Fitch Rates Preferred Shares of BlackRock Muni Closed-End Fund
KEY RATING DRIVERS
The 'AAA' long-term ratings of the VRDP Shares primarily reflect:
--Sufficient asset coverage provided to the VRDP Shares as calculated per the Trust's over-collateralization (OC) tests;
--The structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the Trust's operations;
--The capabilities of BlackRock as investment advisor.
SPECIAL RATE PERIOD
The Trust has declared a Special Rate Period which commences today and will be in effect until Oct. 24, 2018. During this time, Bank of America, N.A. (BOA, 'A+/F1', Outlook Stable) will be the liquidity provider but the VRDP Shares will not be subject to optional or mandatory tender events and will not be remarketed by a remarketing agent pursuant to such events. Therefore no short-term rating is assigned because it would not be considered analytically meaningful during the Special Rate Period.
At the conclusion of the Special Rate Period on Oct. 24, 2018, holder(s) of VRDP Shares and the Trust may mutually elect to extend it. However, if the Special Rate Period is not extended, the VRDP Shares will revert to remarketable securities available for purchase by qualified third party investors. At that point, the VRDP Shares are expected to benefit from an unconditional and irrevocable purchase obligation by a liquidity provider upon optional or mandatory tender events, similar to other Fitch-rated VRDP Shares issued by BlackRock closed-end funds.
If the Special Rate Period is not extended, Fitch would expect to assign a short-term rating to the VRDP Shares based on the rating of the liquidity provider, which currently is BOA. However, any designated liquidity provider or its rating may be subject to change in the future, which could result in a change to Fitch's short-term rating on the VRDP Shares.
The Trust is a perpetual closed-end municipal bond fund, registered under the Investment Company Act of 1940, whose investment objective is to provide current income exempt from regular federal income tax. Under normal market conditions, the Trust invests at least 80% of its total assets in municipal bonds, municipal securities and derivative instruments with exposure to such bonds and securities expected to pay interest or income that is exempt from regular federal income tax.
Substantially all of the municipal bonds owned by the Trust are presently rated below investment grade; however, because the Trust has economic exposure to additional municipal bonds through its ownership of residual interest tender option bonds (TOBs), at least 50% of the Trust's economic exposure to investment securities is to municipal bonds rated investment-grade quality. The Trust had managed assets of $251 million on Oct. 21, 2015. Post issuance, managed assets are expected to grow moderately because a portion of the VRDP proceeds will fund additional asset purchases.
The effective leverage ratio for the Trust as of Sept. 30, 2015 was 34%. During the period from Oct.1, 2014 through Sept. 30, 2015, the effective leverage ranged from 33% to 34%. During this period the Trust was leveraged exclusively with TOBs.
The proceeds of the VRDP Shares will be used to pay down TOBs and purchase additional managed assets. Subsequent to the VRDP Share issuance Fitch expects the effective leverage ratio to increase to the 38%-40% range, which is near the higher end of the range that is typical for a BlackRock municipal closed-end fund.
As of today's issuance, the Trust's asset coverage ratio for the VRDP Shares, as calculated in accordance with the 'AAA' guidelines for Fitch total and net OC tests (OC Tests) outlined in Fitch's criteria was in excess of 100%. This is the minimum threshold required under the terms of the VRDP Shares.
Also as of today's issuance, the Trust's asset coverage ratios for the above noted VRDP Shares, as calculated in accordance with the Investment Company Act of 1940, were in excess of the minimum asset coverage threshold of 225% currently set by the terms of the VRDP Shares.
The Trust's governing documents also require the Trust to maintain an Effective Leverage Ratio (the calculation of which includes both preferred shares and floating-rate certificates of TOBs) below 45% (or 46% if the increase in the ratio is due exclusively to asset market value volatility).
In the event of a breach of any of the above thresholds, the Trust is required to restore compliance per structural protections required by the documents governing the VRDP Shares and described below.
Compliance with the asset coverage tests listed above is tested periodically as required by the documents governing the VRDP Shares. The Trust's investment advisor is expected to cure any breach by altering the composition of the portfolio toward assets with lower discount factors (for OC Test breaches), or by reducing leverage in a sufficient amount (for all other breaches) within a pre-specified time period.
For the OC Tests the total market value exposure (i.e. valuation, cure and redemption) is within Fitch's 60 business day guideline. For the asset coverage test, the exposure period slightly exceeds Fitch's guideline; however, Fitch does not deem this significant due to the presence of OC Tests which are aligned with Fitch CEF ratings criteria.
In the case of an Effective Leverage Ratio breach for VRDP Shares during a Special Rate Period, the liquidity provider has the option to institute actions to require the Trust to remedy the breach pursuant to a covenant with the liquidity provider.
An Effective Leverage Ratio breach for remarketable VRDP Shares would be a breach of the fee agreement with the liquidity provider.
THE TRUST ADVISOR
BlackRock Advisors, LLC, a subsidiary of BlackRock, Inc., is the advisor to the Trust, responsible for the Trust's overall investment strategies and their implementation. BlackRock, Inc. and its affiliates had approximately $4.7 trillion of assets under management as of June 30, 2015.
The ratings assigned to the VRDP Shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the Trust, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
For additional information about Fitch's rating guidelines applicable to debt and preferred stock issued by closed-end funds, please review the criteria referenced below, which can be found on Fitch's web site at 'www.fitchratings.com'.