of Time Warner Inc. (2007 to 2009); Member of the Council of Foreign Relations
Number of portfolios in fund complex overseen by Director (including the Fund)		18
Other board memberships held by Director during the past five years		Director of The India Fund, Inc. (since 2016); formerly, Director of Aberdeen Income Credit Strategies Fund (2017 to 2018); and Director of The Asia Tigers Fund, Inc. (2016 to 2018)

 

Western Asset Municipal High Income Fund Inc.					47

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Additional information (unaudited) (cont’d)

Information about Directors and Officers

 

Interested Director and Officer
Jane Trust, CFA2
Year of birth		1962
Position(s) held with Fund1		Director, Chairman, President and Chief Executive Officer, Class I
Term of office1 and length of time served		Since 2015
Principal occupation(s) during the past five years		Senior Vice President, Fund Board Management, Franklin Templeton (since 2020); Officer and/or Trustee/Director of 123 funds associated with LMPFA or its affiliates (since 2015); President and Chief Executive Officer of LMPFA (since 2015); formerly, Senior Managing Director (2018 to 2020) and Managing Director (2016 to 2018) of Legg Mason & Co., LLC (“Legg Mason & Co.”); and Senior Vice President of LMPFA (2015)
Number of portfolios in fund complex overseen by Director (including the Fund)		123
Other board memberships held by Director during the past five years		None
Additional Officers
Fred Jensen Franklin Templeton 280 Park Avenue, 8th Floor, New York, NY 10017
Year of birth		1963
Position(s) held with Fund1		Chief Compliance Officer
Term of office1 and length of time served		Since 2020
Principal occupation(s) during the past five years		Director - Global Compliance of Franklin Templeton (since 2020); Managing Director of Legg Mason & Co. (2006 to 2020); Director of Compliance, Legg Mason Office of the Chief Compliance Officer (2006 to 2020); formerly, Chief Compliance Officer of Legg Mason Global Asset Allocation (prior to 2014); Chief Compliance Officer of Legg Mason Private Portfolio Group (prior to 2013); formerly, Chief Compliance Officer of The Reserve Funds (investment adviser, funds and broker-dealer) (2004) and Ambac Financial Group (investment adviser, funds and broker-dealer) (2000 to 2003)
Marc A. De Oliveira Franklin Templeton 100 First Stamford Place, 6th Floor, Stamford, CT 06902
Year of birth		1971
Position(s) held with Fund1		Secretary and Chief Legal Officer
Term of office1 and length of time served		Since 2023
Principal occupation(s) during the past five years		Associate General Counsel of Franklin Templeton (since 2020); Secretary and Chief Legal Officer of certain funds associated with Legg Mason & Co. or its affiliates since 2020); Assistant Secretary of certain funds associated with Legg Mason & Co. or its affiliates (since 2006); formerly, Managing Director (2016 to 2020) and Associate General Counsel of Legg Mason & Co. (2005 to 2020)

 

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Additional Officers (cont’d)
Thomas C. Mandia Franklin Templeton 100 First Stamford Place, 6th Floor, Stamford, CT 06902
Year of birth		1962
Position(s) held with Fund1		Senior Vice President
Term of office1 and length of time served		Since 2021
Principal occupation(s) during the past five years		Senior Associate General Counsel of Franklin Templeton (since 2020); Secretary of LMPFA (since 2006); Assistant Secretary of certain funds associated with Legg Mason & Co. or its affiliates (since 2006); Secretary of LM Asset Services, LLC (“LMAS”) (since 2002) and Legg Mason Fund Asset Management, Inc. (“LMFAM”) (since 2013) (formerly registered investment advisers); formerly, Managing Director and Deputy General Counsel of Legg Mason & Co. (2005 to 2020) and Assistant Secretary of certain funds in the fund complex (2006 to 2022)
Christopher Berarducci Franklin Templeton 280 Park Avenue, 8th Floor, New York, NY 10017
Year of birth		1974
Position(s) held with Fund1		Treasurer and Principal Financial Officer
Term of office1 and length of time served		Since 2019
Principal occupation(s) during the past five years		Vice President, Fund Administration and Reporting, Franklin Templeton (since 2020); Treasurer (since 2010) and Principal Financial Officer (since 2019) of certain funds associated with Legg Mason & Co. or its affiliates; formerly, Managing Director (2020), Director (2015 to 2020), and Vice President (2011 to 2015) of Legg Mason & Co.
Jeanne M. Kelly Franklin Templeton 280 Park Avenue, 8th Floor, New York, NY 10017
Year of birth		1951
Position(s) held with Fund1		Senior Vice President
Term of office1 and length of time served		Since 2007
Principal occupation(s) during the past five years		U.S. Fund Board Team Manager, Franklin Templeton (since 2020); Senior Vice President of certain funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); President and Chief Executive Officer of LMAS and LMFAM (since 2015); formerly, Managing Director of Legg Mason & Co. (2005 to 2020); Senior Vice President of LMFAM (2013 to 2015)

 

†	Directors who are not “interested persons” of the Fund within the meaning of Section 2(a)(19) of the Investment Company Act of 1940, as amended (the “1940 Act”).

 

1

The Fund’s Board of Directors is divided into three classes: Class I, Class II and Class III. The terms of office of the Class I, II and III Directors expire at the Annual Meetings of Stockholders in the year 2024, year 2025 and year 2026, respectively, or thereafter in each case when their respective successors are duly elected and qualified. The Fund’s executive officers are chosen each year, to hold office until their successors are duly elected and qualified.

 

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Additional information (unaudited) (cont’d)

Information about Directors and Officers

 

2	Ms. Trust is an “interested person” of the Fund as defined in the 1940 Act because Ms. Trust is an officer of LMPFA and certain of its affiliates.

 

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Annual chief executive officer and principal financial officer certifications (unaudited)

 

The Fund’s Chief Executive Officer (“CEO”) has submitted to the NYSE the required annual certification and the Fund also has included the Certifications of the Fund’s CEO and Principal Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Fund’s Form N-CSR filed with the SEC for the period of this report.

 

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Other shareholder communications regarding accounting matters (unaudited)

 

The Fund’s Audit Committee has established guidelines and procedures regarding the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters (collectively, “Accounting Matters”). Persons with complaints or concerns regarding Accounting Matters may submit their complaints to the Chief Compliance Officer (“CCO”). Persons who are uncomfortable submitting complaints to the CCO, including complaints involving the CCO, may submit complaints directly to the Fund’s Audit Committee Chair. Complaints may be submitted on an anonymous basis.

The CCO may be contacted at:

Franklin Resources Inc.

Compliance Department

280 Park Ave, 8th Floor

New York, NY 10017

Complaints may also be submitted by telephone at 1-800-742-5274. Complaints submitted through this number will be received by the CCO.

 

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Summary of information regarding the Fund (unaudited)

 

Investment Objective

The Fund seeks high current income exempt from federal income taxes.

The Fund’s investment objective may be changed only by the affirmative vote of the holders of a “majority of the Fund’s outstanding voting securities,” as defined in the 1940 Act.

Principal Investment Policies and Strategies

The Fund invests primarily in intermediate-and long term municipal debt securities issued by state and local governments including U.S. territories and possessions, political subdivisions, agencies and public authorities (“municipal obligations”). However, the Fund may invest in municipal obligations of any maturity. Under normal conditions, at least 80% of the Fund’s assets will be invested in municipal obligations. The Fund may invest up to 100% of its assets in municipal obligations rated below investment grade (commonly referred to as “junk bonds”). Investment grade securities are those rated in the Baa/BBB categories or above by at least one National Recognized Statistical Rating Organization (“NRSRO”) that provides such a rating or unrated securities that the subadviser determined to be of comparable credit quality. The Fund may invest in non-publicly traded municipal securities, zero-coupon municipal obligations and non-appropriation or other municipal lease obligations. The Fund may hold securities or use investment techniques that provide for payments based or “derived” from the performance of an underlying asset, index or other economic benchmark.

Municipal obligations are debt securities, the interest from which is, in the opinion of bond counsel to their issuer, excluded from gross income for regular federal income tax purposes. Municipal obligations may bear fixed, floating or variable rates of interest. Municipal obligations include “public purpose” obligations, which generate interest that is exempt from regular federal income tax and, for individual taxpayers, is not subject to the alternative minimum tax (“AMT”). Municipal obligations also include qualified “private activity bonds”, which generate interest that is exempt from regular federal income tax but that is subject to the AMT.

Under normal conditions, the Fund may hold up to 20% of its assets in cash or money market instruments, including taxable money market instruments (“Taxable Investments”). When the investment manager believes that long-term municipal obligations consistent with the Fund’s investment objective are unavailable, the Fund may take a temporary defensive posture and invest without limitation in short-term municipal obligations and Taxable Investments.

The Fund may use a variety of derivative instruments for investment purposes, as well as for hedging or risk-management purposes.

The Fund may enter into tender option bond (“TOB”) transactions and may invest in inverse floating rate instruments issued in TOB transactions.

 

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Summary of information regarding the Fund (unaudited) (cont’d)

 

The Fund will make commitments to purchase when-issued municipal obligations only with the intention of acquiring the securities, but may sell these securities before the settlement date if the manager deems it advisable. Any gain realized on the sale would be taxable.

The Fund may acquire “stand-by commitments” with respect to municipal obligations held in its portfolio. The Fund will acquire stand-by commitments solely to facilitate portfolio liquidity and does not intend to exercise its rights thereunder for trading purposes.

To protect against a decline in the value of municipal obligations it owns or an increase in the price of municipal obligations it proposes to purchase in the future, the Fund may engage in financial futures and options transactions, subject to applicable regulations by the Commodities Futures Trading Commission. The futures contracts or options on futures contracts that may be entered into by the Fund will be restricted to those that are either based on an index of long-term municipal obligations or relate to debt securities the prices of which are anticipated by the investment manager to correlate with the prices of the municipal obligations owned or to be purchased by the Fund.

The Fund may enter into interest rate futures contracts in order to protect against the adverse effect of changing interest rates on its portfolio securities or those to be purchased by the Fund. The Fund may purchase and sell call and put options on interest rate futures contracts that are traded on a United States exchange or board of trade. The Fund may utilize municipal bond index futures to protect against changes in the market value of the municipal obligations in its portfolio or that it intends to acquire. The Fund may purchase and sell put and call options on municipal bond indexes and municipal bond index futures and enter into closing transactions with respect to those options.

The Fund is authorized to lend securities it holds to brokers, dealers and other financial organizations, so long as the terms and the structure of such loans are not inconsistent with the requirements of the 1940 Act.

The Fund may borrow money, except for temporary or emergency purposes, and then not in amounts that are greater than 15% of total assets (including the amount borrowed). The Fund may buy more securities if the Fund has borrowed money in amounts greater than 5% of net assets.

The Fund may enter into repurchase agreement transactions with member banks of the Federal Reserve System or with certain dealers listed on the Federal Reserve Bank of New York’s list of reporting dealers. Under the terms of a typical repurchase agreement, the Fund would acquire an underlying debt obligation for a relatively short period (usually not more than seven days) subject to an obligation of the seller to repurchase, and the Fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during the Fund’s holding period.

 

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Principal Risk Factors

There are various risks associated with an investment in the Fund. You should consider whether the Fund is an appropriate investment for you. The Fund invests substantially all of its assets in municipal obligations, and circumstances or events that affect the value of municipal obligations will affect the Fund’s net asset value. The Fund may invest primarily in lower-rated securities. An investment in these securities has speculative characteristics and may involve a substantial risk of loss. The following is intended to provide a summary of the principal risks of an investment in the Fund.

Investment and Market Risk. An investment in the Fund is subject to investment risk, including the possible loss of the entire amount that you invest. Your investment in the Common Stock represents an indirect investment in the fixed income securities and other investments owned by the Fund, most of which could be purchased directly. The value of the Fund’s portfolio securities may move up or down, sometimes rapidly and unpredictably. At any point in time, your Common Stock may be worth less than your original investment, even after taking into account the reinvestment of Fund dividends and distributions.

Below Investment Grade (High Yield or Junk Bond) Securities Risk. The Fund may invest up to 100% of its assets in municipal obligations of below investment grade quality. High yield debt securities are generally subject to greater credit risks than higher-grade debt securities, including the risk of default on the payment of interest or principal. High yield debt securities are considered speculative, typically have lower liquidity and are more difficult to value than higher grade bonds. High yield debt securities tend to be volatile and more susceptible to adverse events, credit downgrades and negative sentiments and may be difficult to sell at a desired price, or at all, during periods of uncertainty or market turmoil.

Municipal Securities Risk. Liquidity in the municipal securities market may vary from time to time. At times of decreased liquidity, the ability of the Fund to buy and sell municipal securities may, with respect to any particular securities, be limited. The amount of information about the financial condition of an issuer of municipal securities may not be as extensive as information about corporations whose securities are publicly traded, and the Fund’s performance may therefore be more dependent on the sub-adviser’s analytical abilities than if the Fund were to invest in stocks or taxable bonds. The secondary market for municipal securities, particularly the below investment grade municipal securities in which the Fund may invest, also tends to be less developed or liquid than many other securities markets, which may adversely affect the Fund’s ability to sell its municipal securities at attractive prices.

 

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Summary of information regarding the Fund (unaudited) (cont’d)

 

Obligations of issuers of municipal securities may be subject to the provisions of bankruptcy, insolvency and the United States Bankruptcy Code and applicable state laws, which could limit the ability of the Fund to recover payments of principal or interest on such securities.

Certain municipal securities which may be held by the Fund may permit the issuer at its option to “call,” or redeem, its securities. If an issuer were to redeem municipal securities held by the Fund during a time of declining interest rates, the Fund may realize a capital loss on its investment if the security was purchased at a premium and may not be able to reinvest the proceeds in municipal securities providing as high a level of investment return as the securities redeemed.

Inverse Floating Rate Securities and TOBs Risk. Subject to certain limitations, the Fund may invest in inverse floating rate securities. Typically, inverse floating rate securities represent beneficial interests in a special purpose trust (sometimes called a “tender option bond trust”) formed by a third party sponsor for the purpose of holding municipal bonds purchased from the Fund or from another third party. An investment in an inverse floating rate security may involve greater risk than an investment in a fixed-rate bond. Because changes in the interest rate on the underlying security or index inversely affect the residual interest paid on the inverse floating rate security, the value of an inverse floating rate security is generally more volatile than that of a fixed-rate bond.

Inverse floating rate securities have interest rate adjustment formulas which generally reduce or, in the extreme, eliminate the interest paid to the Fund when short-term interest rates rise, and increase the interest paid to the Fund when short-term interest rates fall. Inverse floating rate securities have varying degrees of liquidity, and the market for these securities is relatively volatile. These securities tend to underperform the market for fixed-rate bonds in a rising interest rate environment, but tend to outperform the market for fixed-rate bonds when interest rates decline. Shifts in long-term interest rates may, however, alter this tendency.

During times of reduced market liquidity, such as at the present, the Fund may not be able to sell municipal securities readily at prices reflecting the values at which the securities are carried on the Fund’s books. Sales of large blocks of municipal securities by market participants, such as the Fund, that are seeking liquidity can further reduce municipal security prices in an illiquid market. The Fund may seek to make sales of large blocks of municipal securities as part of its investment strategy or it may be required to raise cash to re-collateralize, unwind or “collapse” tender option bond trusts that issued inverse floating rate securities to the Fund or to make payments to such trusts to enable them to pay for tenders of the short-term securities they have issued if the remarketing agents for those municipal securities are unable to sell the short-term securities in the marketplace to other buyers (typically tax-exempt money market funds). The Fund’s potential exposure to losses

 

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related to or on inverse floating rate securities may increase beyond the value of the Fund’s inverse floater investments as the Fund may potentially be liable to fulfill all amounts owed to holders of the floating rate certificates.

Although volatile, inverse floating rate securities typically offer the potential for yields exceeding the yields available on fixed-rate bonds with comparable credit quality, coupon, call provisions and maturity. These securities usually permit the investor to convert the floating rate to a fixed rate (normally adjusted downward), and this optional conversion feature may provide a partial hedge against rising rates if exercised at an opportune time.

Investment in inverse floating rate securities may amplify the effects of the Fund’s use of leverage. Any economic effect of leverage through the Fund’s purchase of inverse floating rate securities will create an opportunity for increased Common Stock net income and returns, but may also result in losses if the cost of leverage exceeds the return on the inverse floating rate securities purchased by the Fund.

TOB transactions expose the Fund to leverage and credit risk, and generally involve greater risk than investments in fixed rate municipal bonds, including the risk of loss of principal. The interest payments that the Fund would typically receive on inverse floaters acquired in such transactions vary inversely with short-term interest rates and will be reduced (and potentially eliminated) when short-term interest rates increase. Inverse floaters will generally underperform the market for fixed rate municipal securities when interest rates rise. The value and market for inverse floaters can be volatile, and inverse floaters can have limited liquidity. Investments in inverse floaters issued in TOB transactions are derivative instruments and, therefore, are also subject to the risks generally applicable to investments in derivatives.

Insurance Risk. The Fund may purchase municipal securities that are secured by insurance, bank credit agreements or escrow accounts. The credit quality of the companies that provide such credit enhancements will affect the value of those securities. Certain significant providers of insurance for municipal securities have recently incurred significant losses as a result of exposure to sub-prime mortgages and other lower credit quality investments that have experienced recent defaults or otherwise suffered extreme credit deterioration. As a result, such 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. In such a case, the value of insurance associated with a municipal security would decline, and the insurance may not add any value. The insurance feature of a municipal security does not

 

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Summary of information regarding the Fund (unaudited) (cont’d)

 

guarantee the full payment of principal and interest through the life of an insured obligation, the market value of the insured obligation or the net asset value of the Common Stock represented by such insured obligation.

Special Risks Related to Certain Municipal Securities. The Fund may invest in municipal leases and certificates of participation in such leases. Municipal leases and certificates of participation involve special risks not normally associated with general obligations or revenue bonds. Leases and installment purchase or conditional sale contracts (which normally provide for title to the leased asset to pass eventually to the governmental issuer) have evolved as a means for governmental issuers to acquire property and equipment without meeting the constitutional and statutory requirements for the issuance of debt. The debt issuance limitations are deemed to be inapplicable because of the inclusion in many leases or contracts of “non-appropriation” clauses that relieve the governmental issuer of any obligation to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate governmental body on a yearly or other periodic basis. In addition, such leases or contracts may be subject to the temporary abatement of payments in the event the governmental issuer is prevented from maintaining occupancy of the leased premises or utilizing the leased equipment. Although the obligations may be secured by the leased equipment or facilities, the disposition of the property in the event of non-appropriation or foreclosure might prove difficult, time consuming and costly, and may result in a delay in recovering or the failure to fully recover the Fund’s original investment. In the event of non-appropriation, the issuer would be in default and taking ownership of the assets may be a remedy available to the Fund, although the Fund does not anticipate that such a remedy would normally be pursued. To the extent that the Fund invests in unrated municipal leases or participates in such leases, the credit quality rating and risk of cancellation of such unrated leases will be monitored on an ongoing basis. Certificates of participation, which represent interests in unmanaged pools of municipal leases or installment contracts, involve the same risks as the underlying municipal leases. In addition, the Fund may be dependent upon the municipal authority issuing the certificates of participation to exercise remedies with respect to the underlying securities. Certificates of participation also entail a risk of default or bankruptcy, both of the issuer of the municipal lease and also the municipal agency issuing the certificate of participation.

Alternative Minimum Tax and Taxable Income Risk. The Fund will qualify to pay “exempt-interest dividends,” which are exempt from regular U.S. federal income tax, for any taxable year only if at least 50% of the value of its assets, as of the close of each quarter of the taxable year, consists of state or local obligations described in Section 103(a) of the Internal Revenue Code of 1986, as amended (the “Code”). Assuming that the Fund qualifies to pay exempt-interest dividends, it is anticipated that certain of the Fund’s distributions will nevertheless constitute taxable income. Moreover, a portion of the Fund’s exempt-interest dividends may be subject to federal alternative minimum tax, and all or a portion of such dividends may be subject to state and local taxation.

 

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A portion of the Fund’s distributions may be taxable to Common Stockholders. In particular, the Fund may use a variety of derivative instruments and may sell certain fixed-income securities short including, but not limited to, U.S. Treasuries, for investment and/or hedging purposes. To the extent that the Fund utilizes these strategies the Fund could generate taxable income and gains. Distributions of any capital gain or other taxable income (including gains and “market discount” realized by the Fund on the sale of municipal securities) will be taxable to Common Stockholders. The Fund may not be a suitable investment for investors subject to the federal alternative minimum tax or who would become subject to such tax by investing in the Fund. The suitability of an investment in Common Stock will depend upon a comparison of the after tax yield likely to be provided from the 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 investor’s tax position. Special considerations apply to corporate investors.

Certain provisions of the Code relating to the issuance of municipal obligations impose restrictions on the volume of municipal obligations qualifying for federal tax exemption. One effect of these provisions could be to increase the cost of the municipal securities available for purchase by the Fund and thus reduce available yield. Legislative proposals that may further restrict or eliminate the federal income tax exemption for interest on municipal obligations may be introduced in the future. The value of the Fund’s investments and its net asset value may be adversely affected by changes in tax rates and policies. Because interest income from municipal securities normally is not subject to regular federal income taxation, the attractiveness of municipal securities in relation to other investment alternatives is affected by changes in federal income tax rates or changes in the tax-exempt status of interest income from municipal securities. Any proposed or actual changes in such rates or exempt status, therefore, can significantly affect the demand for and supply, liquidity and marketability of municipal securities. This could in turn affect the Fund’s net asset value and ability to acquire and dispose of municipal securities at desirable yield and price levels.

Credit Crisis Liquidity and Volatility Risk. The markets for credit instruments, including fixed income securities, have experienced periods of extreme illiquidity and volatility. General market uncertainty and consequent repricing risk have led to market imbalances of sellers and buyers, which in turn have also resulted in significant valuation uncertainties in a variety of debt securities, including certain fixed income securities. These conditions resulted, and in many cases continue to result in greater volatility, less liquidity, widening credit spreads and a lack of price transparency, with many debt securities remaining illiquid and of uncertain value. During times of reduced market liquidity, the Fund may not be able

 

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Summary of information regarding the Fund (unaudited) (cont’d)

 

to sell securities readily at prices reflecting the values at which the securities are carried on the Fund’s books. Sales of large blocks of securities by market participants, such as the Fund, that are seeking liquidity can further reduce security prices in an illiquid market. These market conditions may make valuation of some of the Fund’s securities uncertain and/or result in sudden and significant valuation increases or decreases in its holdings. Illiquidity and volatility in the credit markets may directly and adversely affect the setting of dividend rates on the Common Stock.

Government Intervention in Financial Markets Risk. The instability in the financial markets has led the U.S. government and foreign governments to take a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced extreme volatility, and in some cases a lack of liquidity. U.S. federal and state governments and foreign governments, their regulatory agencies or self regulatory organizations may take additional actions that affect the regulation of the securities in which the Fund invests, or the issuers of such securities, in ways that are unforeseeable. Issuers of corporate fixed income securities might seek protection under the bankruptcy laws. Legislation or regulation may also change the way in which the Fund itself is regulated. Such legislation or regulation could limit or preclude the Fund’s ability to achieve its investment objectives. Western Asset will monitor developments and seek to manage the Fund’s portfolio in a manner consistent with achieving the Fund’s investment objectives, but there can be no assurance that it will be successful in doing so.

Derivatives Risk. The Fund may utilize a variety of derivative instruments such as financial futures contracts and options. Using derivatives can increase Fund losses and reduce opportunities for gains when market prices, interest rates, currencies, or the derivatives themselves behave in a way not anticipated by the Fund. Using derivatives also can have a leveraging effect and increase Fund volatility. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Derivatives may not be available at the time or price desired, may be difficult to sell, unwind or value, and the counterparty may default on its obligations to the Fund. Derivatives are generally subject to the risks applicable to the assets, rates, indices or other indicators underlying the derivative. The value of a derivative may fluctuate more than the underlying assets, rates, indices or other indicators to which it relates. Use of derivatives may have different tax consequences for the Fund than an investment in the underlying security, and those differences may affect the amount, timing and character of income distributed to shareholders. The U.S. government and foreign governments are in the process of adopting and implementing regulations governing derivatives markets, including mandatory clearing of certain derivatives, margin and reporting requirements. The ultimate impact of the regulations remains unclear. Additional regulation of derivatives may make derivatives more costly, limit their availability or utility, otherwise adversely affect their performance or disrupt markets.

 

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Effective August 19, 2022, the Fund began operating under Rule 18f-4 under the 1940 Act which, among other things, governs the use of derivative investments and certain financing transactions (e.g. reverse repurchase agreements) by registered investment companies. Among other things, Rule 18f-4 requires funds that invest in derivative instruments beyond a specified limited amount to apply a value at risk (VaR) based limit to their use of certain derivative instruments and financing transactions and to adopt and implement a derivatives risk management program. A fund that uses derivative instruments in a limited amount is not subject to the full requirements of Rule 18f-4. Compliance with Rule 18f-4 by the Fund could, among other things, make derivatives more costly, limit their availability or utility, or otherwise adversely affect their performance. Rule 18f-4 may limit the Fund’s ability to use derivatives as part of its investment strategy.

Short Sales Risk. To the extent the Fund makes use of short sales for investment and/or risk management purposes, the Fund may be subject to risks associated with selling short. Short sales are transactions in which the Fund sells securities or other instruments that the Fund does not own or otherwise engages in economically similar transactions through the use of derivatives such as options, forwards or futures contracts. Short sales expose the Fund to the risk that it will be required to cover its short position at a time when the securities have appreciated in value, thus resulting in a loss to the Fund. The Fund may engage in short sales where it does not own or have the right to acquire the security sold short at no additional cost. The Fund’s loss on a short sale theoretically could be unlimited in a case where the Fund is unable, for whatever reason, to close out its short position. In addition, the Fund’s short selling strategies may limit its ability to benefit from increases in the markets. Short selling also involves a form of financial leverage that may exaggerate any losses realized by the Fund. Also, there is the risk that the counterparty to a short sale may fail to honor its contractual terms, causing a loss to the Fund.

Counterparty Risk. Changes in the credit quality of the companies that serve as the Fund’s counterparties with respect to derivatives or other transactions supported by another party’s credit will affect the value of those instruments. Certain entities that have served as counterparties in the markets for these transactions have recently incurred significant financial hardships including bankruptcy and losses as a result of exposure to sub-prime mortgages and other lower quality credit investments that have experienced recent defaults or otherwise suffered extreme credit deterioration. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the Fund may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or may obtain no recovery in such circumstances.

Credit Risk. If an issuer or guarantor of a security held by the Fund or a counterparty to a financial contract with the Fund defaults or its credit is downgraded, or is perceived to be

 

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Summary of information regarding the Fund (unaudited) (cont’d)

 

less creditworthy, or if the value of the assets underlying a security declines, the value of your investment will typically decline. Changes in actual or perceived creditworthiness may occur quickly. The Fund could be delayed or hindered in its enforcement of rights against an issuer, guarantor or counterparty. Subordinated securities are more likely to suffer a credit loss than non-subordinated securities of the same issuer and will be disproportionately affected by a default, downgrade or perceived decline in creditworthiness.

Interest Rate Risk. The market value of the Fund’s investments will change in response to changes in interest rates and other factors. During periods of declining interest rates, the values of fixed-income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. The magnitude of these fluctuations is generally greater for securities with longer maturities. The subadviser’s judgment about interest rate trends may prove to be incorrect.

Prepayment Risk. Prepayments may cause losses on securities purchased at a premium. At times, some of the securities in which the Fund may invest may have higher than market interest rates and therefore may be purchased at a premium above their par value. Unscheduled prepayments, which are made at par, may cause the Fund to experience a loss equal to any unamortized premium. In addition, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of the Fund.

Inflation/Deflation Risk. Inflation risk is the risk that the value of certain assets or income from the Fund’s investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Stock and distributions on the Common Stock can decline. In addition, during any periods of rising inflation, the dividend rates or borrowing costs associated with the Fund’s use of leverage would likely increase, which would tend to further reduce returns to stockholders. Deflation risk is the risk that prices throughout the economy decline over time—the opposite of inflation. Deflation may have an adverse affect on the creditworthiness of issuers and may make issuer defaults more likely, which may result in a decline in the value of the Fund’s portfolio.

Liquidity Risk. The Fund may invest all or a portion of its net assets in illiquid securities. The term “illiquid securities” for this purpose means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the securities. Illiquid securities may trade at a discount from comparable, more liquid securities and may be subject to wide fluctuations in market value. Accordingly, the Fund may be forced to sell these securities at less than fair market value or may not be able to sell them when the Subadviser believes it is desirable to do so.

 

62				Western Asset Municipal High Income Fund Inc.

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Market Events Risk. The market values of securities or other assets will fluctuate, sometimes sharply and unpredictably, due to factors such as economic events, governmental actions or intervention, actions taken by the U.S. Federal Reserve or foreign central banks, market disruptions caused by trade disputes or other factors, political developments, armed conflicts, economic sanctions and countermeasures in response to sanctions, major cybersecurity events, the global and domestic effects of widespread or local health, weather or climate events, and other factors that may or may not be related to the issuer of the security or other asset. Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political events, trading and tariff arrangements, public health events, terrorism, wars, natural disasters and other circumstances in one country or region could have profound impacts on global economies or markets. As a result, whether or not the fund invests in securities of issuers located in or with significant exposure to the countries or markets directly affected, the value and liquidity of the fund’s investments may be negatively affected. Following Russia’s invasion of Ukraine, Russian stocks lost all, or nearly all, of their market value. Other securities or markets could be similarly affected by past or future geopolitical or other events or conditions. Furthermore, events involving limited liquidity, defaults, non-performance or other adverse developments that affect one industry, such as the financial services industry, or concerns or rumors about any events of these kinds, have in the past and may in the future lead to market-wide liquidity problems, may spread to other industries, and could negatively affect the value and liquidity of the fund’s investments.

The long-term impact of the COVID-19 pandemic and its subsequent variants on economies, markets, industries and individual issuers is not known. Some sectors of the economy and individual issuers have experienced or may experience particularly large losses. Periods of extreme volatility in the financial markets, reduced liquidity of many instruments, increased government debt, inflation, and disruptions to supply chains, consumer demand and employee availability, may continue for some time. The U.S. government and the Federal Reserve, as well as certain foreign governments and central banks, took extraordinary actions to support local and global economies and the financial markets in response to the COVID-19 pandemic. This and other government intervention into the economy and financial markets may not work as intended, and have resulted in a large expansion of government deficits and debt, the long term consequences of which are not known. In addition, the COVID-19 pandemic, and measures taken to mitigate its effects, could result in disruptions to the services provided to the fund by its service providers.

Raising the ceiling on U.S. government debt has become increasingly politicized. Any failure to increase the total amount that the U.S. government is authorized to borrow could lead to a default on U.S. government obligations, with unpredictable consequences for economies and markets in the U.S. and elsewhere. Recently, inflation and interest rates have increased and may rise further. These circumstances could adversely affect the value and liquidity of the fund’s investments, impair the fund’s ability to satisfy redemption requests, and negatively impact the fund’s performance.

 

Western Asset Municipal High Income Fund Inc.					63

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Summary of information regarding the Fund (unaudited) (cont’d)

 

The United States and other countries are periodically involved in disputes over trade and other matters, which may result in tariffs, investment restrictions and adverse impacts on affected companies and securities. For example, the United States has imposed tariffs and other trade barriers on Chinese exports, has restricted sales of certain categories of goods to China, and has established barriers to investments in China. Trade disputes may adversely affect the economies of the United States and its trading partners, as well as companies directly or indirectly affected and financial markets generally. The United States government has prohibited U.S. persons from investing in Chinese companies designated as related to the Chinese military. These and possible future restrictions could limit the fund’s opportunities for investment and require the sale of securities at a loss or make them illiquid. Moreover, the Chinese government is involved in a longstanding dispute with Taiwan that has included threats of invasion. If the political climate between the United States and China does not improve or continues to deteriorate, if China were to attempt unification of Taiwan by force, or if other geopolitical conflicts develop or get worse, economies, markets and individual securities may be severely affected both regionally and globally, and the value of the fund’s assets may go down.

LIBOR Risk. The Fund’s investments, payment obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or “LIBOR,” which was the offered rate for short-term Eurodollar deposits between major international banks. In 2017, the U.K. Financial Conduct Authority (“FCA”) announced its intention to cease compelling banks to provide the quotations needed to sustain LIBOR after 2021. In addition, global regulators have announced that, with limited exceptions, no new LIBOR-based contracts should be entered into after 2021. Actions by regulators have resulted in the establishment of alternative reference rates to LIBOR in most major currencies. In March 2022, the U.S. federal government enacted legislation to establish a process for replacing LIBOR in certain existing contracts that do not already provide for the use of a clearly defined or practicable replacement benchmark rate as described in the legislation. Generally speaking, for contracts that do not contain a fallback provision as described in the legislation, a benchmark replacement recommended by the Federal Reserve Board effectively automatically replaced the USD LIBOR benchmark in the contract upon LIBOR’s cessation at the end of June 2023. The recommended benchmark replacement is based on the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York, including certain spread adjustments and benchmark replacement conforming changes. Various financial industry groups have been planning for the transition away from LIBOR, but there remains uncertainty regarding the impact of the transition from LIBOR on the Fund’s transactions and the financial markets generally. The transition away from LIBOR may lead to increased volatility and illiquidity in markets that rely on LIBOR and may

 

64				Western Asset Municipal High Income Fund Inc.

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adversely affect the Fund’s performance. The transition may also result in a reduction in the value of certain LIBOR-based investments held by the Fund or reduce the effectiveness of related transactions such as hedges. Any such effects of the transition away from LIBOR, as well as other unforeseen effects, could result in losses for the Fund.

Market Price Discount from Net Asset Value Risk. Shares of closed-end investment companies frequently trade at a discount from their net asset value. This risk is separate and distinct from the risk that the Fund’s net asset value could decrease as a result of its investment activities and may be a greater risk to investors expecting to sell their Common Stock in a relatively short period following completion of this offering. Whether investors will realize gains or losses upon the sale of the Common Stock will depend not upon the Fund’s net asset value but upon whether the market price of the Common Stock at the time of sale is above or below the investor’s purchase price for the Common Stock.

Because the market price of the Common Stock will be determined by factors such as relative supply of and demand for the Common Stock in the market, general market and economic conditions and other factors beyond the control of the Fund, the Fund cannot predict whether the Common Stock will trade at, above or below net asset value or at, above or below the initial public offering price. The Fund’s Common Stock is designed primarily for long term investors and you should not view the Fund as a vehicle for trading purposes.

Portfolio Turnover Risk. Changes to the investments of the Fund may be made regardless of the length of time particular investments have been held. A high portfolio turnover rate may result in increased transaction costs for the Fund in the form of increased dealer spreads and other transactional costs, which may have an adverse impact on performance. The portfolio turnover rate of the Fund will vary from year to year, as well as within a year.

Management Risk. The Fund is subject to management risk because it is an actively managed investment portfolio. The subadviser and each individual portfolio manager will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results.

Anti-Takeover Provisions Risk. The Charter and Bylaws of the Fund include provisions that are designed to limit the ability of other entities or persons to acquire control of the Fund for short-term objectives, including by converting the Fund to open-end status or changing the composition of the Board, that may be detrimental to the Fund’s ability to achieve its primary investment objective of seeking high current income. The Bylaws also contain a provision providing that the Board of Directors has adopted a resolution to opt in the Fund to the provisions of the Maryland Control Share Acquisition Act (“MCSAA”). There can be no assurance, however, that such provisions will be sufficient to deter professional arbitrageurs that seek to cause the Fund to take actions that may not be consistent with its

 

Western Asset Municipal High Income Fund Inc.					65

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Summary of information regarding the Fund (unaudited) (cont’d)

 

investment objective or aligned with the interests of long-term shareholders, such as liquidating debt investments prior to maturity, triggering taxable events for shareholders and decreasing the size of the Fund. Such provisions may limit the ability of shareholders to sell their shares at a premium over prevailing market prices by discouraging an investor from seeking to obtain control of the Fund. There can be no assurance, however, that such provisions will be sufficient to deter professional investors that seek to cause the Fund to take actions that may not be aligned with the interests of long-term shareholders in order to allow the professional investor to arbitrage the Fund’s market price.

Temporary Defensive Strategies Risk. When Western Asset anticipates unusual market or other conditions, the Fund may temporarily depart from its principal investment strategies as a defensive measure and invest all or a portion of its assets in obligations of the U.S. government, its agencies or instrumentalities; other investment grade debt securities; investment grade commercial paper; certificates of deposit and bankers’ acceptances; repurchase agreements with respect to any of the foregoing investments or any other fixed income securities that Western Asset considers consistent with this strategy. To the extent that the Fund invests defensively, it may not achieve its investment objectives.

When-Issued and Delayed Delivery Transactions Risk. The Fund may use when-issued and delayed delivery transactions to purchase securities. The value of securities purchased in these transactions may decrease before they are delivered to the Fund. Also, the yield on securities purchased in these transactions may be higher in the market when the delivery takes place.

Operational risk. The valuation of the Fund’s investments may be negatively impacted because of the operational risks arising from factors such as processing errors and human errors, inadequate or failed internal or external processes, failures in systems and technology, changes in personnel, and errors caused by third party service providers or trading counterparties. It is not possible to identify all of the operational risks that may affect the Fund or to develop processes and controls that completely eliminate or mitigate the occurrence of such failures. The Fund and its shareholders could be negatively impacted as a result.

Cybersecurity risk. Cybersecurity incidents, both intentional and unintentional, may allow an unauthorized party to gain access to Fund assets, Fund or proprietary information, cause the Fund, the Fund’s manager and subadviser and/or their service providers to suffer data breaches, data corruption or loss of operational functionality or prevent fund investors from purchasing, redeeming or exchanging shares or receiving distributions. The Fund, manager and subadviser have limited ability to prevent or mitigate cybersecurity incidents affecting third party service providers, and such third party service providers may have limited indemnification obligations to the Fund or the manager. Cybersecurity incidents may result in financial losses to the Fund and its shareholders, and substantial costs may be incurred

 

66				Western Asset Municipal High Income Fund Inc.

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in an effort to prevent or mitigate future cybersecurity incidents. Issuers of securities in which the Fund invests are also subject to cybersecurity risks, and the value of these securities could decline if the issuers experience cybersecurity incidents.

More Information

For a complete list of the Fund’s fundamental investment restrictions and more detailed descriptions of the Fund’s investment policies, strategies and risks, see the Fund’s registration statement on Form N-2 that was declared effective by the SEC in connection with the Fund’s initial public offering in November 1988. The Fund’s fundamental investment restrictions may not be changed without the approval of the holders of a majority of the outstanding voting securities, as defined in the 1940 Act.

 

Western Asset Municipal High Income Fund Inc.					67

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Dividend reinvestment plan (unaudited)

 

Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and return of capital distributions, on your Common Stock will be automatically reinvested by Computershare Trust Company, N.A., as agent for the stockholders (the “Plan Agent”), in additional shares of Common Stock under the Fund’s Dividend Reinvestment Plan (the “Plan”). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare Trust Company, N.A., as dividend paying agent.

If you participate in the Plan, the number of shares of Common Stock you will receive will be determined as follows:

(1) If the market price of the Common Stock (plus $0.03 per share commission) on the payment date (or, if the payment date is not a NYSE trading day, the immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date, the Fund will issue new Common Stock at a price equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Stock on the payment date.

(2) If the net asset value per share of the Common Stock exceeds the market price of the Common Stock (plus $0.03 per share commission) at the close of trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Stock in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading day following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the stockholders; except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share commission) rises so that it equals or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the Plan Agent will cease purchasing Common Stock in the open market and the Fund shall issue the remaining Common Stock at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the day prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.

Common Stock in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan. You may withdraw from the Plan (i.e., opt-out) by notifying the Plan Agent in writing at P.O. Box 43006, Providence, RI 02940-3078 or by calling the Plan Agent at 1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business days prior to any dividend or distribution record date; otherwise such withdrawal will be effective as soon as practicable after the Plan Agent’s investment of the most recently declared dividend or distribution on the Common Stock.

 

68				Western Asset Municipal High Income Fund Inc.

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Plan participants who sell their shares will be charged a service charge (currently $5.00 per transaction) and the Plan Agent is authorized to deduct brokerage charges actually incurred from the proceeds (currently $0.05 per share commission). There is no service charge for reinvestment of your dividends or distributions in Common Stock. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional shares of Common Stock, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Stock over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Fund’s net asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.

Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the Plan.

The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. The Plan may be terminated, amended or supplemented by the Fund upon notice in writing mailed to stockholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund for which the termination or amendment is to be effective. Upon any termination, you will be sent cash for any fractional share of Common Stock in your account. You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your Common Stock on your behalf. Additional information about the Plan and your account may be obtained from the Plan Agent at P.O. Box 43006, Providence, RI 02940-3078 or by calling the Plan Agent at 1-888-888-0151.

 

Western Asset Municipal High Income Fund Inc.					69

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Important tax information (unaudited)

 

By mid-February, tax information related to a shareholder’s proportionate share of distributions paid during the preceding calendar year will be received, if applicable. Please also refer to www.franklintempleton.com for per share tax information related to any distributions paid during the preceding calendar year. Shareholders are advised to consult with their tax advisors for further information on the treatment of these amounts on their tax returns.

The following tax information for the Fund is required to be furnished to shareholders with respect to income earned and distributions paid during its fiscal year.

The Fund hereby reports the following amounts, or if subsequently determined to be different, the maximum allowable amounts, for the fiscal year ended October 31, 2023:

 

		Pursuant to:		Amount Reported
Exempt-Interest Dividends Distributed		§852(b)(5)(A)		$	5,180,946
Qualified Net Interest Income (QII)		§871(k)(1)(C)		$	46,238
Section 163(j) Interest Earned		§163(j)		$	46,619

 

70				Western Asset Municipal High Income Fund Inc.

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Western Asset

Municipal High Income Fund Inc.

 

Directors

Robert D. Agdern

Carol L. Colman

Daniel P. Cronin

Paolo M. Cucchi

Eileen A. Kamerick

Nisha Kumar

Jane Trust

Chairman

Officers

Jane Trust

President and Chief Executive Officer

Christopher Berarducci

Treasurer and Principal Financial Officer

Fred Jensen

Chief Compliance Officer

Marc A. De Oliveira*

Secretary and Chief Legal Officer

Thomas C. Mandia

Senior Vice President

Jeanne M. Kelly

Senior Vice President

Western Asset Municipal High Income Fund Inc.

620 Eighth Avenue

47th Floor

New York, NY 10018

Investment manager

Franklin Templeton Fund Adviser, LLC**

Subadviser

Western Asset Management Company, LLC

Custodian

The Bank of New York Mellon

Transfer agent

Computershare Inc.

P.O. Box 43006

Providence, RI 02940-3078

Independent registered public accounting firm

PricewaterhouseCoopers LLP

Baltimore, MD

Legal counsel

Simpson Thacher & Bartlett LLP

900 G Street NW

Washington, DC 20001

New York Stock Exchange Symbol

MHF

 

*	Effective September 7, 2023, Mr. De Oliveira became Secretary and Chief Legal Officer.

**	Formerly known as Legg Mason Partners Fund Advisor, LLC.

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Legg Mason Funds Privacy and Security Notice

 

Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds

This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include the Western Asset Money Market Funds sold by the Funds’ distributor, Franklin Distributors, LLC, as well as Legg Mason-sponsored closed-end funds. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.

The Type of Nonpublic Personal Information the Funds Collect About You

The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:

 

•

Personal information included on applications or other forms;

 

•

Account balances, transactions, and mutual fund holdings and positions;

 

•

Bank account information, legal documents, and identity verification documentation; and

 

•

Online account access user IDs, passwords, security challenge question responses.

How the Funds Use Nonpublic Personal Information About You

The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have authorized or as permitted or required by law.

The Funds may disclose information about you to:

 

•

Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or to comply with obligations to government regulators;

 

•

Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform statistical analysis, market research and marketing services solely for the Funds;

 

•

Permit access to transfer, whether in the United States or countries outside of the United States to such Funds’ employees, agents and affiliates and service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;

 

•

The Funds’ representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;

 

•

Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.

 

NOT PART OF THE ANNUAL REPORT

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Legg Mason Funds Privacy and Security Notice (cont’d)

 

Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf, including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.

The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.

Keeping You Informed of the Funds’ Privacy and Security Practices

The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time, they will notify you promptly if this privacy policy changes.

The Funds’ Security Practices

The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.

Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.

In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, if you have questions about the Funds’ privacy practices, or our use of your nonpublic personal information, write the Funds using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.franklintempleton.com, or contact the Funds at 1-877-721-1926 for the Western Asset Money Market Funds or 1-888-777-0102 for the Legg Mason-sponsored closed-end funds.

Revised October 2022

 

NOT PART OF THE ANNUAL REPORT

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Legg Mason Funds Privacy and Security Notice (cont’d)

 

Legg Mason California Consumer Privacy Act Policy

Although much of the personal information we collect is “nonpublic personal information” subject to federal law, residents of California may, in certain circumstances, have additional rights under the California Consumer Privacy Act (“CCPA”). For example, if you are a broker, dealer, agent, fiduciary, or representative acting by or on behalf of, or for, the account of any other person(s) or household, or a financial advisor, or if you have otherwise provided personal information to us separate from the relationship we have with personal investors, the provisions of this Privacy Policy apply to your personal information (as defined by the CCPA).

In addition to the provisions of the Legg Mason Funds Security and Privacy Notice, you may have the right to know the categories and specific pieces of personal information we have collected about you.

You also have the right to request the deletion of the personal information collected or maintained by the Funds.

If you wish to exercise any of the rights you have in respect of your personal information, you should advise the Funds by contacting them as set forth below. The rights noted above are subject to our other legal and regulatory obligations and any exemptions under the CCPA. You may designate an authorized agent to make a rights request on your behalf, subject to the identification process described below. We do not discriminate based on requests for information related to our use of your personal information, and you have the right not to receive discriminatory treatment related to the exercise of your privacy rights.

We may request information from you in order to verify your identity or authority in making such a request. If you have appointed an authorized agent to make a request on your behalf, or you are an authorized agent making such a request (such as a power of attorney or other written permission), this process may include providing a password/passcode, a copy of government issued identification, affidavit or other applicable documentation, i.e. written permission. We may require you to verify your identity directly even when using an authorized agent, unless a power of attorney has been provided. We reserve the right to deny a request submitted by an agent if suitable and appropriate proof is not provided.

For the 12-month period prior to the date of this Privacy Policy, the Legg Mason Funds have not sold any of your personal information; nor do we have any plans to do so in the future.

Contact Information

Address: Data Privacy Officer, 100 International Dr., Baltimore, MD 21202

Email: DataProtectionOfficer@franklintempleton.com

Phone: 1-800-396-4748

Revised October 2022

 

NOT PART OF THE ANNUAL REPORT

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Western Asset Municipal High Income Fund Inc.

Western Asset Municipal High Income Fund Inc.

620 Eighth Avenue

47th Floor

New York, NY 10018

Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at market prices, shares of its stock.

The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Forms N-PORT are available on the SEC’s website at www.sec.gov. To obtain information on Form N-PORT, shareholders can call the Fund at 1-888-777-0102.

Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) at www.franklintempleton.com and (3) on the SEC’s website at www.sec.gov.

Quarterly performance, semi-annual and annual reports, current net asset value and other information regarding the Fund may be found on Franklin Templeton’s website, which can be accessed at www.franklintempleton.com. Any reference to Franklin Templeton’s website in this report is intended to allow investors public access to information regarding the Fund and does not, and is not intended to, incorporate Franklin Templeton’s website in this report.

This report is transmitted to the shareholders of Western Asset Municipal High Income Fund Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.

Computershare Inc.

P.O. Box 43006

Providence, RI 02940-3078

 

WASX010547 12/23 SR23-4781

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ITEM 2.

CODE OF ETHICS.

The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.

 

ITEM 3.

AUDIT COMMITTEE FINANCIAL EXPERT.

The Board of Directors of the registrant has determined that Eileen A. Kamerick and Nisha Kumar, are the members of the Board’s Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial experts”.

 

ITEM 4.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

(a) Audit Fees. The aggregate fees billed in the previous fiscal years ending October 31, 2022 and October 31, 2023 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $42,168 in October 31, 2022 and $42,168 in October 31, 2023.

(b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $0 in October 31, 2022 and $0 in October 31, 2023.

(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $9,750 in October 31, 2022 and $9,750 in October 31, 2023. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.

There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.

(d) All Other Fees. The aggregate fees for other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item for the Western Asset Municipal High Income Fund Inc. were $0 in October 31, 2022 and $0 in October 31, 2023.

All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”), and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to Western Asset Municipal High Income Fund Inc. requiring pre-approval by the Audit Committee in the Reporting Period.

(e) Audit Committee’s pre—approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.

(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.

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The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.

Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.

(2) None of the services described in paragraphs (b) through (d) of this Item were performed in reliance on paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

(f) Not applicable.

(g) Non-audit fees billed by the Auditor for services rendered to Western Asset Municipal High Income Fund Inc., LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Western Asset Municipal High Income Fund Inc. during the reporting period were $350,359 in October 31, 2022 and $342,635 in October 31, 2023.

(h) Yes. Western Asset Municipal High Income Fund Inc.’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Western Asset Municipal High Income Fund Inc. or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.

(i) Not applicable.

(j) Not applicable.

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ITEM 5.

AUDIT COMMITTEE OF LISTED REGISTRANTS.

a) Registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)58(A) of the Exchange Act. The Audit Committee consists of the following Board members:

Robert D. Agdern

Carol L. Colman

Daniel P. Cronin

Paolo M. Cucchi

Eileen A. Kamerick

Nisha Kumar

b) Not applicable

 

ITEM 6.

SCHEDULE OF INVESTMENTS.

Included herein under Item 1.

 

ITEM 7.

DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Western Asset Management Company, LLC

Proxy Voting Policies and Procedures

NOTE

The policy below relating to proxy voting and corporate actions is a global policy for Western Asset Management Company, LLC (“Western Asset” or the “Firm”) and all Western Asset affiliates, including Western Asset Management Company Limited (“Western Asset Limited”), Western Asset Management Company Ltd (“Western Asset Japan”) and Western Asset Management Company Pte. Ltd. (“Western Asset Singapore”), as applicable. As compliance with the policy is monitored by Western Asset, the policy has been adopted from the US Compliance Manual and all defined terms are those defined in the US Compliance Manual rather than the compliance manual of any other Western Asset affiliate.

BACKGROUND

An investment adviser is required to adopt and implement policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with fiduciary duties and Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). The authority to vote the proxies of our clients is established through investment management agreements or comparable documents. In addition to SEC requirements governing advisers, long-standing fiduciary standards and responsibilities have been established for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the investment manager.

POLICY

As a fixed income only manager, the occasion to vote proxies is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and Rule 206(4)-6 under the Advisers Act. In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the investment manager.

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While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).

In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Franklin Resources (Franklin Resources includes Franklin Resources, Inc. and organizations operating as Franklin Resources) or any of its affiliates (other than Western Asset affiliated companies) regarding the voting of any securities owned by its clients.

 

•

PROCEDURES

Responsibility and Oversight

The Regulatory Affairs Group is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Operations Group (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.

Client Authority

The Investment Management Agreement for each client is reviewed at account start-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Regulatory Affairs Group maintains a matrix of proxy voting authority.

Proxy Gathering

Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.

Proxy Voting

Once proxy materials are received by Corporate Actions, they are forwarded to the Regulatory Affairs Group for coordination and the following actions:

Proxies are reviewed to determine accounts impacted.

Impacted accounts are checked to confirm Western Asset voting authority.

The Regulatory Affairs Group reviews proxy issues to determine any material conflicts of interest. (See Conflicts of Interest section of these procedures for further information on determining material conflicts of interest.)

If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party.

The Regulatory Affairs Group provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Regulatory Affairs Group.

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Portfolio Compliance Group votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials.

Timing

Western Asset’s Legal and Compliance Department personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.

Recordkeeping

Western Asset maintains records of proxies voted pursuant to Rule 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:

 

•

A copy of Western Asset’s proxy voting policies and procedures.

Copies of proxy statements received with respect to securities in client accounts.

A copy of any document created by Western Asset that was material to making a decision how to vote proxies.

Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests.

A proxy log including:

 

1.

Issuer name;

 

2.

Exchange ticker symbol of the issuer’s shares to be voted;

 

3.

Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;

 

4.

A brief identification of the matter voted on;

 

5.

Whether the matter was proposed by the issuer or by a shareholder of the issuer;

 

6.

Whether a vote was cast on the matter;

 

7.

A record of how the vote was cast; and

 

8.

Whether the vote was cast for or against the recommendation of the issuer’s management team.

Records are maintained in an easily accessible place for a period of not less than five (5) years with the first two (2) years in Western Asset’s offices.

Disclosure

Western Asset’s proxy policies and procedures are described in the Firm’s Form ADV Part 2A. Clients are provided with a copy of these policies and procedures upon request. In addition, clients may receive reports on how their proxies have been voted, upon request.

Conflicts of Interest

All proxies are reviewed by the Regulatory Affairs Group for material conflicts of interest. Issues to be reviewed include, but are not limited to:

 

1.

Whether Western Asset (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company;

 

2.

Whether Western Asset or an officer or director of Western Asset or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and

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3.

Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.

Voting Guidelines

Western Asset’s substantive voting decisions are based on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.

Situations can arise in which more than one Western Asset client invests in instruments of the same issuer or in which a single client may invest in instruments of the same issuer but in multiple accounts or strategies. Multiple clients or the same client in multiple accounts or strategies may have different investment objectives, investment styles, or investment professionals involved in making decisions. While there may be differences, votes are always cast in the best interests of the client and the investment objectives agreed with Western Asset. As a result, there may be circumstances where Western Asset casts different votes on behalf of different clients or on behalf of the same client with multiple accounts or strategies.

Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.

 

I.	Board Approved Proposals

The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:

 

1.

Matters relating to the Board of Directors

Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:

 

a.

Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors.

 

b.

Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.

 

c.

Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.

 

d.

Votes are cast on a case-by-case basis in contested elections of directors.

 

2.

Matters relating to Executive Compensation

Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:

 

a.

Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution.

 

b.

Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options.

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c.

Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.

 

d.

Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less.

 

3.

Matters relating to Capitalization

The Management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.

 

a.

Western Asset votes for proposals relating to the authorization of additional common stock.

 

b.

Western Asset votes for proposals to effect stock splits (excluding reverse stock splits).

 

c.

Western Asset votes for proposals authorizing share repurchase programs.

 

4.

Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions

Western Asset votes these issues on a case-by-case basis on board-approved transactions.

 

5.

Matters relating to Anti-Takeover Measures

Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:

 

a.

Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.

 

b.

Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.

 

6.

Other Business Matters

Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.

 

a.

Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws.

 

b.

Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.

 

7.

Reporting of Financially Material Information

Western Asset generally believes issuers should disclose information that is material to their business. This principle extends to Environmental, Social and Governance matters. What qualifies as “material” can vary, so votes are cast on a case by case basis but consistent with the overarching principle.

 

II.	Shareholder Proposals

SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:

 

1.

Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.

 

2.

Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals.

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3.

Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.

Environmental or social issues that are the subject of a proxy vote will be considered on a case by case basis. Constructive proposals that seek to advance the health of the issuer and the prospect for risk-adjusted returns to Western Assets clients are viewed more favorably than proposals that advance a single issue or limit the ability of management to meet its operating objectives.

 

III.	Voting Shares of Investment Companies

Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.

 

1.

Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios.

 

2.

Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.

 

IV.	Voting Shares of Foreign Issuers

In the event Western Asset is required to vote on securities held in non-U.S. issuers – i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.

 

1.

Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.

 

2.

Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.

 

3.

Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.

 

4.

Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.

 

V.	Environmental, Social and Governance Matters

Western Asset considers ESG matters as part of the overall investment process where appropriate. The Firm seeks to identify and consider material risks to the investment thesis, including material risks presented by ESG factors. While Western Asset is primarily a fixed income manager, opportunities to vote proxies are considered on the investment merits of the instruments and strategies involved.

As a general proposition, Western Asset votes to encourage disclosure of information material to their business. This principle extends to ESG matters. What qualifies as “material” can vary, so votes are cast on a case by case basis but consistent with the overarching principle. Western Asset recognizes that objective standards and criteria may not be available or universally agreed and that there may be different views and subjective analysis regarding factors and their significance.

As a general matter, Western Asset votes to encourage management and governance practices that enhance the strength of the issuer, build value for investors, and mitigate risks that might threaten their ability to operate and navigate competitive pressures.

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Targeted environmental or social issues that are the subject of a proxy vote will be considered on a case by case basis. Constructive proposals that seek to advance the health of the issuer and the prospect for risk-adjusted returns to Western Assets clients are viewed more favorably than proposals that advance a single issue or limit the ability of management to meet its operating objectives.

Situations can arise in which different clients and strategies have explicit ESG objectives beyond generally taking into account material ESG risks. Votes may be cast for such clients with the ESG objectives in mind. Votes involving ESG proposals that are not otherwise addressed in this policy will be voted on a case-by-case basis consistent with the Firm’s fiduciary duties to its clients, the potential consequences to the investment thesis for that issuer, and the specific facts and circumstances of each proposal.

Retirement Accounts

For accounts subject to ERISA, as well as other retirement accounts, Western Asset is presumed to have the responsibility to vote proxies for the client. The Department of Labor has issued a bulletin that states that investment managers have the responsibility to vote proxies on behalf of Retirement Accounts unless the authority to vote proxies has been specifically reserved to another named fiduciary. Furthermore, unless Western Asset is expressly precluded from voting the proxies, the Department of Labor has determined that the responsibility remains with the investment manager.

In order to comply with the Department of Labor’s position, Western Asset will be presumed to have the obligation to vote proxies for its retirement accounts unless Western Asset has obtained a specific written instruction indicating that: (a) the right to vote proxies has been reserved to a named fiduciary of the client, and (b) Western Asset is precluded from voting proxies on behalf of the client. If Western Asset does not receive such an instruction, Western Asset will be responsible for voting proxies in the best interests of the retirement account client and in accordance with any proxy voting guidelines provided by the client.

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ITEM 8.

INVESTMENT PROFESSIONALS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

 

(a)(1):

As of the date of filing this report:

 

NAME AND ADDRESS		LENGTH OF PRINCIPAL OCCUPATION(S) DURING TIME SERVED PAST 5 YEARS
S. Kenneth Leech Western Asset 385 East Colorado Blvd. Pasadena, CA 91101		Since 2014		Responsible for the day-to-day management with other members of the Fund’s portfolio management team; Co-Chief Investment Officer of Western Asset from 1998 to 2008 and since 2014; Senior Advisor/Chief Investment Officer Emeritus of Western Asset from 2008-2013; Co- Chief Investment Officer of Western Asset from 2013-2014.
David Fare Western Asset 385 East Colorado Blvd. Pasadena, CA 91101		Since 2006		Responsible for the day-to-day management with other members of the Fund’s portfolio management team; portfolio manager at Western Asset since 2005; prior to that time, Mr. Fare was with Citigroup Asset Management or one of its affiliates since 1989.
Robert Amodeo Western Asset 385 East Colorado Blvd. Pasadena, CA 91101		Since 2007		Responsible for the day-to-day management with other members of the Fund’s portfolio management team; portfolio manager at Western Asset since 2005; prior to that time, Mr. Amodeo was a Managing Director and portfolio manager with Salomon Brothers Asset Management Inc from 1992 to 2005.
John Mooney Western Asset 385 East Colorado Blvd. Pasadena, CA 91101		Since March 31, 2023		Responsible for the day-to-day management with other members of the Fund’s portfolio management team; portfolio manager at Western Asset since 2005; prior to that time, Mr. Mooney was with Citigroup Asset Management, AIG/SunAmerica, and First Investors Management Company.

 

(a)(2):

DATA TO BE PROVIDED BY FINANCIAL CONTROL

The following tables set forth certain additional information with respect to the fund’s investment professionals for the fund. Unless noted otherwise, all information is provided as of October 31, 2023.

Other Accounts Managed by Investment Professionals

The table below identifies the number of accounts (other than the fund) for which the fund’s investment professionals have day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance is also indicated.

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Name of PM		Type of Account		Number of Accounts Managed		Total Assets Managed		Number of Accounts Managed for which Advisory Fee is Performance -Based		Assets Managed for which Advisory Fee is Performance -Based
S. Kenneth Leech‡		Other Registered Investment Companies		94		$118.56 billion		None		None
		Other Pooled Vehicles		308		$64.95 billion		24		$2.57 billion
		Other Accounts		643		$173.60 billion		22		$11.73 billion
David T. Fare‡		Other Registered Investment Companies		16		$9.32 billion		None		None
		Other Pooled Vehicles		3		$1.50 billion		None		None
		Other Accounts		13		$4.09 billion		None		None
Robert Amodeo‡		Other Registered Investment Companies		18		$9.79 billion		None		None
		Other Pooled Vehicles		3		$1.50 billion		None		None
		Other Accounts		13		$4.09 billion		None		None
John Mooney ‡		Other Registered Investment Companies		16		$8.58 billion		None		None
		Other Pooled Vehicles		3		$1.50 billion		None		None
		Other Accounts		13		$4.09 billion		None		None

 

‡

The numbers above reflect the overall number of portfolios managed by employees of Western Asset Management Company (“Western Asset”). Mr. Leech is involved in the management of all the Firm’s portfolios, but they are not solely responsible for particular portfolios. Western Asset’s investment discipline emphasizes a team approach that combines the efforts of groups of specialists working in different market sectors. They are responsible for overseeing implementation of Western Asset’s overall investment ideas and coordinating the work of the various sector teams. This structure ensures that client portfolios benefit from a consensus that draws on the expertise of all team members.

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(a)(3):

As of October 31, 2023:

Investment Professional Compensation

Conflicts of Interest

The Subadviser has adopted compliance policies and procedures to address a wide range of potential conflicts of interest that could directly impact client portfolios. For example, potential conflicts of interest may arise in connection with the management of multiple portfolios (including portfolios managed in a personal capacity). These could include potential conflicts of interest related to the knowledge and timing of a portfolio’s trades, investment opportunities and broker selection. Portfolio managers are privy to the size, timing, and possible market impact of a portfolio’s trades.

It is possible that an investment opportunity may be suitable for both a portfolio and other accounts managed by a portfolio manager, but may not be available in sufficient quantities for both the portfolio and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by a portfolio and another account. A conflict may arise where the portfolio manager may have an incentive to treat an account preferentially as compared to a portfolio because the account pays a performance-based fee or the portfolio manager, the Subadviser or an affiliate has an interest in the account. The Subadviser has adopted procedures for allocation of portfolio transactions and investment opportunities across multiple client accounts on a fair and equitable basis over time. Eligible accounts that can participate in a trade generally share the same price on a pro-rata allocation basis, taking into account differences based on factors such as cash availability, investment restrictions and guidelines, and portfolio composition versus strategy.

With respect to securities transactions, the Subadviser determines which broker or dealer to use to execute each order, consistent with their duty to seek best execution of the transaction. However, with respect to certain other accounts (such as pooled investment vehicles that are not registered investment companies and other accounts managed for organizations and individuals), the Subadviser may be limited by the client with respect to the selection of brokers or dealers or may be instructed to direct trades through a particular broker or dealer. In these cases, trades for a portfolio in a particular security may be placed separately from, rather than aggregated with, such other accounts. Having separate transactions with respect to a security may temporarily affect the market price of the security or the execution of the transaction, or both, to the possible detriment of a portfolio or the other account(s) involved. Additionally, the management of multiple portfolios and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of each portfolio and/or other account. The Subadviser’s team approach to portfolio management and block trading approach seeks to limit this potential risk.

The Subadviser also maintains a gift and entertainment policy to address the potential for a business contact to give gifts or host entertainment events that may influence the business judgment of an employee. Employees are permitted to retain gifts of only a nominal value and are required to make reimbursement for entertainment events above a certain value. All gifts (except those of a de minimis value) and entertainment events that are given or sponsored by a business contact are required to be reported in a gift and entertainment log which is reviewed on a regular basis for possible issues.

Employees of the Subadviser have access to transactions and holdings information regarding client accounts and the Subadviser’s overall trading activities. This information represents a potential conflict of interest because employees may take advantage of this information as they trade in their personal accounts. Accordingly, the Subadviser maintains a Code of Ethics that is compliant with Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act to address personal trading. In addition, the Code of Ethics seeks to establish broader principles of good conduct and fiduciary responsibility in all aspects of the Subadviser’s business. The Code of Ethics is administered by the Legal and Compliance Department and monitored through the Subadviser’s compliance monitoring program.

The Subadviser may also face other potential conflicts of interest with respect to managing client assets, and the description above is not a complete description of every conflict of interest that could be deemed to exist. The Subadviser also maintains a compliance monitoring program and engages independent auditors to conduct a SOC1/ISAE 3402 audit on an annual basis. These steps help to ensure that potential conflicts of interest have been addressed.

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Investment Professional Compensation

With respect to the compensation of the Fund’s investment professionals, the Subadviser’s compensation system assigns each employee a total compensation range, which is derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits and a retirement plan.

In addition, the Subadviser’s employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the Subadviser, and are determined by the professional’s job function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary. The principal factor considered is an investment professional’s investment performance versus appropriate peer groups and benchmarks (e.g., a securities index and with respect to the Fund, the benchmark set forth in the Fund’s Prospectus to which the Fund’s average annual total returns are compared or, if none, the benchmark set forth in the Fund’s annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensation—with 3 and 5 years having a larger emphasis. The Subadviser may also measure an investment professional’s pre-tax investment performance against other benchmarks, as it determines appropriate. Because investment professionals are generally responsible for multiple accounts (including the Fund) with similar investment strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account. Other factors that may be considered when making bonus decisions include client service, business development, length of service to the Subadviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the Subadviser’s business.

Finally, in order to attract and retain top talent, all investment professionals are eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include long-term incentives that vest over a set period of time past the award date.

 

(a)(4):

Investment Professional Securities Ownership

The table below identifies the dollar range of securities beneficially owned by each investment professional as of October 31, 2023.

 

Portfolio Manager(s)		Dollar Range of Portfolio Securities Beneficially Owned
S. Kenneth Leech		A
David T. Fare		A
Robert Amodeo		A
John Mooney		A

Dollar Range ownership is as follows:

A: none

B: $1 - $10,000

C: 10,001 - $50,000

D: $50,001 - $100,000

E: $100,001 - $500,000

F: $500,001 - $1 million

G: over $1 million

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ITEM 9.

PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS

Not applicable.

 

ITEM 10.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

 

ITEM 11.

CONTROLS AND PROCEDURES.

 

(a)

The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934.

 

(b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the period covered by this report that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting.

 

ITEM 12.

DISCLOSURE OF SECURITIES LENDING ACTIVITIES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

 

ITEM 13.

RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION.

 

(a)

Not applicable.

 

(b)

Not applicable.

 

ITEM 14.

EXHIBITS.

(a) (1) Code of Ethics attached hereto.

Exhibit  99.CODE ETH

(a) (2)  Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.

Exhibit 99.CERT

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.

Exhibit 99.906CERT

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.

Western Asset Municipal High Income Fund Inc.

 

By:		/s/ Jane Trust
		Jane Trust
		Chief Executive Officer
Date:		December 27, 2023

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By:		/s/ Jane Trust
		Jane Trust
		Chief Executive Officer
Date:		December 27, 2023
By:		/s/ Christopher Berarducci
		Christopher Berarducci
		Principal Financial Officer
Date:		December 27, 2023

Code of Conduct for Principal Executive and Financial Officers (SOX)

Covered Officers and Purpose of the Code

The Funds’ code of ethics (the “Code”) for investment companies within the Legg Mason family of mutual funds (each a “Fund,” and collectively, the “Funds”) applies to each Fund’s Principal Executive Officer, Principal Financial Officer, and Controller (the “Covered Officers”) for the purpose of promoting:

 

•

honest and ethical conduct, including ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

 

•

full, fair, accurate, timely and understandable disclosure in reports and documents a registrant files with, or submits to, the Securities and Exchange Commission (“SEC”) and in other public communications made by the Funds;

 

•

compliance with applicable laws and governmental rules and regulations;

 

•

prompt internal reporting of Code violations to appropriate persons identified in the Code; and

 

•

accountability for adherence to the Code.

Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest.

Covered Officers Should Ethically Handle Actual and Apparent Conflicts of Interest

A “conflict of interest” occurs when a Covered Officer’s private interest interferes with the interests of, or his or her service to, a Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her family, receives improper personal benefits as a result of his or her position with a Fund.

Certain conflicts of interest arise out of the relationships between Covered Officers and a Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 (“Investment Company Act”) and the Investment Advisers Act of 1940 (“Investment Advisers Act”). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with a Fund because of their status as “affiliated persons” of the Fund. The Funds’ and the investment advisers’ compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code.

Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between a Fund and an investment adviser of which Covered Officers are also officers or employees. As a result, this Code recognizes Covered Officers will, in the normal course of their duties (whether formally for a Fund or for the adviser, or for both), be involved in establishing policies and

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implementing decisions that will have different effects on the adviser and the Funds. The participation of Covered Officers in such activities is inherent in the contractual relationship between a Fund and an adviser and is consistent with the performance by Covered Officers of their duties as officers of the Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds’ Boards of Directors/Trustees (“Boards”) that Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes and that such service, by itself does not give rise to a conflict of interest.

Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of a Fund.

Each Covered Officer must:

 

•

not use his or her personal influence or personal relationships improperly to influence investment decisions or financial reporting by a Fund;

 

•

not cause a Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the Fund; and,

 

•

not use material non-public knowledge of portfolio transactions made or contemplated for the Trust to trade personally or cause others to trade personally in contemplation of the market effect of such transactions.

There are some actual or potential conflict of interest situations that, if material, should always be discussed with the Chief Compliance Officer (“CCO”) or designate that has been appointed by the Board of the Funds. Examples of these include:

 

•

service as a director on the board of any public company (other than the Funds or their investment advisers or any affiliated person thereof);

 

•

the receipt of any non-nominal gifts (i.e., in excess of $100);

 

•

the receipt of any entertainment from any company with which a Fund has current or prospective business dealings unless such entertainment is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety;

 

•

any ownership interest in, or any consulting or employment relationship with, any of the Funds’ service providers (other than their investment advisers, or principal underwriter, or any affiliated person thereof);

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•

a direct or indirect financial interest in commissions, transaction charges or spreads paid by a Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer’s employment, such as compensation or equity ownership.

Disclosure and Compliance

Each Covered Officer should:

 

•

familiarize him or herself with the disclosure requirements generally applicable to the Funds;

 

•

not knowingly misrepresent, or cause others to misrepresent, facts about a Fund to others, whether within or outside the Fund, including to the Fund’s Directors/Trustees and auditors, and to governmental regulators and self-regulatory organizations; and

 

•

to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Funds and the advisers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds.

It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations.

Reporting and Accountability

Each Covered Officer must:

 

•

upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he or she has received, read, and understands the Code;

 

•

annually thereafter affirm to the Board that he or she has complied with the requirements of the Code;

 

•

not retaliate against any other Covered Officer or any employee of the Funds or their advisers or any affiliated persons thereof or service providers of the Funds for reports of potential violations that are made in good faith;

 

•

notify the CCO promptly if he or she knows of any violation of this Code, of which failure to do so is itself a violation; and

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•

report at least annually, if necessary, any employment position, including officer or directorships, held by the Covered Officer or any immediate family member of a Covered Officer with affiliated persons of or Service Providers to the Funds.

The CCO is responsible for applying this Code to specific situations in which questions are presented and has the authority to interpret this Code in any particular situation. However, approvals or waivers sought by a Covered Officer will be considered by the Compliance Committee or Audit Committee, (the “Committee”) responsible for oversight of the Fund’s code of ethics under Rule 17j-1 under the Investment Company Act. If a Covered Officer seeking an approval or waiver sits on the Committee, the Covered Person shall recuse him or herself from any such deliberations. Any approval or waiver granted by the Committee will be reported promptly to the Chair of the Audit Committees of the Funds.

The Funds will follow these procedures in investigating and enforcing this Code:

 

•

the CCO will take all appropriate action to investigate any potential violations reported to him, which actions may include the use of internal or external counsel, accountants or other personnel;

 

•

if, after such investigation, the CCO believes that no violation has occurred, the CCO is not required to take any further action;

 

•

any matter that the CCO believes is a violation will be reported to the Committee;

 

•

if the Committee concurs that a violation has occurred, it will inform the Board, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer;

 

•

the Committee will be responsible for granting waivers, as appropriate; and,

 

•

any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules.

Other Policies and Procedures

This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds’ advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of Covered Officers subject to this Code, they are superseded by this Code to the extent they overlap or conflict with the provisions of this Code. The Funds’ and their investment advisers’ and principal underwriter’s codes of ethics under Rule 17j-1 under the Investment Company Act are separate requirements applying to Covered Officers and others, and are not part of this Code.

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Confidentiality

All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the appropriate Board and Fund counsel, and the board of Directors/Trustees and fund counsel of any other investment company for whom a Covered Officer serves in a similar capacity.

Annual Report

No less than annually, the CCO shall provide the Board with a written report describing any issues having arisen since the prior year’s report.

Internal Use

This Code is intended solely for the internal use by the Funds and does not constitute an admission by or on behalf of any Fund, as to any fact, circumstance or legal consideration.

CERTIFICATIONS PURSUANT TO SECTION 302

EX-99.CERT

CERTIFICATIONS

I, Jane Trust, certify that:

 

1.	I have reviewed this report on Form N-CSR of Western Asset Municipal High Income Fund Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officers and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: December 27, 2023						/s/ Jane Trust
						Jane Trust
						Chief Executive Officer

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CERTIFICATIONS

I, Christopher Berarducci, certify that:

 

1.	I have reviewed this report on Form N-CSR of Western Asset Municipal High Income Fund Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial information included in this report, and the financial statements on which the financial information is based, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officers and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: December 27, 2023						/s/ Christopher Berarducci
						Christopher Berarducci
						Principal Financial Officer

CERTIFICATIONS PURSUANT TO SECTION 906

EX-99.906CERT

CERTIFICATION

Jane Trust, Chief Executive Officer, and Christopher Berarducci, Principal Financial Officer of Western Asset Municipal High Income Fund Inc. (the “Registrant”), each certify to the best of their knowledge that:

1.    The Registrant’s periodic report on Form N-CSR for the period ended October 31, 2023 (the “Form N-CSR”) fully complies with the requirements of section 15(d) of the Securities Exchange Act of 1934, as amended; and

2.    The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

Chief Executive Officer				Principal Financial Officer
Western Asset Municipal High Income Fund Inc.				Western Asset Municipal High Income Fund Inc.
/s/ Jane Trust				/s/ Christopher Berarducci
Jane Trust				Christopher Berarducci
Date: December 27, 2023				Date: December 27, 2023

This certification is being furnished to the Securities and Exchange Commission solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Form N-CSR with the Commission.

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