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Notes to Financial Statements
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1. Organization:
BlackRock Municipal Bond Investment Trust (BIE) and BlackRock
Municipal Bond Trust (BBK), BlackRock Municipal Income Investment Quality Trust (BAF), BlackRock Municipal Income Quality Trust (BYM) and BlackRock Municipal Income Trust II (BLE) are organized as
Delaware statutory trusts. BlackRock MuniHoldings Investment Quality Fund (MFL) and BlackRock MuniVest Fund, Inc. (MVF) are organized as a Massachusetts business trust and as a Maryland corporation, respectively. BIE, BBK,
BAF, BYM, BLE, MFL, and MVF are referred to herein collectively as the Trusts. BBK, BYM and BLE are registered under the Investment Company Act of 1940, as amended (the 1940 Act), as diversified, closed-end management
investment companies. BAF, BIE, MFL, and MVF are registered under the 1940 Act as non-diversified, closed-end management investment companies. The Boards of Directors and Boards of Trustees of the Trusts are collectively referred to throughout this
report as the Board of Trustees or the Board, and the trustees thereof are collectively referred to throughout this report as Trustees. The Trusts determine and make available for publication the NAVs of their
Common Shares on a daily basis.
2. Significant Accounting Policies:
The Trusts financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP), which may require management to make
estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could
differ from those estimates. The following is a summary of the significant accounting policies followed by the Trusts:
Valuation: US GAAP
defines fair value as the price the Trusts would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The Trusts determine the fair values of their financial
instruments at market value using independent dealers or pricing services under policies approved by the Board. The BlackRock Global Valuation Methodologies Committee (the Global Valuation Committee) is the committee formed by management
to develop global pricing policies and procedures and to provide oversight of the pricing function for the Trusts for all financial instruments.
Municipal investments (including commitments to purchase such investments on a when-issued basis) are valued on the basis of prices provided by
dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrixes, market transactions in
comparable investments and information with respect to various relationships between investments. Financial futures contracts traded on exchanges are valued at their last sale price. Investments in open-end registered investment companies are valued
at NAV each business day. Short-term securities with remaining maturities of 60 days or less may be valued at amortized cost, which approximates fair value.
In the event that application of these methods of valuation results in a price for an investment that is deemed not to be representative of the market value of such investment, or if a price is not
available, the investment will be valued by the Global Valuation Committee, or its delegate, in accordance with a policy approved by the Board as reflecting fair value (Fair Value Assets). When determining the price for Fair Value
Assets, the Global Valuation Committee, or its delegate, seeks to determine the price that each Trust might reasonably expect to receive from the current sale of that asset in an arms-length transaction. Fair value determinations shall be
based upon all available factors that the Global Valuation Committee, or its delegate, deem relevant consistent with the principles of fair value measurement which include the market approach, income approach and/or in the case of recent
investments, the cost approach, as appropriate. The market approach generally consists of using comparable market transactions. The income approach generally is used to discount future cash flows to present value and is adjusted for liquidity as
appropriate. These factors include but are not limited to: (i) attributes specific to the investment or asset; (ii) the principal market for the investment or asset; (iii) the customary participants in the principal market for the
investment or asset; (iv) data assumptions by market participants for the investment or asset, if reasonably available; (v) quoted prices for similar investments or assets in active markets; and (vi) other factors, such as future cash
flows, interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, recovery rates, liquidation amounts and/or default rates. Due to the inherent uncertainty of valuations of such investments, the fair values may
differ from the values that would have been used had an active market existed. The Global Valuation Committee, or its delegate, employs various methods for calibrating valuation approaches for investments where an active market does not exist,
including regular due diligence of the Trusts pricing vendors, regular reviews of key inputs and assumptions, transactional back-testing or disposition analysis to compare unrealized gains and losses to realized gains and losses, reviews of
missing or stale prices and large movements in market values and reviews of any market related activity. The pricing of all Fair Value Assets is subsequently reported to the Board or a committee thereof on a quarterly basis.
Segregation and Collateralization: In cases in which the 1940 Act and the interpretive positions of the Securities and Exchange Commission (SEC)
require that the Trusts either deliver collateral or segregate assets in connection with certain investments (e.g., TOBs and financial futures contract), the Trusts will, consistent with SEC rules and/or certain interpretive letters issued by the
SEC, segregate collateral or designate on its books and records cash or liquid securities having a market value at least equal to the amount that would otherwise be required to be physically segregated. Furthermore, based on requirements and
agreements with certain exchanges and third party broker-dealers, each Trust engaging in such transactions may have requirements to deliver/deposit securities to/with an exchange or broker-dealer as collateral for certain investments.
Investment Transactions and Investment Income: For financial reporting purposes, investment transactions are recorded on the dates the transactions are
entered into (the trade dates). Realized gains and losses on investment transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Interest income,
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Notes to Financial Statements (continued)
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including amortization and accretion of premiums and discounts on debt securities, is recognized on the accrual basis.
Dividends and Distributions: Dividends from net investment income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. The character and timing of dividends
and distributions are determined in accordance with federal income tax regulations, which may differ from US GAAP. Dividends and distributions to Preferred Shareholders are accrued and determined as described in Note 9.
Income Taxes: It is each Trusts policy to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required.
Each Trust files US federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on each Trusts US federal tax return remains open
for each of the four years ended August 31, 2013. The statutes of limitations on each Trusts state and local tax returns may remain open for an additional year depending upon the jurisdiction. Management does not believe there are any
uncertain tax positions that require recognition of a tax liability.
Recent Accounting Standards: In December 2011, the Financial Accounting
Standards Board (the FASB) issued guidance that will expand current disclosure requirements on the offsetting of certain assets and liabilities. The new disclosures will be required for investments and derivative financial instruments
subject to master netting or similar agreements, which are eligible for offset in the Statements of Assets and Liabilities and will require an entity to disclose both gross and net information about such investments and transactions in the financial
statements. In January 2013, the FASB issued guidance that clarifies which investments and transactions are subject to the offsetting disclosure requirements. The scope of the disclosure requirements for offsetting will be limited to derivative
instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions. The guidance is effective for financial statements with fiscal years beginning on or after January 1, 2013, and
interim periods within those fiscal years. Management is evaluating the impact, if any, of this guidance on the Trusts financial statement disclosures.
Deferred Compensation Plan: Under the Deferred Compensation Plan (the Plan) approved by each Trusts Board, the independent Trustees (Independent Trustees) may defer a portion of
their annual complex-wide compensation. Deferred amounts earn an approximate return as though equivalent dollar amounts had been invested in common shares of certain other BlackRock Closed-End Funds selected by the Independent Trustees. This has the
same economic effect for the Independent Trustees as if the Independent Trustees had invested the deferred amounts directly in certain other BlackRock Closed-End Funds.
The Plan is not funded and obligations thereunder represent general unsecured claims against the general assets of each Trust. Deferred compensation liabilities are included in officers and
trustees fees payable in the Statement of Assets and Liabilities and will remain as a liability of the Trusts until such amounts are distributed in accordance with the Plan.
Other: Expenses directly related to a Trust are charged to that Trust. Other operating expenses shared by several trusts are pro rated among those trusts on the basis of relative net assets or other
appropriate methods.
The Trusts have an arrangement with the custodians whereby fees may be reduced by credits earned on uninvested cash
balances, which, if applicable, are shown as fees paid indirectly in the Statements of Operations. The custodians impose fees on overdrawn cash balances, which can be offset by accumulated credits earned or may result in additional custody charges.
3. Securities and Other Investments:
Zero-Coupon Bonds: The Trusts may invest in zero-coupon bonds, which are normally issued at a significant discount from face value and do not provide for
periodic interest payments. Zero-coupon bonds may experience greater volatility in market value than similar maturity debt obligations which provide for regular interest payments.
Forward Commitments and When-Issued Delayed Delivery Securities: The Trusts may purchase securities on a when-issued basis and may purchase or sell securities on a forward commitment basis. Settlement of
such transactions normally occurs within a month or more after the purchase or sale commitment is made. The Trusts may purchase securities under such conditions with the intention of actually acquiring them, but may enter into a separate agreement
to sell the securities before the settlement date. Since the value of securities purchased may fluctuate prior to settlement, the Trusts may be required to pay more at settlement than the security is worth. In addition, the Trusts are not entitled
to any of the interest earned prior to settlement. When purchasing a security on a delayed delivery basis, the Trusts assume the rights and risks of ownership of the security, including the risk of price and yield fluctuations. In the event of
default by the counterparty, the Trusts maximum amount of loss is the unrealized appreciation of unsettled when-issued transactions, which is shown in the Schedules of Investments.
Municipal Bonds Transferred to TOBs: The Trusts leverage their assets through the use of TOBs. A TOB is a special purpose entity established by a third party sponsor, into which a trust, or an agent on
behalf of a trust, transfers municipal bonds into a trust (TOB Trust). Other trusts managed by the investment advisor may also contribute municipal bonds to a TOB into which a Trust has contributed bonds. A TOB typically issues two
classes of beneficial interests: short-term floating rate certificates (TOB Trust Certificates), which are sold to third party investors, and residual certificates (TOB Residuals), which are generally issued to the
participating trusts that contributed the municipal bonds to the TOB Trust. If multiple trusts participate in the same TOB, the rights and obligations under the TOB Residual will be shared among the trusts ratably in proportion to their
participation.
The TOB Residuals held by a Trust include the right of a Trust (1) to cause the holders of a proportional share of the TOB
Trust Certificates to tender their certificates at par plus accrued interest upon the occurrence of certain mandatory tender events defined in the TOB agreements, and (2) to transfer, subject to a specified number of days prior notice, a
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ANNUAL REPORT
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AUGUST 31, 2013
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71
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Notes to Financial Statements (continued)
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corresponding share of the municipal bonds from the TOB to a Trust. The TOB may also be collapsed without the consent of a Trust, as the TOB Residual holder, upon the occurrence of certain
termination events as defined in the TOB agreements. Such termination events may include the bankruptcy or default of the municipal bond, a substantial downgrade in credit quality of the municipal bond, the inability of the TOB to obtain renewal of
the liquidity support agreement, a substantial decline in market value of the municipal bond and a judgment or ruling that interest on the municipal bond is subject to federal income taxation. Upon the occurrence of a termination event, the TOB
would generally be liquidated in full with the proceeds typically applied first to any accrued fees owed to the trustee, remarketing agent and liquidity provider, and then to the holders of the TOB Trust Certificates up to par plus accrued interest
owed on the TOB Trust Certificates, with the balance paid out to the TOB Residual holder. During the year ended August 31, 2013, no TOBs in which the Trusts participated were terminated without the consent of the Trusts.
The cash received by the TOB from the sale of the TOB Trust Certificates, less transaction expenses, is paid to a Trust. The Trust typically invests the cash
received in additional municipal bonds. Each Trusts transfer of the municipal bonds to a TOB Trust is accounted for as a secured borrowing; therefore, the municipal bonds deposited into a TOB are presented in the Trusts Schedules of
Investments and the TOB Trust Certificates are shown in other liabilities in the Statements of Assets and Liabilities. The carrying amount of each Trusts payable to the holder of the TOB Trust Certificates, as reported in Statement of Assets
and Liabilities as TOB Trust Certificates, approximates its fair value.
The Trusts may invest in TOBs on either a non-recourse or recourse basis.
TOB Trusts are typically supported by a liquidity facility provided by a bank or other financial institution (the Liquidity Provider) that allows the holders of the TOB Trust Certificates to tender their certificates in exchange for
payment from the Liquidity Provider of par plus accrued interest on any business day prior to the occurrence of the termination events described above. When a Trust invests in TOBs on a non-recourse basis, and the Liquidity Provider is required to
make a payment under the liquidity facility due to a termination event, the Liquidity Provider will typically liquidate all or a portion of the municipal securities held in the TOB Trust and then Trust, on a net basis, the balance, if any, of the
amount owed under the liquidity facility over the liquidation proceeds (the Liquidation Shortfall). If a Trust invests in a TOB on a recourse basis, the Trust will typically enter into a reimbursement agreement with the Liquidity
Provider where the Trust is required to repay the Liquidity Provider the amount of any Liquidation Shortfall. As a result, a Trust investing in a recourse TOB will bear the risk of loss with respect to any Liquidation Shortfall. If multiple trusts
participate in any such TOB, these losses will be shared ratably including the maximum potential amounts owed by the Trusts at August 31, 2013, in proportion to their participation. The recourse TOB Trusts are identified in the Schedule of
Investments.
Interest income, including amortization and accretion of premiums and discounts, from the underlying municipal bonds is recorded by
the Trusts on an accrual basis. Interest expense incurred on the secured borrowing and other expenses related to remarketing, administration and trustee services to a TOB are shown as interest expense, fees and amortization of offering costs in the
Statement of Operations. The TOB Trust Certificates have interest rates that generally reset weekly and their holders have the option to tender such certificates to the TOB for redemption at par at each reset date. As of August 31, 2013, the
aggregate value of the underlying municipal bonds transferred to TOBs, the related liability for TOB Trust Certificates and the range of interest rates on the liability for TOB Trust Certificates were as follows:
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Underlying
Municipal Bonds
Transferred to
TOBs
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|
Liability for
TOB Trust
Certificates
|
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|
Range of
Interest Rates
|
|
BIE
|
|
$
|
30,363,376
|
|
|
$
|
16,755,823
|
|
|
|
0.06% - 0.31%
|
|
BBK
|
|
$
|
28,621,098
|
|
|
$
|
17,039,244
|
|
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|
0.06% - 0.11%
|
|
BAF
|
|
$
|
57,899,496
|
|
|
$
|
33,845,143
|
|
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0.06% - 0.31%
|
|
BYM
|
|
$
|
202,779,695
|
|
|
$
|
114,947,707
|
|
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|
0.06% - 0.34%
|
|
BLE
|
|
$
|
122,350,419
|
|
|
$
|
73,531,145
|
|
|
|
0.06% - 0.11%
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|
MFL
|
|
$
|
177,085,345
|
|
|
$
|
95,959,167
|
|
|
|
0.06% - 0.31%
|
|
MVF
|
|
$
|
278,664,673
|
|
|
$
|
149,084,654
|
|
|
|
0.06% - 0.15%
|
|
For the year ended August 31, 2013, the Trusts average TOB trust certificates outstanding and the daily weighted
average interest rate, including fees, were as follows:
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Average TOB
Trust Certificates
Outstanding
|
|
|
Daily Weighted
Average
Interest Rate
|
|
BIE
|
|
$
|
19,047,265
|
|
|
|
0.73
|
%
|
BBK
|
|
$
|
17,545,761
|
|
|
|
0.72
|
%
|
BAF
|
|
$
|
41,886,384
|
|
|
|
0.74
|
%
|
BYM
|
|
$
|
115,036,505
|
|
|
|
0.69
|
%
|
BLE
|
|
$
|
91,739,088
|
|
|
|
0.72
|
%
|
MFL
|
|
$
|
131,844,852
|
|
|
|
0.77
|
%
|
MVF
|
|
$
|
195,776,797
|
|
|
|
0.70
|
%
|
Should short-term interest rates rise, the Trusts investments in TOBs may adversely affect the Trusts net
investment income and dividends to Common Shareholders. Also, fluctuations in the market value of municipal bonds deposited into the TOB Trust may adversely affect the Trusts NAVs per share.
4. Derivative Financial Instruments:
The
Trusts engage in various portfolio investment strategies using derivative contracts both to increase the returns of the Trusts and/or to economically hedge their exposure to certain risks such as interest rate risk. These contracts may be transacted
on an exchange or OTC.
Financial Futures Contracts: The Trusts purchase and/or sell financial futures contracts and options on financial futures
contracts to gain exposure to, or economically hedge against, changes in interest rates (interest rate risk). Financial futures contracts are agreements between the Trusts and a counterparty to buy or sell a specific quantity of an underlying
instrument at a specified price and at a specified date. Depending on the terms of the particular contract, financial futures contracts are settled either through physical delivery of the underlying instrument on the settlement date or by payment of
a cash settlement amount on the settlement date. Upon entering into a financial futures contract, the Trusts are required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on a
contracts size and risk profile. The initial margin deposit must then be maintained
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ANNUAL REPORT
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AUGUST 31, 2013
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Notes to Financial Statements (continued)
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at an established level over the life of the contract. Securities deposited as initial margin are designated on the Schedule of Investments and cash deposited is recorded on the Statement of
Assets and Liabilities as cash pledged for financial futures contracts. Pursuant to the contract, the Trusts agree to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin. Variation margin is recorded by the Trusts as unrealized appreciation or depreciation, and if applicable, as a receivable or payable for variation margin in the Statements of Assets and Liabilities. When the
contract is closed, the Trusts record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The use of financial futures contracts involves the risk of an
imperfect correlation in the movements in the price of financial futures contracts, interest and the underlying assets.
Options: The Trusts
purchase and write call and put options to increase or decrease their exposure to underlying instruments (interest rate risk) and/or, in the case of options written, to generate gains from option premiums. A call option gives the purchaser (holder)
of the option the right (but not the obligation) to buy, and obligates the seller (writer) to sell (when the option is exercised) the underlying instrument at the exercise or strike price at any time or at a specified time during the option period.
A put option gives the holder the right to sell and obligates the writer to buy the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. When the Trusts purchase (write) an option, an
amount equal to the premium paid (received) by the Trusts is reflected as an asset (liability). The amount of the asset (liability) is subsequently marked-to-market to reflect the current market value of the option purchased (written). When an
instrument is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the instrument acquired or deducted from (or added to) the proceeds of the instrument sold. When an
option expires (or the Trusts enter into a closing transaction), the Trusts realize a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premiums
received or paid). When the Trusts write a call option, such option is covered, meaning that the Trusts hold the underlying instrument subject to being called by the option counterparty. When the Trusts write a put option, such option is
covered by cash in an amount sufficient to cover the obligation.
In purchasing and writing options, the Trusts bear the risk of an unfavorable
change in the value of the underlying instrument or the risk that the Trusts may not be able to enter into a closing transaction due to an illiquid market. Exercise of a written option could result in the Trusts purchasing or selling a security when
it otherwise would not, or at a price different from the current market value.
The following is a summary of the Trusts derivative financial instruments categorized by risk exposure:
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|
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|
|
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The Effect of Derivative Financial Instruments in the Statements of Operations Year
Ended August 31, 2013
|
|
Net Realized Gain (Loss) From
|
|
BIE
|
|
|
BBK
|
|
|
BAF
|
|
|
BYM
|
|
|
BLE
|
|
|
MFL
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Financial futures contracts
|
|
$
|
198,918
|
|
|
$
|
111,541
|
|
|
$
|
496,500
|
|
|
$
|
675,270
|
|
|
$
|
408,756
|
|
|
$
|
2,076,871
|
|
Options
1
|
|
|
|
|
|
|
(57,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
198,918
|
|
|
$
|
53,678
|
|
|
$
|
496,500
|
|
|
$
|
675,270
|
|
|
$
|
408,756
|
|
|
$
|
2,076,871
|
|
|
1
|
|
Options purchased are included in the net realized gain (loss) from investments.
|
For the year ended August 31, 2013, the average quarterly balances of outstanding derivative financial instruments were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BIE
|
|
|
BBK
|
|
|
BAF
|
|
|
BYM
|
|
|
BLE
|
|
|
MFL
|
|
Financial futures contracts:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of contracts sold
|
|
|
14
|
|
|
|
11
|
|
|
|
34
|
|
|
|
84
|
|
|
|
57
|
|
|
|
141
|
|
Average notional value of contracts sold
|
|
$
|
1,744,453
|
|
|
$
|
1,469,195
|
|
|
$
|
4,361,133
|
|
|
$
|
10,981,523
|
|
|
$
|
7,300,859
|
|
|
$
|
18,219,844
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of option contracts purchased
|
|
|
|
|
|
|
366
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average notional value of option contracts purchased
|
|
|
|
|
|
$
|
47,763
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Actual contract amount shown due to limited activity.
|
Counterparty Credit Risk: A derivative contract may suffer a mark to market loss if the value of the contract decreases due to an unfavorable change in the
market rates or values of the underlying instrument. Losses can also occur if the counterparty does not perform under the contract.
With exchange
traded purchased options and futures, there is less counterparty credit risk to the Trusts since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer
and the seller of the contract; therefore, the credit risk is limited to failure of the clearinghouse. Credit risk exists in exchange traded futures with respect to initial and variation margin that is held in a clearing brokers customer
accounts. While clearing brokers are required to segregate customer margin from their own assets, in the event that a clearing broker becomes insolvent or goes into bankruptcy and at that time there is a shortfall in the aggregate amount of margin
held by the clearing broker for all its clients, typically the shortfall would be allocated on a pro rata basis across all the clearing brokers customers, potentially resulting in losses to the Trusts.
5. Investment Advisory Agreement and Other Transactions with Affiliates:
The PNC Financial Services Group, Inc. is the largest stockholder and an affiliate, for 1940 Act purposes of BlackRock, Inc. (BlackRock).
Each Trust entered into an Investment Advisory Agreement with BlackRock Advisors, LLC (the Manager), the Trusts investment advisor, an indirect, wholly owned subsidiary of BlackRock, to
provide investment advisory and
|
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ANNUAL REPORT
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AUGUST 31, 2013
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73
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Notes to Financial Statements (continued)
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administration services. The Manager is responsible for the management of each Trusts portfolio and provides the necessary personnel, facilities, equipment and certain other services
necessary to the operations of each Trust. For such services, each Trust pays the Manager a monthly fee based on a percentage of each Trusts average weekly net assets, except MFL and MVF, which are based on average daily net assets, at the
following annual rates:
|
|
|
|
|
BIE
|
|
|
0.65
|
%
|
BBK
|
|
|
0.65
|
%
|
BAF
|
|
|
0.55
|
%
|
BYM
|
|
|
0.55
|
%
|
BLE
|
|
|
0.55
|
%
|
MFL
|
|
|
0.55
|
%
|
MVF
|
|
|
0.50
|
%
|
Average weekly net assets and average daily net assets are the average weekly or the average daily value of each Trusts
total assets minus the sum of its accrued liabilities.
The Manager entered into a sub-advisory agreement with BlackRock Financial Management,
Inc. (BFM), an affiliate of the Manager, with respect to BIE, BBK, BAF, BYM and BLE, and BlackRock Investment Management, LLC (BIM), an affiliate of the Manager, with respect to MFL and MVF. The Manager pays BFM and BIM, for
services they provide, a monthly fee that is a percentage of the investment advisory fees paid by each Trust to the Manager.
The Manager
voluntarily agreed to waive a portion of the investment advisory fees or other expenses, with respect to BIE as a percentage of its average weekly net assets of 0.08%. With respect to MFL, the Manager voluntarily agreed to waive its investment
advisory fees on the proceeds of Preferred Shares and TOBs that exceed 35% of its total assets minus the sum of its accrued liabilities. For the year ended August 31, 2013, each Trust reimbursed the Manager for certain accounting services,
which is included in accounting services in the Statements of Operations. The reimbursements were as follows:
|
|
|
|
|
BIE
|
|
$
|
73,696
|
|
MFL
|
|
$
|
489,913
|
|
The Manager voluntarily agreed to waive its investment
advisory fees by the amount of investment advisory fees each Trust pays to the Manager indirectly through its investment in affiliated money market funds. However, the Manager does not waive its investment advisory fees by the amount of investment
advisory fees paid in connection with each Trusts investment in other affiliated investment companies, if any. This amount is included in fees waived by Manager in the Statements of Operations. For the year ended August 31, 2013, the
amounts waived were as follows:
|
|
|
|
|
BIE
|
|
$
|
527
|
|
BBK
|
|
$
|
1,438
|
|
BAF
|
|
$
|
902
|
|
BYM
|
|
$
|
2,274
|
|
BLE
|
|
$
|
2,627
|
|
MFL
|
|
$
|
6,545
|
|
MVF
|
|
$
|
6,990
|
|
These voluntary waivers may be reduced or discontinued at any time without notice.
Certain officers and/or Trustees of the Trusts are officers and/or directors of BlackRock or its affiliates. The Trusts reimburse the Manager for a portion
of the compensation paid to the Trusts Chief Compliance Officer, which is included in officer and trustees in the Statements of Operations.
The Trusts may purchase securities from, or sell securities to, an affiliated fund provided the affiliation is solely due to having a common investment
adviser, common officers, or common trustees. For the year ended August 31, 2013, the purchase and sale transactions with an affiliated trust in compliance with Rule 17a-7 under the 1940 Act were as follows:
|
|
|
|
|
|
|
|
|
Purchases
|
|
Sales
|
|
BIE
|
|
|
|
$
|
740,373
|
|
BBK
|
|
|
|
$
|
772,238
|
|
BAF
|
|
|
|
$
|
1,876,289
|
|
BLE
|
|
|
|
$
|
4,700,000
|
|
MFL
|
|
|
|
$
|
8,823,627
|
|
6. Purchases and Sales:
Purchases and sales of investments excluding short-term securities for the year ended August 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
Sales
|
|
BIE
|
|
$
|
28,849,395
|
|
|
$
|
31,078,619
|
|
BBK
|
|
$
|
84,286,718
|
|
|
$
|
95,607,598
|
|
BAF
|
|
$
|
96,353,584
|
|
|
$
|
97,028,259
|
|
BYM
|
|
$
|
165,755,112
|
|
|
$
|
156,201,420
|
|
BLE
|
|
$
|
113,089,837
|
|
|
$
|
101,027,992
|
|
MFL
|
|
$
|
575,205,607
|
|
|
$
|
606,086,741
|
|
MVF
|
|
$
|
122,749,493
|
|
|
$
|
170,143,514
|
|
7. Income Tax Information:
US GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These
reclassifications have no effect on net assets or net asset values per share. The following permanent differences, as of August 31, 2013, amortization and accretion methods on fixed income securities, the characterization of expenses and income
recognized from pass-through entities were reclassified to the following accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BIE
|
|
|
BBK
|
|
|
BAF
|
|
|
BYM
|
|
|
BLE
|
|
|
MFL
|
|
|
MVF
|
|
Paid-in capital
|
|
$
|
(18,564
|
)
|
|
$
|
(59,885
|
)
|
|
$
|
(48,986
|
)
|
|
$
|
(81,263
|
)
|
|
$
|
(85,106
|
)
|
|
$
|
(16,708
|
)
|
|
$
|
(130,706
|
)
|
Undistributed net investment income
|
|
$
|
17,845
|
|
|
$
|
166,156
|
|
|
$
|
47,329
|
|
|
$
|
79,636
|
|
|
$
|
84,706
|
|
|
$
|
13,529
|
|
|
$
|
124,469
|
|
Accumulated net realized gain (loss)
|
|
$
|
719
|
|
|
$
|
(106,271
|
)
|
|
$
|
1,657
|
|
|
$
|
1,627
|
|
|
$
|
400
|
|
|
$
|
3,179
|
|
|
$
|
6,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
ANNUAL REPORT
|
|
AUGUST 31, 2013
|
|
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
The tax character of distributions paid during the fiscal years ended August 31, 2013 and August 31, 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BIE
|
|
|
BBK
|
|
|
BAF
|
|
|
BYM
|
|
|
BLE
|
|
|
MFL
|
|
|
MVF
|
|
Tax-exempt income
1
|
|
|
8/31/13
|
|
|
$
|
3,137,694
|
|
|
$
|
11,043,650
|
|
|
$
|
7,701,866
|
|
|
$
|
26,255,131
|
|
|
$
|
25,589,833
|
|
|
$
|
35,043,625
|
|
|
$
|
47,946,356
|
|
|
|
|
8/31/12
|
|
|
$
|
3,303,406
|
|
|
|
11,798,953
|
|
|
|
8,145,514
|
|
|
|
25,744,362
|
|
|
|
24,994,461
|
|
|
|
35,611,547
|
|
|
|
47,212,073
|
|
Ordinary income
2
|
|
|
8/31/13
|
|
|
|
149
|
|
|
|
772,204
|
|
|
|
|
|
|
|
410
|
|
|
|
214,942
|
|
|
|
2,525
|
|
|
|
1,054
|
|
|
|
|
8/31/12
|
|
|
|
|
|
|
|
44,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,977
|
|
Long term capital gains
3
|
|
|
8/31/13
|
|
|
|
|
|
|
|
815,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8/31/13
|
|
|
$
|
3,137,843
|
|
|
$
|
12,630,922
|
|
|
$
|
7,701,866
|
|
|
$
|
26,255,541
|
|
|
$
|
25,804,775
|
|
|
$
|
35,046,150
|
|
|
$
|
47,947,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/31/12
|
|
|
$
|
3,303,406
|
|
|
$
|
11,843,572
|
|
|
$
|
8,145,514
|
|
|
$
|
25,744,362
|
|
|
$
|
24,994,461
|
|
|
$
|
35,611,547
|
|
|
|
$47,231,050
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
The Trusts designate these amounts paid during the fiscal year ended August 31, 2013, as exempt-interest dividends.
|
|
2
|
|
Ordinary income consists primarily of taxable income recognized from market discount and net short-term capital gains. Additionally, all ordinary income
distributions are comprised of interest related dividends and qualified short-term capital dividends for non-US residents and are eligible for exemption from US withholding tax for nonresident aliens and foreign corporations.
|
|
3
|
|
The Trust designates this amount paid during the fiscal year ended August 31, 2013 as a capital gain dividend.
|
As of August 31, 2013, the tax components of accumulated net earnings (losses) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BIE
|
|
|
BBK
|
|
|
BAF
|
|
|
BYM
|
|
|
BLE
|
|
|
MFL
|
|
|
MVF
|
|
Undistributed tax-exempt income
|
|
$
|
401,462
|
|
|
$
|
2,560,451
|
|
|
$
|
1,430,838
|
|
|
$
|
4,921,818
|
|
|
$
|
5,395,364
|
|
|
$
|
5,987,370
|
|
|
$
|
10,170,502
|
|
Undistributed ordinary income
|
|
|
|
|
|
|
447,312
|
|
|
|
|
|
|
|
|
|
|
|
11,560
|
|
|
|
|
|
|
|
34,089
|
|
Undistributed long-term capital gains
|
|
|
|
|
|
|
509,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital loss carryforwards
|
|
|
(868,706
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,855,746
|
)
|
|
|
(8,881,562
|
)
|
|
|
(13,598,354
|
)
|
|
|
(19,587,630
|
)
|
Net unrealized gains (losses)
4
|
|
|
1,808,008
|
|
|
|
(3,937,515
|
)
|
|
|
(2,463,309
|
)
|
|
|
(11,941,271
|
)
|
|
|
(16,797,753
|
)
|
|
|
(181,638
|
)
|
|
|
14,811,202
|
|
Qualified late-year losses
5
|
|
|
(967,674
|
)
|
|
|
|
|
|
|
(2,089,616
|
)
|
|
|
(511,102
|
)
|
|
|
|
|
|
|
(16,338,505
|
)
|
|
|
(2,477,322
|
)
|
|
|
|
|
|
Total
|
|
$
|
373,090
|
|
|
$
|
(419,899
|
)
|
|
$
|
(3,122,087
|
)
|
|
$
|
(19,386,301
|
)
|
|
$
|
(20,272,391
|
)
|
|
$
|
(24,131,127
|
)
|
|
$
|
2,950,841
|
|
|
|
|
|
|
|
4
|
|
The differences between book-basis and tax-basis net unrealized gains (losses)
were attributable primarily to the tax deferral of losses on wash sales, amortization and accretion methods of premiums and discounts on fixed income securities, the accrual of income on securities in default, the treatment of residual interests in
TOB Trusts and the deferral of compensation to Trustees.
|
|
5
|
|
The Trusts have elected to defer certain qualified late-year losses and recognize such losses in the year ending August 31, 2014.
|
As of August 31, 2013, the Trusts had capital loss carryforwards available to offset future realized capital gains through
the indicated expiration dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expires August 31,
|
|
BIE
|
|
|
BYM
|
|
|
BLE
|
|
|
MFL
|
|
|
MVF
|
|
2016
|
|
|
|
|
|
$
|
3,216,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
6,430,212
|
|
|
$
|
2,066,643
|
|
|
$
|
1,863,647
|
|
|
$
|
7,618,622
|
|
2018
|
|
$
|
150,549
|
|
|
|
2,209,430
|
|
|
|
4,366,226
|
|
|
|
11,734,707
|
|
|
|
|
|
2019
|
|
|
718,157
|
|
|
|
|
|
|
|
2,448,693
|
|
|
|
|
|
|
|
5,276,524
|
|
No expiration date
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,692,484
|
|
|
|
|
|
|
Total
|
|
$
|
868,706
|
|
|
$
|
11,855,746
|
|
|
$
|
8,881,562
|
|
|
$
|
13,598,354
|
|
|
$
|
19,587,630
|
|
|
|
|
|
|
|
6
|
|
Must be utilized prior to losses subject to expiration.
|
During the year ended August 31, 2013, the Trusts listed below utilized the following amounts of their respective capital
loss carryforward:
|
|
|
|
|
BIE
|
|
$
|
510,855
|
|
BAF
|
|
$
|
709,003
|
|
BYM
|
|
$
|
4,188,132
|
|
BLE
|
|
$
|
2,980,023
|
|
MFL
|
|
$
|
6,943,699
|
|
As of August 31, 2013, gross unrealized appreciation and gross unrealized depreciation based on cost for federal income
tax purposes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BIE
|
|
|
BBK
|
|
|
BAF
|
|
|
BYM
|
|
|
BLE
|
|
|
MFL
|
|
|
MVF
|
|
Tax cost
|
|
$
|
63,733,995
|
|
|
$
|
230,670,368
|
|
|
$
|
165,296,975
|
|
|
$
|
501,633,889
|
|
|
$
|
473,936,312
|
|
|
$
|
802,978,168
|
|
|
$
|
799,116,323
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
$
|
3,430,568
|
|
|
$
|
8,457,867
|
|
|
$
|
5,497,786
|
|
|
$
|
14,861,714
|
|
|
$
|
13,627,249
|
|
|
$
|
23,856,564
|
|
|
$
|
43,070,313
|
|
Gross unrealized depreciation
|
|
|
(1,615,929
|
)
|
|
|
(12,339,382
|
)
|
|
|
(7,943,548
|
)
|
|
|
(26,748,342
|
)
|
|
|
(30,307,874
|
)
|
|
|
(23,869,963
|
)
|
|
|
(23,761,331
|
)
|
|
|
|
|
|
Net unrealized appreciation (depreciation)
|
|
$
|
1,814,639
|
|
|
$
|
(3,881,515
|
)
|
|
$
|
(2,445,762
|
)
|
|
$
|
(11,886,628
|
)
|
|
$
|
(16,680,625
|
)
|
|
$
|
(13,399
|
)
|
|
$
|
19,308,982
|
|
|
|
|
|
|
8. Concentration, Market and Credit Risk:
Each Trust invests a substantial amount of their assets in issuers located in a single state or limited number of states. Please see the
Schedules of Investments for concentrations in specific states or US territories.
Many municipalities insure repayment of their bonds, which may
reduce the potential for loss due to credit risk. The market value of these bonds may fluctuate for other reasons, including market perception of the value of such insurance, and there is no guarantee that the insurer will meet its obligation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANNUAL REPORT
|
|
AUGUST 31, 2013
|
|
75
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
In the normal course of business, the Trusts invest in securities and enter into transactions where risks exist due to fluctuations in the market (market risk) or failure of the issuer of a security to meet
all its obligations (issuer credit risk). The value of securities held by the Trusts may decline in response to certain events, including those directly involving the issuers whose securities are owned by the Trusts; conditions affecting the general
economy; overall market changes; local, regional or global political, social or economic instability; and currency and interest rate and price fluctuations. Similar to issuer credit risk, the Trusts may be exposed to counterparty credit risk, or the
risk that an entity with which the Trusts have unsettled or open transactions may fail to or be unable to perform on its commitments. The Trusts manage counterparty credit risk by entering into transactions only with counterparties that it believes
have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Trusts to market, issuer and counterparty credit risks, consist principally of
financial instruments and receivables due from counterparties. The extent of the Trusts exposure to market, issuer and counterparty credit risks with respect to these financial assets is generally approximated by their value recorded in the
Statements of Assets and Liabilities, less any collateral held by the Trusts.
As of August 31, 2013, BIE, BAF and BYM invested a significant
portion of their assets in securities in the county/city/special district/school district sectors. BIE, BAF, BYM, BLE, MFL and MVF invested a significant portion of their assets in securities in the transportation sector. BBK and MVF invested a
significant portion of their assets in securities in the health sector. BAF, BYM and MFL invested a significant portion of their assets in securities in the utilities sector. Changes in economic conditions affecting the county/city/special
district/school district, transportation, health and utilities sectors would have a greater impact on the Trusts and could affect the value, income and/or liquidity of positions in such securities.
The Trusts may hold a significant amount of bonds subject to calls by the issuers at defined dates and prices. When bonds are called by issuers and the
Trusts reinvest the proceeds received, such investments may be in securities with lower yields than the bonds originally held, and correspondingly, could adversely impact the yield and total return performance of a trust.
9. Capital Share Transactions:
Each of BIE,
BBK, BAF, BYM and BLE is authorized to issue an unlimited number of shares, including Preferred Shares, par value $0.001 per share, all of which were initially classified as Common Shares. The Board is authorized, however, to reclassify any unissued
Common Shares to Preferred Shares, including AMPS, without approval of Common Shareholders.
MFL is authorized to issue an unlimited number of
shares, including 1 million Preferred Shares, including AMPS, par value $0.10 per share.
MVF is authorized to issue 160 million shares,
150 million of which were initially classified as Common Shares, par value $0.10 per share and 10 million of which were classified as Preferred Shares, including AMPS, par value $0.10 per share.
Common Shares
For the years shown, shares issued and
outstanding increased by the following amounts as a result of dividend reinvestment:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
August 31, 2013
|
|
|
Year
Ended
August 31, 2012
|
|
BIE
|
|
|
937
|
|
|
|
2,729
|
|
BBK
|
|
|
15,055
|
|
|
|
32,815
|
|
BAF
|
|
|
2,424
|
|
|
|
4,717
|
|
BYM
|
|
|
30,719
|
|
|
|
42,891
|
|
BLE
|
|
|
40,304
|
|
|
|
66,755
|
|
MFL
|
|
|
45,928
|
|
|
|
46,224
|
|
MVF
|
|
|
361,054
|
|
|
|
537,279
|
|
Preferred Shares
Each
Trusts Preferred Shares rank prior to the Trusts Common Shares as to the payment of dividends by the Trust and distribution of assets upon dissolution or liquidation of the Trust. The 1940 Act prohibits the declaration of any dividend on
the Trusts Common Shares or the repurchase of the Trusts Common Shares if the Trust fails to maintain the asset coverage of at least 200% of the liquidation preference of the outstanding Preferred Shares. In addition, pursuant to the
Preferred Shares governing instrument, the Trust is restricted from declaring and paying dividends on classes of shares ranking junior to or on parity with the Preferred Shares or repurchasing such shares if the Trust fails to declare and pay
dividends on the Preferred Shares, redeem any Preferred Shares required to be redeemed under the Preferred Shares governing instrument or comply with the basic maintenance amount requirement of the rating agencies then rating the Preferred Shares.
The holders of Preferred Shares have voting rights equal to the holders of Common Shares (one vote per share) and will vote together with holders
of Common Shares (one vote per share) as a single class. However, the holders of Preferred Shares, voting as a separate class, are also entitled to elect two Trustees for each Trust. In addition, the 1940 Act requires that along with approval by
shareholders that might otherwise be required, the approval of the holders of a majority of any outstanding Preferred Shares, voting separately as a class would be required to (a) adopt any plan of reorganization that would adversely affect the
Preferred Shares, (b) change a Trusts sub-classification as a closed-end investment company or change its fundamental investment restrictions or (c) change its business so as to cease to be an investment company.
VRDP Shares
BIE and MFL (collectively, the VRDP
Trusts), have issued Series W-7 VRDP Shares, $100,000 liquidation value per share, in a privately negotiated offering. The VRDP Shares were offered to qualified institutional buyers as defined pursuant to Rule 144A under the Securities Act of
1933, as amended, (the Securities Act) and include a liquidity feature, pursuant to a liquidity agreement, that allows the holders of VRDP Shares to have their shares purchased by the liquidity provider in the event of a failed
remarketing. The VRDP Trusts are required to redeem the VRDP Shares owned by the liquidity provider after six months of continuous, unsuccessful remarketing. Upon the occurrence of the first unsuccessful remarketing, the VRDP Trusts are required to
segregate liquid assets to fund the redemption. The VRDP Shares are subject to certain restrictions on transfer.
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|
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|
|
|
|
|
|
|
|
|
|
|
76
|
|
ANNUAL REPORT
|
|
AUGUST 31, 2013
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
The VRDP Shares outstanding as of the year ended August 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue
Date
|
|
|
Shares
Issued
|
|
|
Aggregate
Principal
|
|
|
Maturity
Date
|
|
BIE
|
|
|
9/15/11
|
|
|
|
178
|
|
|
$
|
17,800,000
|
|
|
|
10/01/41
|
|
MFL
|
|
|
6/30/11
|
|
|
|
2,746
|
|
|
$
|
274,600,000
|
|
|
|
7/01/41
|
|
The VRDP Trusts entered into a fee agreement with the liquidity provider that required a per annum liquidity fee payable to
the liquidity provider. These fees, if applicable, are shown as liquidity fees in the Statements of Operations.
The initial fee agreement between
BIE and the liquidity provider was for a 364 day term and was scheduled to expire on September 12, 2012 and subsequently extended until March 15, 2013, unless renewed or terminated in advance. On November 29, 2012, BIE entered into a
new fee agreement with an alternate liquidity provider. The new fee agreement is for a 2-year term and is scheduled to expire on December 4, 2014, unless renewed or terminated in advance. The change in liquidity provider resulted in a mandatory
tender of BIEs VRDP Shares on November 28, 2012, which were successfully remarketed by the remarketing agent. The fee agreement between MFL and its liquidity provider was renewed for a 364-day term and is scheduled to expire on
June 25, 2014, unless renewed or terminated in advance.
In the event the fee agreement is not renewed or is terminated in advance, and the
VRDP Trusts do not enter into a fee agreement with an alternate liquidity provider, the VRDP Shares will be subject to mandatory purchase by the liquidity provider prior to the termination of the fee agreement. The VRDP Trusts are required to redeem
any VRDP Shares purchased by the liquidity provider six months after the purchase date. Immediately after the purchase of any VRDP Shares by the liquidity provider, the VRDP Trusts are required to begin to segregate liquid assets with the VRDP
Trusts custodian to fund the redemption. There is no assurance the VRDP Trusts will replace such redeemed VRDP Shares with any other preferred shares or other form of leverage.
Each VRDP Trust is required to redeem its VRDP Shares on the maturity date, unless earlier redeemed or repurchased. Six months prior to the maturity date, each VRDP Trust is required to begin to segregate
liquid assets with the Trusts custodian to fund the redemption. In addition, VRDP Trusts are required to redeem certain of its outstanding VRDP Shares if it fails to maintain certain asset coverage, basic maintenance amount or leverage
requirements.
Subject to certain conditions, the VRDP Shares may be redeemed, in whole or in part, at any time at the option of the VRDP Trusts.
The redemption price per VRDP Share is equal to the liquidation value per share plus any outstanding unpaid dividends. In the event of an optional redemption of the VRDP Shares prior to the initial termination date of the fee agreement, the VRDP
Trusts must pay the respective liquidity provider fees on such redeemed VRDP Shares for the remaining term of the fee agreement up to the initial termination date.
Dividends on the VRDP Shares are payable monthly at a variable rate set weekly by the remarketing agent. Such dividend rates are generally based upon a spread over a base rate and cannot exceed a maximum
rate. In the event of a failed remarketing, the dividend rate of the VRDP Shares will be reset to a maximum rate. The maximum rate is determined based on, among other things, the long-term preferred share rating assigned to the VRDP Shares and the
length of time that the VRDP Shares fail to be remarketed. At the date of issuance, the VRDP Shares were assigned a long-term rating of Aaa from Moodys and AAA from Fitch. In May 2012, Moodys completed a review of its methodology for
rating securities issued by registered closed-end funds. As of August 31, 2013, the VRDP Shares were assigned a long-term rating of Aa1 from Moodys under its new ratings methodology. The VRDP Shares continue to be assigned a long-term
rating of AAA from Fitch.
The short-term ratings on the VRDP Shares are directly related to the short-term ratings of the liquidity provider for
such VRDP Shares. Changes in the credit quality of the liquidity provider could cause a change in the short-term credit ratings of the VRDP Shares as rated by Moodys, Fitch and/or S&P. A change in the short-term credit rating of the
liquidity provider or the VRDP Shares may adversely affect the dividend rate paid on such shares, although the dividend rate paid on the VRDP Shares is not directly related based upon either short-term rating. As of August 31, 2013, the
short-term ratings of the liquidity provider and the VRDP Shares for BIE were P1, F1 and A1 and for MFL were P2, F1 and A1 as rated by Moodys, Fitch and/or S&P, respectively, which is within the two highest rating categories. The liquidity
provider may be terminated prior to the scheduled termination date if the liquidity provider fails to maintain short-term debt ratings in one of the two highest rating categories.
For financial reporting purposes, the VRDP Shares are considered debt of the issuer; therefore, the liquidation value, which approximates fair value, of the VRDP Shares is recorded as a liability in the
Statements of Assets and Liabilities. Unpaid dividends are included in interest expense and fees payable in the Statements of Assets and Liabilities, and the dividends accrued and paid on the VRDP Shares are included as a component of interest
expense, fees and amortization of offering costs in the Statements of Operations. The VRDP Shares are treated as equity for tax purposes. Dividends paid to holders of the VRDP Shares are generally classified as tax-exempt income for tax-reporting
purposes.
The VRDP Trusts may incur remarketing fees of 0.10% on the aggregate principal amount of all the VRDP Shares, which, if any, are
included in remarketing fees on Preferred Shares in the Statements of Operations. All of BIEs and MFLs VRDP Shares that were tendered for remarketing during the year ended August 31, 2013 were successfully remarketed.
The annualized dividend rates for the VRDP Shares for the year ended August 31, 2013 were as follows:
VRDP Shares issued and outstanding remained constant for the year ended August 31, 2013 for BIE and MFL.
VMTP Shares
BBK, BAF, BYM, BLE and MVF (collectively,
the VMTP Trusts), have issued Series W-7 VMTP Shares, $100,000 liquidation value per share, in
|
|
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|
|
|
|
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|
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|
|
ANNUAL REPORT
|
|
AUGUST 31, 2013
|
|
77
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
a privately negotiated offering and sale of VMTP Shares exempt from registration under the Securities Act.
The VMTP Shares outstanding as of the year ended August 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue
Date
|
|
|
Shares
Issued
|
|
|
Aggregate
Principal
|
|
|
Term
Date
|
|
BBK
|
|
|
12/16/11
|
|
|
|
799
|
|
|
$
|
79,900,000
|
|
|
|
1/02/15
|
|
BAF
|
|
|
12/16/11
|
|
|
|
422
|
|
|
$
|
42,200,000
|
|
|
|
1/02/15
|
|
BYM
|
|
|
12/16/11
|
|
|
|
1,372
|
|
|
$
|
137,200,000
|
|
|
|
1/02/15
|
|
BLE
|
|
|
12/16/11
|
|
|
|
1,513
|
|
|
$
|
151,300,000
|
|
|
|
1/02/15
|
|
MVF
|
|
|
12/16/11
|
|
|
|
2,438
|
|
|
$
|
243,800,000
|
|
|
|
1/02/15
|
|
Each VMTP Trust is required to redeem its VMTP Shares on the term date, unless earlier redeemed or repurchased or unless
extended. There is no assurance that the term of a Trusts VMTP Shares will be extended or that a Trusts VMTP Shares will be replaced with any other preferred shares or other form of leverage upon the redemption or repurchase of the VMTP
Shares. Six months prior to term date, each VMTP Trust is required to begin to segregate liquid assets with the Trusts custodian to fund the redemption. In addition, each VMTP Trust is required to redeem certain of its outstanding VMTP Shares
if it fails to maintain certain asset coverage, basic maintenance amount or leverage requirements.
Subject to certain conditions, a Trusts
VMTP Shares may be redeemed, in whole or in part, at any time at the option of the Trust. The redemption price per VMTP Share is equal to the liquidation value per share plus any outstanding unpaid dividends and applicable redemption premium. If the
Trust redeem the VMTP Shares on a date that is one year or more prior to the term date and the VMTP Shares are rated above A1/A+ by Moodys and Fitch, respectively, then such redemption is subject to a prescribed redemption premium (up to 3% of
the liquidation preference) payable to the holder of the VMTP Shares based on the time remaining to the term date, subject to certain exceptions for redemptions that are required to maintain minimum asset coverage requirements. The VMTP Shares are
subject to certain restrictions on transfer, and a Trust may also be required to register the VMTP Shares for sale under the Securities Act under certain circumstances. In addition, amendments to the VMTP governing document generally require the
consent of the holders of VMTP Shares.
Dividends on the VMTP Shares are declared daily and payable monthly at a variable rate set weekly at a
fixed rate spread to the Securities Industry and Financial Markets Association Municipal Swap Index (SIFMA). The fixed spread is determined based on the long-term preferred share rating assigned to the VMTP Shares by Moodys and Fitch. At the
date of issuance, the VMTP Shares were assigned long-term ratings of Aaa from Moodys and AAA from Fitch. In May 2012, Moodys completed a review of its methodology for rating securities issued by registered closed-end funds. As of
August 31, 2013, the VMTP Shares were assigned a long-term rating of Aa1 from Moodys under its new rating methodology. The VMTP Shares continue to be assigned a long-term rating of AAA from Fitch. The dividend rate on the VMTP Shares is
subject to a step-up spread if the Trust fails to comply with certain provisions, including, among other things, the timely payment of dividends, redemptions or gross-up payments, and maintaining certain asset coverage and leverage requirements.
The average annualized dividend rates for the VMTP Shares for the year ended August 31, 2013 were as follows:
|
|
|
|
|
BBK
|
|
|
1.13
|
%
|
BAF
|
|
|
1.13
|
%
|
BYM
|
|
|
1.13
|
%
|
BLE
|
|
|
1.13
|
%
|
MVF
|
|
|
1.13
|
%
|
For financial reporting purposes, the VMTP Shares are considered debt of the issuer; therefore the liquidation value, which
approximates fair value, of the VMTP Shares is recorded as a liability in the Statements of Assets and Liabilities. Unpaid dividends are included in interest expense and fees payable in the Statements of Assets and Liabilities, and the dividends
accrued and paid on the VMTP Shares are included as a component of interest expense, fees and amortization of offering costs in the Statements of Operations. The VMTP Shares are treated as equity for tax purposes. Dividends paid to holders of the
VMTP Shares are generally classified as tax-exempt income for tax-reporting purposes.
VMTP Shares issued and outstanding remained constant for
the year ended August 31, 2013.
Offering Costs: The Trusts incurred costs in connection with the issuance of VRDP Shares or VMTP Shares. For
VRDP Shares, these costs were recorded as a deferred charge and will be amortized over the 30-year life of the VRDP Shares with the exception of upfront fees paid to the liquidity provider which were amortized over the life of the liquidity
agreement. For VMTP Shares, these costs were recorded as a deferred charge and will be amortized over the 3-year life of the VMTP Shares. Amortization of these costs is included in interest expense, fees and amortization of offering costs in the
Statement of Operations.
AMPS
The AMPS
were redeemable at the option of each Trust, in whole or in part, on any dividend payment date at their liquidation preference per share plus any accumulated and unpaid dividends whether or not declared. The AMPS were also subject to mandatory
redemption at their liquidation preference plus any accumulated and unpaid dividends, whether or not declared, if certain requirements relating to the composition of the assets and liabilities of a Trust, as set forth in each Trusts Articles
Supplementary /Statement of Preferences and/or Certificate of Designation (the Governing Instrument) were not satisfied.
From
February 13, 2008 to the redemption date listed below, the AMPS of the Trusts failed to clear any of their auctions. A failed auction was not an event of default for the Trusts, but it had negative impact on the liquidity of AMPS. A failed
auction occurs when there are more sellers of a Trusts AMPS than buyers.
As of August 31, 2013, the Trusts did not have any AMPS
outstanding.
During the year ended August 31, 2012, BIE, BBK, BAF, BYM, BLE and MVF announced the following redemptions of AMPS at a price
of $25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
ANNUAL REPORT
|
|
AUGUST 31, 2013
|
|
|
|
|
|
Notes to Financial Statements (concluded)
|
|
|
per share plus any accrued and unpaid dividends through the redemption date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Redemption
Date
|
|
|
Shares
Redeemed
|
|
|
Aggregate
Principal
|
|
BIE
|
|
W-7
|
|
|
10/06/11
|
|
|
|
714
|
|
|
$
|
17,850,000
|
|
BBK
|
|
T-7
|
|
|
1/11/12
|
|
|
|
1,598
|
|
|
$
|
39,950,000
|
|
|
|
R-7
|
|
|
1/13/12
|
|
|
|
1,598
|
|
|
$
|
39,950,000
|
|
BAF
|
|
M-7
|
|
|
1/10/12
|
|
|
|
1,691
|
|
|
$
|
42,275,000
|
|
BYM
|
|
M-7
|
|
|
1/10/12
|
|
|
|
1,830
|
|
|
$
|
45,750,000
|
|
|
|
F-7
|
|
|
1/13/12
|
|
|
|
1,830
|
|
|
$
|
45,750,000
|
|
|
|
R-7
|
|
|
1/09/12
|
|
|
|
1,830
|
|
|
$
|
45,750,000
|
|
BLE
|
|
M-7
|
|
|
1/10/12
|
|
|
|
1,513
|
|
|
$
|
37,825,000
|
|
|
|
T-7
|
|
|
1/11/12
|
|
|
|
1,513
|
|
|
$
|
37,825,000
|
|
|
|
R-7
|
|
|
1/13/12
|
|
|
|
1,513
|
|
|
$
|
37,825,000
|
|
|
|
F-7
|
|
|
1/12/12
|
|
|
|
1,513
|
|
|
$
|
37,825,000
|
|
MVF
|
|
A
|
|
|
1/09/12
|
|
|
|
1,460
|
|
|
$
|
36,500,000
|
|
|
|
B
|
|
|
1/17/12
|
|
|
|
1,460
|
|
|
$
|
36,500,000
|
|
|
|
C
|
|
|
1/23/12
|
|
|
|
1,460
|
|
|
$
|
36,500,000
|
|
|
|
D
|
|
|
1/03/12
|
|
|
|
1,460
|
|
|
$
|
36,500,000
|
|
|
|
E
|
|
|
1/03/12
|
|
|
|
2,190
|
|
|
$
|
54,750,000
|
|
|
|
F
|
|
|
1/11/12
|
|
|
|
1,723
|
|
|
$
|
43,075,000
|
|
BIE financed the AMPS redemptions with the proceeds received from the issuance of VRDP Shares of $17,800,000.
BBK, BAF, BYM, BLE, and MVF financed the AMPS redemptions with proceeds received from the issuance of VMTP Shares as follows:
|
|
|
|
|
BBK
|
|
$
|
79,900,000
|
|
BAF
|
|
$
|
42,200,000
|
|
BYM
|
|
$
|
137,200,000
|
|
BLE
|
|
$
|
151,300,000
|
|
MVF
|
|
$
|
243,800,000
|
|
10. Subsequent Events:
Managements evaluation of the impact of all subsequent events on the Trusts financial statements was completed through the date the financial statements were issued and the following items were
noted:
Each Trust paid a net investment income dividend in the following amounts per share on October 1, 2013 to Common Shareholders of
record on September 16, 2013:
|
|
|
|
|
|
|
Common
Dividend
Per Share
|
|
BIE
|
|
$
|
0.0760
|
|
BBK
|
|
$
|
0.0785
|
|
BAF
|
|
$
|
0.0685
|
|
BYM
|
|
$
|
0.0780
|
|
BLE
|
|
$
|
0.0850
|
|
MFL
|
|
$
|
0.0715
|
|
MVF
|
|
$
|
0.0590
|
|
Additionally, the Trusts declared a net investment income dividend on October 1, 2013 payable to Common Shareholders of
record on October 16, 2013 for the same amounts noted above.
The dividends declared on VRDP Shares or VMTP Shares for the period
September 1, 2013 to September 30, 2013 for the Trusts were as follows:
|
|
|
|
|
|
|
|
|
Series
|
|
Dividends
Declared
|
|
BIE
|
|
W-7
|
|
$
|
2,395
|
|
BBK
|
|
W-7
|
|
$
|
69,721
|
|
BAF
|
|
W-7
|
|
$
|
36,824
|
|
BYM
|
|
W-7
|
|
$
|
119,721
|
|
BLE
|
|
W-7
|
|
$
|
132,025
|
|
MFL
|
|
W-7
|
|
$
|
58,832
|
|
MVF
|
|
W-7
|
|
$
|
212,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANNUAL REPORT
|
|
AUGUST 31, 2013
|
|
79
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
To the Shareholders and Board of Trustees of
BlackRock Municipal Bond Investment Trust,
BlackRock Municipal Bond Trust,
BlackRock
Municipal Income Investment Quality Trust,
BlackRock Municipal Income Quality Trust,
BlackRock Municipal Income Trust II, and
BlackRock MuniHoldings Investment Quality Fund,
and to the Shareholders and Board of Directors of
BlackRock MuniVest Fund, Inc.:
We have audited the accompanying statements of assets and
liabilities, including the schedules of investments, of BlackRock Municipal Bond Investment Trust, BlackRock Municipal Bond Trust, BlackRock Municipal Income Investment Quality Trust, BlackRock Municipal Income Quality Trust, BlackRock Municipal
Income Trust II, BlackRock MuniHoldings Investment Quality Fund, and BlackRock MuniVest Fund, Inc. (collectively, the Trusts), as of August 31, 2013, and the related statements of operations and cash flows for the year then ended, the
statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of
the Trusts management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements and financial highlights are free of material misstatement. The Trusts are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trusts internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of August 31, 2013, by correspondence with the custodians and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material
respects, the financial positions of BlackRock Municipal Bond Investment Trust, BlackRock Municipal Bond Trust, BlackRock Municipal Income Investment Quality Trust, BlackRock Municipal Income Quality Trust, BlackRock Municipal Income Trust II,
BlackRock MuniHoldings Investment Quality Fund, and BlackRock MuniVest Fund, Inc. as of August 31, 2013, the results of their operations and cash flows for the year then ended, the changes in their net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
October 25, 2013
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Disclosure of Investment Advisory Agreements and
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The Board of Directors or Trustees, as applicable (each, a Board, collectively, the Boards, and the members of which are referred to as Board Members) of BlackRock
Municipal Bond Investment Trust (BIE), BlackRock Municipal Bond Trust (BBK), BlackRock Municipal Income Investment Quality Trust (BAF), BlackRock Municipal Income Quality Trust (BYM), BlackRock
Municipal Income Trust II (BLE), BlackRock MuniHoldings Investment Quality Fund (MFL) and BlackRock MuniVest Fund, Inc. (MVF and together with BIE, BBK, BAF, BYM, BLE and MFL, each a Fund, and,
collectively, the Funds) met in person on April 18, 2013 (the April Meeting) and June 4-5, 2013 (the June Meeting) to consider the approval of each Funds investment advisory agreement (each, an
Advisory Agreement) with BlackRock Advisors, LLC (the Manager), each Funds investment advisor. The Board of each Fund also considered the approval of the sub-advisory agreement (each, a Sub-Advisory
Agreement) among the Manager, BlackRock Financial Management, Inc. or BlackRock Investment Management, LLC, as applicable (the Sub-Advisor), and its Fund. The Manager and the Sub-Advisor are referred to herein as
BlackRock. The Advisory Agreements and the Sub-Advisory Agreements are referred to herein as the Agreements.
Activities and Composition of the Board
Each
Board consists of eleven individuals, nine of whom are not interested persons of such Fund as defined in the Investment Company Act of 1940 (the 1940 Act) (the Independent Board Members). The Board Members are
responsible for the oversight of the operations of the Funds and perform the various duties imposed on the directors of investment companies by the 1940 Act. The Independent Board Members have retained independent legal counsel to assist them in
connection with their duties. The Chairman of each Board is an Independent Board Member. Each Board has established six standing committees: an Audit Committee, a Governance and Nominating Committee, a Compliance Committee, a Performance Oversight
Committee, an Executive Committee, and a Leverage Committee, each of which is chaired by an Independent Board Member and composed of Independent Board Members (except for the Executive Committee and the Leverage Committee, each of which also has one
interested Board Member).
The Agreements
Pursuant to the 1940 Act, the Boards are required to consider the continuation of the Agreements on an annual basis. The Boards have four quarterly meetings per year, each extending over two days, and a
fifth one-day meeting to consider specific information surrounding the consideration of renewing the Agreements. In connection with this process, the Boards assessed, among other things, the nature, scope and quality of the services provided to the
Funds by BlackRock, its personnel and its affiliates, including investment management, administrative and shareholder services, oversight of fund accounting and custody, marketing services, risk oversight, compliance and assistance in meeting
applicable legal and regulatory requirements.
The Boards, acting directly and through their respective committees, considered at each of their
meetings, and from time to time as appropriate, factors that are relevant to their annual consideration of the renewal of the Agreements, including the services and support provided by BlackRock to the Funds and their shareholders. Among the matters
the Boards considered were: (a) investment performance for one-year, three-year, five-year and/or since inception periods, as applicable, against peer funds, and applicable benchmarks, if any, as well as senior managements and portfolio
managers analysis of the reasons for any over-performance or underperformance against their peers and/or benchmark, as applicable; (b) fees, including advisory, administration, if applicable, and other amounts paid to BlackRock and its
affiliates by the Funds for services such as call center and fund accounting; (c) Fund operating expenses and how BlackRock allocates expenses to the Funds; (d) the resources devoted to, risk oversight of, and compliance reports relating
to, implementation of the Funds investment objectives, policies and restrictions; (e) the Funds compliance with their Code of Ethics and other compliance policies and procedures; (f) the nature, cost and character of
non-investment management services provided by BlackRock and its affiliates; (g) BlackRocks and other service providers internal controls and risk and compliance oversight mechanisms; (h) BlackRocks implementation of the
proxy voting policies approved by the Boards; (i) execution quality of portfolio transactions; (j) BlackRocks implementation of the Funds valuation and liquidity procedures; (k) an analysis of management fees for products
with similar investment objectives across the open-end fund, closed-end fund and institutional account product channels, as applicable; (l) BlackRocks compensation methodology for its investment professionals and the incentives it
creates; and (m) periodic updates on BlackRocks business.
The Boards have engaged in an ongoing strategic review with BlackRock of
opportunities to consolidate funds and of BlackRocks commitment to investment performance. In addition, the Boards requested and BlackRock provided an analysis of fair valuation and stale pricing policies. BlackRock also furnished information
to the Boards in response to specific questions. These questions covered issues such as BlackRocks profitability, investment performance and management fee levels. The Boards further considered the importance of: (i) organizational and
structural variables to investment performance; (ii) rates of portfolio turnover; (iii) BlackRocks performance accountability for portfolio managers; (iv) marketing support for the funds; (v) services provided to the Funds
by BlackRock affiliates; and (vi) BlackRocks oversight of relationships with third party service providers.
The Board of each Fund
considered BlackRocks efforts during the past year with regard to refinancing outstanding AMPS, as well as ongoing time and resources devoted to other forms of preferred shares and alternative leverage. As of the date of this report, the Funds
have redeemed 100% of their outstanding AMPS.
Board Considerations in Approving the Agreements
The Approval Process: Prior to the April Meeting, the Boards requested and received materials specifically relating to the Agreements. The Boards are
engaged in a process with its independent legal counsel and BlackRock to review the nature and scope of the information provided to better assist their deliberations. The materials provided in connection with the April Meeting included
(a) information independently compiled and prepared by Lipper, Inc. (Lipper) on Fund fees and expenses as compared with a peer group of funds as determined by Lipper (Expense Peers) and the investment performance of the
Funds as compared with a
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peer group of funds as determined by Lipper
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and a customized peer group selected by BlackRock; (b) information on the profits realized by BlackRock and its affiliates pursuant to the Agreements and a discussion of fall-out benefits to BlackRock
and its affiliates; (c) a general analysis provided by BlackRock concerning investment management fees charged to other clients, such as institutional clients and open-end funds, under similar investment mandates, as applicable; (d) review
of non-management fees; (e) the existence, impact and sharing of potential economies of scale; (f) a summary of aggregate amounts paid by each Fund to BlackRock and (g) if applicable, a comparison of management fees to similar
BlackRock closed-end funds, as classified by Lipper.
At the April Meeting, the Boards reviewed materials relating to their consideration of the
Agreements. As a result of the discussions that occurred during the April Meeting, and as a culmination of the Boards year-long deliberative process, the Boards presented BlackRock with questions and requests for additional information.
BlackRock responded to these requests with additional written information in advance of the June Meeting.
At the June Meeting, each Board,
including the Independent Board Members, unanimously approved the continuation of the Advisory Agreement between the Manager and its Fund, and the Sub-Advisory Agreement among the Manager, the Sub-Advisor, and its Fund, each for a one-year term
ending June 30, 2014. In approving the continuation of the Agreements, the Boards considered: (a) the nature, extent and quality of the services provided by BlackRock; (b) the investment performance of the Funds and BlackRock;
(c) the advisory fee and the cost of the services and profits to be realized by BlackRock and its affiliates from their relationship with the Funds; (d) the Funds costs to investors compared to the costs of Expense Peers and
performance compared to the relevant performance comparison as previously discussed; (e) economies of scale; (f) fall-out benefits to BlackRock as a result of its relationship with the Funds; and (g) other factors deemed relevant by
the Board Members.
The Boards also considered other matters they deemed important to the approval process, such as payments made to BlackRock or
its affiliates relating to securities lending, services related to the valuation and pricing of Fund portfolio holdings, direct and indirect benefits to BlackRock and its affiliates from their relationship with the Funds and advice from independent
legal counsel with respect to the review process and materials submitted for the Boards review. The Boards noted the willingness of BlackRock personnel to engage in open, candid discussions with the Boards. The Boards did not identify any
particular information as determinative, and each Board Member may have attributed different weights to the various items considered.
A. Nature,
Extent and Quality of the Services Provided by BlackRock: The Boards, including the Independent Board Members, reviewed the nature, extent and quality of services provided by BlackRock, including the investment advisory services and the resulting
performance of the Funds. Throughout the year, the Boards compared Fund performance to the performance of a comparable group of closed-end funds and/or the performance of a relevant benchmark, if any. The Boards met with
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Lipper ranks funds in quartiles, ranging from first to fourth, where first is the most desirable quartile position and fourth is the least desirable.
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BlackRocks senior management personnel responsible for investment operations, including the senior investment officers. Each Board also reviewed the materials provided by its Funds
portfolio management team discussing the Funds performance and the Funds investment objective, strategies and outlook.
The Boards
considered, among other factors, with respect to BlackRock: the number, education and experience of investment personnel generally and their Funds portfolio management teams; investments by portfolio managers in the funds they manage;
portfolio trading capabilities; use of technology; commitment to compliance; credit analysis capabilities; risk analysis and oversight capabilities; and the approach to training and retaining portfolio managers and other research, advisory and
management personnel. The Boards engaged in a review of BlackRocks compensation structure with respect to their Funds portfolio management teams and BlackRocks ability to attract and retain high-quality talent and create
performance incentives.
In addition to advisory services, the Boards considered the quality of the administrative and other non-investment
advisory services provided to the Funds. BlackRock and its affiliates provide the Funds with certain services (in addition to any such services provided to the Funds by third parties) and officers and other personnel as are necessary for the
operations of the Funds. In particular, BlackRock and its affiliates provide the Funds with the following administrative services including, among others: (i) preparing disclosure documents, such as the prospectus, the summary prospectus (as
applicable) and the statement of additional information in connection with the initial public offering and periodic shareholder reports; (ii) preparing communications with analysts to support secondary market trading of the Funds;
(iii) assisting with daily accounting and pricing; (iv) preparing periodic filings with regulators and stock exchanges; (v) overseeing and coordinating the activities of other service providers; (vi) organizing Board meetings and
preparing the materials for such Board meetings; (vii) providing legal and compliance support; (viii) furnishing analytical and other support to assist the Boards in their consideration of strategic issues such as the merger or
consolidation of certain closed-end funds; and (ix) performing other administrative functions necessary for the operation of the Funds, such as tax reporting, fulfilling regulatory filing requirements and call center services. The Boards
reviewed the structure and duties of BlackRocks fund administration, shareholder services, legal and compliance departments and considered BlackRocks policies and procedures for assuring compliance with applicable laws and regulations.
B. The Investment Performance of the Funds and BlackRock: Each Board, including the Independent Board Members, also reviewed and considered the
performance history of its Funds. In preparation for the April Meeting, the Boards worked with its independent legal counsel, BlackRock and Lipper to develop a template for, and were provided with reports independently prepared by Lipper, which
included a comprehensive analysis of each Funds performance. The Boards also reviewed a narrative and statistical analysis of the Lipper data that was prepared by BlackRock, which analyzed various factors that affect Lippers rankings. In
connection with their review, each Board received and reviewed information regarding the investment performance, based on net asset value (NAV), of its Fund as compared to other funds in its applicable
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Lipper category and a customized peer group selected by BlackRock. The Boards were provided with a description of the methodology used by Lipper to select peer funds and periodically meets with
Lipper representatives to review their methodology. Each Board and its Performance Oversight Committee regularly review, and meet with Fund management to discuss, the performance of its Fund throughout the year.
The Board of each of BBK, BLE and MVF noted that its respective Fund ranked in the first quartile against its Customized Lipper Peer Group Composite for each
of the one-, three- and five-year periods reported.
The Board of each of BYM and MFL noted that its respective Fund ranked in the first, second
and first quartiles against its Customized Lipper Peer Group Composite for the one-, three- and five-year periods reported, respectively.
The
Board of BIE noted that BIE ranked in the third quartile against its Customized Lipper Peer Group Composite for each of the one-, three- and five-year periods reported.
The Board of BAF noted that BAF ranked in the third, third and second quartiles against its Customized Lipper Peer Group Composite for the
one-,
three- and five-year
periods reported, respectively.
BlackRock believes that the Customized Lipper Peer Group Composite is an appropriate performance metric for each
Fund in that it measures a blend of total return and yield.
The Board of each of BIE and BAF and BlackRock reviewed and discussed the reasons for
its respective Funds underperformance during the periods in which the Fund underperformed compared to its Customized Lipper Peer Group Composite. The Board of each of BIE and BAF was informed that, among other things, underperformance is
attributed to the Funds below market distribution yield for the periods in which BIE and BAF underperformed. The continued challenge going forward for BIE and BAF is seeking ways to increase their yield component. One disadvantage each Fund
has versus its Customized Lipper Peer Group Composite is that its investment policies do not allow it to purchase securities that are subject to the alternative minimum tax (AMT), which provides peer funds with additional yield.
The Boards of BIE and BAF and BlackRock also discussed BlackRocks strategy for improving the performance of BIE and BAF and
BlackRocks commitment to providing the resources necessary to assist the Funds portfolio managers and to improve the Funds performance.
The Boards noted that BlackRock has recently made, and continues to make, changes to the organization of BlackRocks overall portfolio management structure designed to result in strengthened leadership
teams.
C. Consideration of the Advisory/Management Fees and the Cost of the Services and Profits to be Realized by BlackRock and its Affiliates
from their Relationship with the Funds: Each Board, including the Independent Board Members, reviewed its Funds contractual management fee rate compared with the other funds in its Lipper category. The contractual management fee rate
represents a combination of the advisory fee and any administrative fees, before taking into account any reimbursements or fee waivers. Each Board also compared its Funds total net operating expense ratio, as well as actual management fee
rate, to those of other funds in its Lipper category. The total net operating expense ratio and actual management fee rate both give effect to any expense reimbursements or fee waivers that benefit the funds. The Boards considered the services
provided and the fees charged by BlackRock to other types of clients with similar investment mandates, including institutional accounts.
The
Boards received and reviewed statements relating to BlackRocks financial condition. The Boards were also provided with a profitability analysis that detailed the revenues earned and the expenses incurred by BlackRock for services provided to
the Funds. The Boards reviewed BlackRocks profitability with respect to the Funds and other funds the Boards currently oversee for the year ended December 31, 2012 compared to available aggregate profitability data provided for the prior
two years. The Boards reviewed BlackRocks profitability with respect to certain other fund complexes managed by the Manager and/or its affiliates. The Boards reviewed BlackRocks assumptions and methodology of allocating expenses in the
profitability analysis, noting the inherent limitations in allocating costs among various advisory products. The Boards recognized that profitability may be affected by numerous factors including, among other things, fee waivers and expense
reimbursements by the Manager, the types of funds managed, precision of expense allocations and business mix. As a result, comparing profitability is difficult.
The Boards noted that, in general, individual fund or product line profitability of other advisors is not publicly available. The Boards reviewed BlackRocks overall operating margin, in general,
compared to that of certain other publicly-traded asset management firms. The Boards considered the differences between BlackRock and these other firms, including the contribution of technology at BlackRock, BlackRocks expense management, and
the relative product mix.
In addition, the Boards considered the cost of the services provided to the Funds by BlackRock, and BlackRocks
and its affiliates profits relating to the management of the Funds and the other funds advised by BlackRock and its affiliates. As part of its analysis, the Boards reviewed BlackRocks methodology in allocating its costs to the management
of the Funds. The Boards also considered whether BlackRock has the financial resources necessary to attract and retain high quality investment management personnel to perform its obligations under the Agreements and to continue to provide the high
quality of services that is expected by the Boards.
The Board of BIE noted that BIEs contractual management fee rate ranked in the third
quartile relative to BIEs Expense Peers. The Board of BIE determined that BIEs contractual management fee rate was reasonable relative to the median contractual management fee rate paid by BIEs Expense Peers. After discussions
between the Board, including the Independent Board Members, and BlackRock, the Board of BIE and BlackRock agreed to a continuation of the voluntary advisory fee reduction, which results in savings to shareholders, implemented on June 1, 2012.
The Board of BBK noted that BBKs contractual management fee rate ranked in the second quartile relative to BBKs Expense Peers.
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The Board of each of BAF, BYM, BLE, MFL and
MVF noted that its respective Funds contractual management fee rate ranked in the first quartile relative to the Funds Expense Peers.
D. Economies of Scale: Each Board, including the Independent Board Members, considered the extent to which economies of scale might be realized as the assets
of its Fund increase. Each Board also considered the extent to which its Fund benefits from such economies and whether there should be changes in the advisory fee rate or breakpoint structure in order to enable the Fund to participate in these
economies of scale, for example through the use of breakpoints in the advisory fee based upon the asset level of the Fund.
Based on the
Boards review and consideration of the issue, the Boards concluded that most closed-end funds do not have fund level breakpoints because closed-end funds generally do not experience substantial growth after the initial public offering. They
are typically priced at scale at a funds inception. The Boards noted that only one closed-end fund in the Fund Complex has breakpoints in its advisory fee structure.
E. Other Factors Deemed Relevant by the Board Members: The Boards, including the Independent Board Members, also took into account other ancillary or fall-out benefits that BlackRock or its
affiliates may derive from their respective relationships with the Funds, both tangible and intangible, such as BlackRocks ability to leverage its investment professionals who manage other portfolios and risk management personnel, an increase
in BlackRocks profile in the investment advisory community, and the engagement of BlackRocks affiliates as service providers to the Funds, including securities lending and cash management services. The Boards also considered
BlackRocks overall operations and its efforts to expand the scale of, and improve the quality of, its operations. The Boards also noted that BlackRock may use and benefit from third party research obtained by soft dollars generated by certain
registered fund transactions to assist in managing all or a number of its other client accounts. The Boards further noted that they had considered the investment by BlackRocks funds in exchange traded funds (i.e., ETFs) without any offset
against the management fees payable by the funds to BlackRock.
In connection with its consideration of the Agreements, the Boards also
received information regarding BlackRocks brokerage and soft dollar practices. The Boards received reports from BlackRock which included information on brokerage commissions and trade execution practices throughout the year.
The Boards noted the competitive nature of the closed-end fund marketplace, and that shareholders are able to sell their Fund shares in the secondary market
if they believe that the Funds fees and expenses are too high or if they are dissatisfied with the performance of the Fund.
The Boards also
considered the various notable initiatives and projects BlackRock performed in connection with its closed-end fund product line. These initiatives included completion of the refinancing of auction rate preferred securities; efforts to eliminate
product overlap with fund mergers; ongoing services to manage leverage that has become increasingly complex; share repurchases and other support initiatives for certain BlackRock funds; and continued communications efforts with shareholders, fund
analysts and financial advisers. With respect to the latter, the Independent Board Members noted BlackRocks continued commitment to supporting the secondary market for the common shares of its closed-end funds through a comprehensive secondary
market communication program designed to raise investor and analyst awareness and understanding of closed-end funds. BlackRocks support services included, among other things: continuing communications concerning the refinancing efforts related
to auction rate preferred securities; sponsoring and participating in conferences; communicating with closed-end fund analysts covering the BlackRock funds throughout the year; providing marketing and product updates for the closed-end funds; and
maintaining and enhancing its closed-end fund website.
Conclusion
Each Board, including the Independent Board Members, unanimously approved the continuation of the Advisory Agreement between the Manager and its Fund for a one-year term ending June 30, 2014, and the
Sub-Advisory Agreement among the Manager, the Sub-Advisor, and its Fund for a one-year term ending June 30, 2014. Based upon its evaluation of all of the aforementioned factors in their totality, the Boards, including the Independent Board
Members, were satisfied that the terms of the Agreements were fair and reasonable and in the best interest of the Funds and their shareholders. In arriving at their decision to approve the Agreements, the Boards did not identify any single factor or
group of factors as all-important or controlling, but considered all factors together, and different Board Members may have attributed different weights to the various factors considered. The Independent Board Members were also assisted by the
advice of independent legal counsel in making these determinations. The contractual fee arrangements for the Funds reflect the results of several years of review by the Board Members and predecessor Board Members, and discussions between such Board
Members (and predecessor Board Members) and BlackRock. As a result, the Board Members conclusions may be based in part on their consideration of these arrangements in prior years.
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Automatic Dividend Reinvestment Plans
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Pursuant to each Trusts Dividend Reinvestment Plan (the Reinvestment
Plan), Common Shareholders are automatically enrolled to have all distributions of dividends and capital gains reinvested by Computershare Trust Company, N.A. (the Reinvestment Plan Agent) in the respective Trusts shares
pursuant to the Reinvestment Plan. Shareholders who do not participate in the Reinvestment Plan will receive all distributions in cash paid by check and mailed directly to the shareholders of record (or if the shares are held in street name or other
nominee name, then to the nominee) by the Reinvestment Plan Agent, which serves as agent for the shareholders in administering the Reinvestment Plan.
After the Trusts declare a dividend or determine to make a capital gain distribution, the Reinvestment Plan Agents will acquire shares for the participants accounts, depending upon the following
circumstances, either (i) through receipt of unissued but authorized shares from the Trust (newly issued shares) or (ii) by purchase of outstanding shares on the open market or on the Trusts primary exchange
(open-market purchases). If, on the dividend payment date, the net asset value per share (NAV) is equal to or less than the market price per share plus estimated brokerage commissions (such condition often referred to as a
market premium), the Reinvestment Plan Agent will invest the dividend amount in newly issued shares acquired on behalf of the participants. The number of newly issued shares to be credited to each participants account will be
determined by dividing the dollar amount of the dividend by the NAV on the date the shares are issued. However, if the NAV is less than 95% of the market price on the dividend payment date, the dollar amount of the dividend will be divided by 95% of
the market price on the dividend payment date. If, on the dividend payment date, the NAV is greater than the market price per share plus estimated brokerage commissions (such condition often referred to as a market discount), the
Reinvestment Plan Agent will invest the dividend amount in shares acquired on behalf of the participants in open-market purchases. If the Reinvestment Plan Agent is unable to invest the full dividend amount in open-market purchases, or if the market
discount shifts to a market premium during the purchase period, the Reinvestment Plan Agent will invest any
un-invested
portion in newly issued shares. Investments in newly issued shares made in this manner
would be made pursuant to the same process described above and the date of issue for such newly issued shares will substitute for the dividend payment date.
Participation in the Reinvestment Plan is completely voluntary and may be terminated or resumed at any time without penalty by notice if received and processed by the Reinvestment Plan Agent prior to the
dividend record date. Additionally, the Reinvestment Plan Agent seeks to process notices received after the record date but prior to the payable date and such notices often will become effective by the payable date. Where late notices are not
processed by the applicable payable date, such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution.
The Reinvestment Plan Agents fees for the handling of the reinvestment of dividends and distributions will be paid by each Trust. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Reinvestment Plan Agents open-market purchases in connection with the reinvestment of dividends and distributions. The automatic reinvestment of dividends and distributions will not relieve participants
of any federal income tax that may be payable on such dividends or distributions.
Each Trust reserves the right to amend or terminate the
Reinvestment Plan. There is no direct service charge to participants in the Reinvestment Plan. However, each Trust reserves the right to amend the Reinvestment Plan to include a service charge payable by the participants. Participants in BIE, BBK,
BAF, BYM and BLE that request a sale of shares are subject to a $2.50 sales fee and a $0.15 per share fee. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay. Participants in MFL and MVF that
request a sale of shares are subject to a $0.02 per share sold brokerage commission. All correspondence concerning the Reinvestment Plan should be directed to Computershare Trust Company, N.A., through the internet at
http://www.computershare.com/blackrock, or in writing to Computershare, P.O. Box 43078, Providence, RI 02940-3078, Telephone:
(800) 699-1236.
Overnight correspondence should be directed to the
Reinvestment Plan Agent at 250 Royall Street, Canton, MA 02021.
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