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Notes to Financial Statements
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1. Organization:
BlackRock Maryland Municipal Bond Trust (BZM), BlackRock New Jersey
Municipal Bond Trust (BLJ), BlackRock New York Municipal Bond Trust (BQH), BlackRock New York Municipal Income Quality Trust (BSE), BlackRock Virginia Municipal Bond Trust (BHV) (collectively the
Bond Trusts), BlackRock Massachusetts Tax-Exempt Trust (MHE), BlackRock MuniHoldings New York Quality Fund, Inc. (MHN) and BlackRock New York Municipal Income Trust II (BFY) (all, collectively the
Trusts) are registered under the 1940 Act, as non-diversified, closed-end management investment companies. The Trusts are organized as Delaware statutory trusts except MHN and MHE, which are organized as a Maryland corporation and a
Massachusetts business trust, respectively. 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 directors/trustees
thereof are collectively referred to throughout this report as the Trustees. The Trusts determine and make available for publication the NAVs of their Common Shares on a daily basis.
Effective August 13, 2013, The Massachusetts Health & Education Tax-Exempt Trust changed its name to BlackRock Massachusetts Tax-Exempt Trust.
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 reported period. Actual results could differ from those estimates. The following is a summary of 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.
Exchange-traded options are valued at the mean between the last bid and ask prices at the close of the options market in which the options trade. An exchange-traded option for which there is no mean price is
valued at the last bid (long positions) or ask (short positions) price. If no bid or ask price is available, the prior days price will be used, unless it is determined that the prior days price no longer reflects the fair value of the
option. Over-the-counter (OTC) options are valued by an independent pricing service using a mathematical model, which incorporates a number of market data factors, such as the trades and prices of the underlying instruments.
In the event that application of these methods of valuation results in a price for an investment, which 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 contracts), the Trusts will, consistent with SEC rules and/or certain
interpretive letters issued by the SEC, segregate collateral or designate on their books and records cash or liquid securities having a market value
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Notes to Financial Statements (continued)
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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, 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, if any, 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 returns 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, 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 approximately 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 Statements 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
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Notes to Financial Statements (continued)
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(TOB Trust Certificates), which are sold to third party investors, and residual certificates (TOB Residuals), which are generally issued to the participating funds
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 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 in 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
in additional municipal bonds. Each Trusts transfer of the municipal bonds to a TOB Trusts 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 Statements 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 the 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 Schedules of
Investments including the maximum potential amounts owed by the Trusts at August 31, 2013.
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 Statements of Operations. The TOB Trust Certificates have interest rates that generally reset weekly and their holders have the option to tender 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
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|
BZM
|
|
$
|
3,003,630
|
|
|
$
|
1,500,000
|
|
|
|
0.10%
|
|
MHE
|
|
$
|
3,121,113
|
|
|
$
|
1,839,595
|
|
|
|
0.07%
|
|
MHN
|
|
$
|
121,720,012
|
|
|
$
|
64,657,827
|
|
|
|
0.06% - 0.61%
|
|
BLJ
|
|
$
|
7,619,170
|
|
|
$
|
4,519,518
|
|
|
|
0.06% - 0.31%
|
|
BQH
|
|
$
|
7,356,584
|
|
|
$
|
4,775,195
|
|
|
|
0.06% - 0.16%
|
|
BSE
|
|
$
|
28,017,607
|
|
|
$
|
17,054,036
|
|
|
|
0.06% - 0.16%
|
|
BFY
|
|
$
|
8,320,003
|
|
|
$
|
5,197,515
|
|
|
|
0.06% - 0.11%
|
|
BHV
|
|
$
|
5,117,402
|
|
|
$
|
3,018,910
|
|
|
|
0.06% - 0.07%
|
|
For the year ended August 31, 2013, the Trusts average TOB trust certificates outstanding and the daily weighted
average interest rates, including fees, were as follows:
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|
|
|
|
|
|
|
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|
Average TOB Trust
Certificates
Outstanding
|
|
|
Daily Weighted
Average
Interest Rates
|
|
BZM
|
|
$
|
2,341,378
|
|
|
|
0.65
|
%
|
MHE
|
|
$
|
1,997,953
|
|
|
|
0.69
|
%
|
MHN
|
|
$
|
77,210,567
|
|
|
|
0.83
|
%
|
BLJ
|
|
$
|
5,221,641
|
|
|
|
0.79
|
%
|
BQH
|
|
$
|
7,452,979
|
|
|
|
0.70
|
%
|
BSE
|
|
$
|
22,093,440
|
|
|
|
0.69
|
%
|
BFY
|
|
$
|
8,575,968
|
|
|
|
0.81
|
%
|
BHV
|
|
$
|
4,053,864
|
|
|
|
0.68
|
%
|
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 values of municipal bonds deposited into the TOB 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.
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ANNUAL REPORT
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AUGUST 31, 2013
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75
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Notes to Financial Statements (continued)
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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
at an established level over the life of the contract. Securities deposited as initial margin are designated on the Schedules of Investments and cash deposited is recorded on the Statements 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 rates 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 options premiums. A call option gives the purchaser (holder) of the option the right (but not the obligation) to
buy, and obligates the seller (writer) to sell (when the option is exercised) the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. A put option gives the holder the right to sell and
obligates the writer to buy the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. When the 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.
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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
|
|
MHE
|
|
|
MHN
|
|
|
BLJ
|
|
|
BQH
|
|
|
BSE
|
|
|
BFY
|
|
Interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial futures contracts
|
|
$
|
122,171
|
|
|
$
|
307,055
|
|
|
$
|
133,140
|
|
|
$
|
31,516
|
|
|
$
|
63,032
|
|
|
$
|
52,527
|
|
Options
1
|
|
|
|
|
|
|
(158,275
|
)
|
|
|
|
|
|
|
(15,181
|
)
|
|
|
(32,881
|
)
|
|
|
(26,247
|
)
|
|
|
|
|
|
Totals
|
|
$
|
122,171
|
|
|
$
|
148,780
|
|
|
$
|
133,140
|
|
|
$
|
16,335
|
|
|
$
|
30,151
|
|
|
$
|
26,280
|
|
|
|
|
|
|
1
Options purchased are included in the
net realized gain (loss) from investments.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended August 31, 2013, the average
quarterly balances of outstanding derivative financial instruments were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MHE
|
|
|
MHN
|
|
|
BLJ
|
|
|
BQH
|
|
|
BSE
|
|
|
BFY
|
|
Financial futures contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of contracts sold
|
|
|
8
|
|
|
|
30
|
|
|
|
9
|
|
|
|
3
|
|
|
|
6
|
|
|
|
5
|
|
Average notional value of contracts sold
|
|
$
|
1,066,055
|
|
|
$
|
4,030,391
|
|
|
$
|
1,162,969
|
|
|
$
|
409,500
|
|
|
$
|
819,000
|
|
|
$
|
682,500
|
|
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of option contracts
purchased
2
|
|
|
|
|
|
|
1,001
|
|
|
|
|
|
|
|
96
|
|
|
|
208
|
|
|
|
166
|
|
Average notional value of option contracts purchased
2
|
|
|
|
|
|
$
|
130,631
|
|
|
|
|
|
|
$
|
12,528
|
|
|
$
|
27,144
|
|
|
$
|
21,663
|
|
|
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.
A
Trusts risk of loss from counterparty credit risk on OTC derivatives is generally limited to the aggregate unrealized gain netted against any collateral held by such Trust. For OTC options purchased, each Trust bears the risk of loss of the
amount of the premiums paid plus the positive change in market values net of any collateral held by such Trust should the counterparty fail to perform under the contracts. Options written by the Trusts do not typically give rise to counterparty
credit risk, as options written generally obligate the Trusts, and not the counterparty, to perform.
With exchange traded purchased options and
futures, there is less counterparty credit risk to the Trusts since the exchange or clearinghouse, as
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
ANNUAL REPORT
|
|
AUGUST 31, 2013
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and 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 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 each Trusts average
weekly net assets except for MHE and MHN, which are based on average daily net assets, at the following annual rates:
|
|
|
|
|
BZM
|
|
|
0.65%
|
|
MHE
|
|
|
0.50%
|
|
MHN
|
|
|
0.55%
|
|
BLJ
|
|
|
0.65%
|
|
BQH
|
|
|
0.65%
|
|
BSE
|
|
|
0.55%
|
|
BFY
|
|
|
0.55%
|
|
BHV
|
|
|
0.65%
|
|
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.
Effective June 6, 2013, the Manager voluntarily agreed to waive a portion of the
investment advisory fees with respect to BZM, at the annual rate as a percentage of the average weekly net assets of 0.05%. For the year ended August 31, 2013, the Manager waived $5,628, which is included in fees waived by Manager in the
Statements of Operations.
With respect to MHN, the Manager voluntarily agreed to waive its investment advisory fee on the proceeds of the
Preferred Shares and TOBs that exceed 35% of total assets minus the sum of its accrued liabilities. For the year ended August 31, 2013, the Manager waived $365,636, which is included in fees waived by Manager in the Statements of Operations.
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. These amounts are included in fees waived by Manager in the Statements of Operations. For the year ended August 31, 2013, the amounts waived were as follows:
|
|
|
|
|
BZM
|
|
$
|
376
|
|
MHE
|
|
$
|
2
|
|
MHN
|
|
$
|
12,428
|
|
BLJ
|
|
$
|
873
|
|
BQH
|
|
$
|
843
|
|
BSE
|
|
$
|
2,298
|
|
BFY
|
|
$
|
2,097
|
|
BHV
|
|
$
|
131
|
|
These voluntary waivers may be reduced or discontinued at any time without notice.
The Manager entered into sub-advisory agreements with the BlackRock Investment Management LLC (BIM) for MHN and MHE and BlackRock Financial
Management, Inc. (BFM) for all other Trusts. BIM and BFM are affiliates of the Manager. The Manager pays BIM and BFM for services they provide, a monthly fee that is a percentage of the investment advisory fees paid by each Trust to the
Manager.
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 due solely to having a common investment adviser, common officers, or common trustees. For the
year ended August 31, 2013, the purchase and sale transactions from an affiliated fund in compliance with Rule 17a-7 of the 1940 Act were as follows:
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
Sales
|
|
MHE
|
|
$
|
2,150,005
|
|
|
$
|
1,220,041
|
|
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
|
|
BZM
|
|
$
|
5,186,611
|
|
|
$
|
6,304,029
|
|
MHE
|
|
$
|
5,461,513
|
|
|
$
|
7,119,341
|
|
MHN
|
|
$
|
137,740,263
|
|
|
$
|
138,454,428
|
|
BLJ
|
|
$
|
5,921,671
|
|
|
$
|
5,013,987
|
|
BQH
|
|
$
|
13,438,389
|
|
|
$
|
15,044,727
|
|
BSE
|
|
$
|
38,640,469
|
|
|
$
|
42,639,978
|
|
BFY
|
|
$
|
39,079,592
|
|
|
$
|
41,824,464
|
|
BHV
|
|
$
|
3,434,950
|
|
|
$
|
4,787,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANNUAL REPORT
|
|
AUGUST 31, 2013
|
|
77
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
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 attributable to
amortization methods on fixed income securities, non-deductible expenses, the reclassification of distributions, the expiration of capital loss carryforwards and distributions received from a regulated investment company were reclassified to the
following accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BZM
|
|
|
MHE
|
|
|
MHN
|
|
|
BLJ
|
|
|
BQH
|
|
|
BSE
|
|
|
BFY
|
|
|
BHV
|
|
Paid in capital
|
|
|
$
|
(4,135
|
)
|
|
$
|
(4,472
|
)
|
|
$
|
(15,069,272
|
)
|
|
$
|
(4,094
|
)
|
|
$
|
(19,250
|
)
|
|
$
|
(21,834
|
)
|
|
$
|
(22,590
|
)
|
|
$
|
(2,901
|
)
|
Undistributed net investment income
|
|
|
$
|
3,748
|
|
|
$
|
4,330
|
|
|
$
|
(709,292
|
)
|
|
$
|
3,490
|
|
|
$
|
36,029
|
|
|
$
|
(53,883
|
)
|
|
$
|
21,073
|
|
|
$
|
2,120
|
|
Accumulated net realized loss
|
|
|
$
|
387
|
|
|
$
|
142
|
|
|
$
|
15,778,564
|
|
|
$
|
604
|
|
|
$
|
(16,779
|
)
|
|
$
|
75,717
|
|
|
$
|
1,517
|
|
|
$
|
781
|
|
The tax character of distributions paid during the fiscal
years ended August 31, 2013 and August 31, 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
BZM
|
|
|
MHE
|
|
|
MHN
|
|
|
BLJ
|
|
|
BQH
|
|
|
BSE
|
|
|
BFY
|
|
|
BHV
|
|
Tax-exempt income
1
|
|
|
8/31/13
|
|
|
$
|
1,752,510
|
|
|
$
|
1,969,715
|
|
|
$
|
29,455,195
|
|
|
$
|
2,246,594
|
|
|
$
|
2,357,279
|
|
|
$
|
5,526,330
|
|
|
$
|
4,527,591
|
|
|
$
|
1,559,733
|
|
|
|
|
8/31/12
|
|
|
|
2,006,675
|
|
|
|
2,041,164
|
|
|
|
30,398,681
|
|
|
|
2,244,465
|
|
|
|
2,750,782
|
|
|
|
5,708,613
|
|
|
|
5,098,689
|
|
|
|
1,616,224
|
|
Ordinary income
2
|
|
|
8/31/13
|
|
|
|
|
|
|
|
149
|
|
|
|
19,211
|
|
|
|
1,164
|
|
|
|
326,379
|
|
|
|
5,421
|
|
|
|
5,366
|
|
|
|
11,332
|
|
|
|
|
8/31/12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term capital gains
3
|
|
|
8/31/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8/31/13
|
|
|
$
|
1,752,510
|
|
|
$
|
1,969,864
|
|
|
$
|
29,474,406
|
|
|
$
|
2,247,758
|
|
|
$
|
3,006,537
|
|
|
$
|
5,531,751
|
|
|
$
|
4,532,957
|
|
|
$
|
1,571,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/31/12
|
|
|
$
|
2,006,675
|
|
|
$
|
2,041,164
|
|
|
$
|
30,398,681
|
|
|
$
|
2,247,473
|
|
|
$
|
2,750,782
|
|
|
$
|
5,708,613
|
|
|
$
|
5,098,689
|
|
|
$
|
1,616,224
|
|
|
|
|
|
|
|
|
|
|
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 losses were as follows:
|
|
|
|
|
BZM
|
|
|
MHE
|
|
|
MHN
|
|
|
BLJ
|
|
|
BQH
|
|
|
BSE
|
|
|
BFY
|
|
|
BHV
|
|
Undistributed tax-exempt income
|
|
|
$
|
292,142
|
|
|
$
|
526,710
|
|
|
$
|
4,521,770
|
|
|
$
|
515,004
|
|
|
$
|
550,775
|
|
|
$
|
729,409
|
|
|
$
|
1,056,368
|
|
|
$
|
230,287
|
|
Undistributed ordinary income
|
|
|
|
|
|
|
|
|
|
|
|
81,372
|
|
|
|
1,152
|
|
|
|
|
|
|
|
2,750
|
|
|
|
|
|
|
|
|
|
Capital loss carryforwards
|
|
|
|
(40,297
|
)
|
|
|
(873,183
|
)
|
|
|
(19,370,538
|
)
|
|
|
(82,546
|
)
|
|
|
|
|
|
|
(3,909,262
|
)
|
|
|
(1,259,671
|
)
|
|
|
(594,069
|
)
|
Net unrealized gains
(losses)
4
|
|
|
|
(1,934,410
|
)
|
|
|
(417,095
|
)
|
|
|
(20,038,757
|
)
|
|
|
(559,578
|
)
|
|
|
(2,423,409
|
)
|
|
|
(4,170,660
|
)
|
|
|
(3,155,558
|
)
|
|
|
199,162
|
|
Qualified late-year losses
5
|
|
|
|
(75,529
|
)
|
|
|
|
|
|
|
(2,139,612
|
)
|
|
|
|
|
|
|
(571,744
|
)
|
|
|
(830,725
|
)
|
|
|
(719,209
|
)
|
|
|
(198,968
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
(1,758,094
|
)
|
|
$
|
(763,568
|
)
|
|
$
|
(36,945,765
|
)
|
|
$
|
(125,968
|
)
|
|
$
|
(2,444,378
|
)
|
|
$
|
(8,178,488
|
)
|
|
$
|
(4,078,070
|
)
|
|
$
|
(363,588
|
)
|
|
|
|
|
|
|
4
The difference between
book-basis and tax-basis net unrealized gains (losses) was attributable primarily to the tax deferral of losses on wash sales and straddles, amortization and accretion methods of premiums and discounts on fixed income securities, the accrual of
income on securities in default, the timing and recognition of partnership income, 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,
|
|
|
BZM
|
|
|
MHE
|
|
|
MHN
|
|
|
BLJ
|
|
|
BSE
|
|
|
BFY
|
|
|
BHV
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
$
|
1,097,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
$
|
35,869
|
|
|
|
2,782,666
|
|
|
|
|
|
|
|
|
|
|
$
|
9,638
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
285,683
|
|
|
|
710,089
|
|
|
|
|
|
|
|
|
|
|
|
383,137
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
375,230
|
|
|
|
4,069,997
|
|
|
|
|
|
|
$
|
1,583,452
|
|
|
|
254,346
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
32,672
|
|
|
|
3,861,956
|
|
|
|
|
|
|
|
1,544,362
|
|
|
|
357,549
|
|
|
|
|
|
2019
|
|
|
$
|
40,297
|
|
|
|
74
|
|
|
|
673,531
|
|
|
|
|
|
|
|
|
|
|
|
255,001
|
|
|
$
|
51,866
|
|
No expiration date
6
|
|
|
|
|
|
|
|
143,655
|
|
|
|
6,174,556
|
|
|
$
|
82,546
|
|
|
|
781,448
|
|
|
|
|
|
|
|
542,203
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
40,297
|
|
|
$
|
873,183
|
|
|
$
|
19,370,538
|
|
|
$
|
82,546
|
|
|
$
|
3,909,262
|
|
|
$
|
1,259,671
|
|
|
$
|
594,069
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
BZM
|
|
$
|
134,028
|
|
MHE
|
|
$
|
130,973
|
|
BLJ
|
|
$
|
78,645
|
|
BSE
|
|
$
|
175,234
|
|
BFY
|
|
$
|
181,523
|
|
BHV
|
|
$
|
4,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
ANNUAL REPORT
|
|
AUGUST 31, 2013
|
|
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
As of August 31, 2013, gross unrealized appreciation and gross unrealized depreciation based on cost for federal income tax purposes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BZM
|
|
|
MHE
|
|
|
MHN
|
|
|
BLJ
|
|
|
BQH
|
|
|
BSE
|
|
|
BFY
|
|
|
BHV
|
|
Tax cost
|
|
$
|
45,106,797
|
|
|
$
|
47,900,814
|
|
|
$
|
679,864,327
|
|
|
$
|
52,233,178
|
|
|
$
|
62,733,439
|
|
|
$
|
130,436,659
|
|
|
$
|
115,459,205
|
|
|
$
|
33,232,795
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
$
|
459,723
|
|
|
$
|
882,876
|
|
|
$
|
12,121,159
|
|
|
$
|
1,509,645
|
|
|
$
|
1,483,596
|
|
|
$
|
2,174,955
|
|
|
$
|
2,567,873
|
|
|
$
|
1,221,156
|
|
Gross unrealized depreciation
|
|
|
(2,383,959
|
)
|
|
|
(1,299,966
|
)
|
|
|
(31,875,505
|
)
|
|
|
(2,059,768
|
)
|
|
|
(3,897,205
|
)
|
|
|
(6,338,227
|
)
|
|
|
(5,712,222
|
)
|
|
|
(1,015,409
|
)
|
|
|
|
|
|
Net unrealized appreciation/ (depreciation)
|
|
$
|
(1,924,236
|
)
|
|
$
|
(417,090
|
)
|
|
$
|
(19,754,346
|
)
|
|
$
|
(550,123
|
)
|
|
$
|
(2,413,609
|
)
|
|
$
|
(4,163,272
|
)
|
|
$
|
(3,144,349
|
)
|
|
$
|
205,747
|
|
|
|
|
|
|
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.
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 they believe 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, MHE invested a significant portion of its assets in securities in the education and health sectors. MHN invested a significant portion of its assets in securities in the
county/city/special district/school district and transportation sectors, BLJ invested a significant portion of its assets in securities in the state and transportation sectors, BQH invested a significant portion of its assets in securities in the
county/city/special district/school district and education sectors, BSE invested a significant portion of its assets in securities in the county/city/special district/school district and education sectors, BFY invested a significant portion of its
assets in securities in the county/city/special district/school district sector, BHV invested a significant portion of its assets in securities in the health sectors. Changes in economic conditions affecting the county/city/special district/school
district, education, health, state and transportation 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 Trust, except for MHN, is authorized to issue an unlimited
number of shares (200 million shares for MHN), all of which were initially classified as Common Shares. The par value for each Trusts Common Shares and Preferred Shares, except for MHE and MHN, is $0.001 per share ($0.01 for MHE and $0.10 for
MHN). The Board is authorized, however, to reclassify any unissued Common Shares to Preferred Shares, including AMPs, without approval of Common Shareholders.
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
|
|
BZM
|
|
|
2,555
|
|
|
|
4,792
|
|
MHE
|
|
|
3,680
|
|
|
|
5,309
|
|
MHN
|
|
|
98,145
|
|
|
|
117,478
|
|
BLJ
|
|
|
2,232
|
|
|
|
3,421
|
|
BQH
|
|
|
8,420
|
|
|
|
10,545
|
|
BSE
|
|
|
15,168
|
|
|
|
19,103
|
|
BFY
|
|
|
13,314
|
|
|
|
18,300
|
|
BHV
|
|
|
4,872
|
|
|
|
5,351
|
|
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 Trusts are 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 Trusts fail 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANNUAL REPORT
|
|
AUGUST 31, 2013
|
|
79
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
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 Directors for each Trust. In addition, the 1940 Act requires that along with the 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 the 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
The 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 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 Trusts are required to segregate liquid assets to fund the redemption. The VRDP Shares are subject to certain restrictions on
transfer.
The VRDP Shares outstanding as of the year ended August 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue
Date
|
|
|
Shares
Issued
|
|
|
Aggregate
Principal
|
|
|
Maturity
Date
|
|
BZM
|
|
|
6/14/12
|
|
|
|
160
|
|
|
$
|
16,000,000
|
|
|
|
7/01/42
|
|
MHE
|
|
|
6/14/12
|
|
|
|
185
|
|
|
$
|
18,500,000
|
|
|
|
7/01/42
|
|
MHN
|
|
|
6/30/11
|
|
|
|
2,436
|
|
|
$
|
243,600,000
|
|
|
|
7/01/41
|
|
BLJ
|
|
|
6/14/12
|
|
|
|
187
|
|
|
$
|
18,700,000
|
|
|
|
7/01/42
|
|
BQH
|
|
|
9/15/11
|
|
|
|
221
|
|
|
$
|
22,100,000
|
|
|
|
10/01/41
|
|
BSE
|
|
|
9/15/11
|
|
|
|
405
|
|
|
$
|
40,500,000
|
|
|
|
10/01/41
|
|
BFY
|
|
|
9/15/11
|
|
|
|
444
|
|
|
$
|
44,400,000
|
|
|
|
10/01/41
|
|
BHV
|
|
|
6/14/12
|
|
|
|
116
|
|
|
$
|
11,600,000
|
|
|
|
7/01/42
|
|
The 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
BQH, BSE and BFY and the liquidity provider was for a 364 day term and was scheduled to expire on September 15, 2012 and subsequently extended until March 15, 2013. On November 29, 2012, BQH, BSE and BFY 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 BQH, BSE and BFYs VRDP Shares on November 28, 2012 which were successfully remarketed by the remarketing agent. The fee agreement between MHN 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. The fee agreement between BZM, MHE, BLJ and BHV and their liquidity provider is for an approximately 3 year term and is scheduled to expire on July 9, 2015 unless renewed or
terminated in advance.
In the event the fee agreements are not renewed or is terminated in advance, and the 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 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 Trusts are required to begin to segregate liquid assets with the Trusts custodian to fund the redemption.
There is no assurance the Trusts will replace such redeemed VRDP Shares with any other preferred shares or other form of leverage.
Each 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 Trust is required to begin to segregate liquid assets with the Trusts custodian to fund the
redemption. In addition, 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 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 VRDP Shares prior to the initial termination date of the fee agreement, the 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 of MHN, BQH, BSE
and BFY were assigned a long-term rating of Aaa from Moodys. The VRDP Shares of BZM, MHE, BLJ and BHV were assigned an initial long-term rating of Aa2 by Moodys under the new methodology. 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 Aa2 for BZM, MHN, BLJ, BQH, BSE, BFY and BHV and Aa3 for MHE from Moodys under its new
rating 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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
ANNUAL REPORT
|
|
AUGUST 31, 2013
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
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 BQH, BSE and BFY were P1, F1 and A1 and for MHN were P2, F1 and A1 as rated by Moodys, Fitch and 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. The short-term ratings on the VRDP Shares of BZM, MHE, BLJ and BHV were withdrawn by
Moodys, Fitch and S&P at the commencement of the special rate periods, as described below.
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 Trusts that are not in a special rate period 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.
The annualized dividend rates for the VRDP Shares for the year ended August 31, 2013 were as
follows:
|
|
|
|
|
|
|
Rate
|
|
BZM
|
|
|
1.08%
|
|
MHE
|
|
|
1.08%
|
|
MHN
|
|
|
0.33%
|
|
BLJ
|
|
|
1.08%
|
|
BQH
|
|
|
0.27%
|
|
BSE
|
|
|
0.24%
|
|
BFY
|
|
|
0.24%
|
|
BHV
|
|
|
1.08%
|
|
Upon issuance of the VRDP Shares on June 14, 2012, BZM, MHE, BLJ and BHV announced a special rate period for an
approximate three-year term ending June 24, 2015 with respect to VRDP Shares. The liquidity and fee agreements remain in effect for the duration of the special rate period; however, the VRDP Shares will not be remarketed or subject to optional
or mandatory tender events during such time. During the special rate period, BZM, MHE, BLJ and BHV are required to maintain the same asset coverage, basic maintenance amount and leverage requirements for the VRDP Shares. During the three-year term
of the special rate period, BZM, MHE, BLJ and BHV will not pay any liquidity and remarketing fees and instead will pay dividends monthly based on the sum of Securities Industry and Financial Markets Association Municipal Swap Index and a percentage
per annum based on the long-term ratings assigned to VRDP Shares.
If BZM, MHE, BLJ or BHV redeems the VRDP Shares on a date that is one year or
more before the end of the special rate period and the VRDP Shares are rated above A1/A by Moodys and Fitch respectively, then such redemption is subject to certain exceptions for redemptions that are required to maintain minimum asset
coverage requirements. After June 24, 2015 the holder of the VRDP Shares and BZM, MHE, BLJ and BHV may mutually agree to extend the special rate period. If the rate period is not extended, the VRDP Shares will revert back to remarketable
securities and will be remarketed and available for purchase by qualified institutional investors. No short-term ratings were assigned by Moodys, Fitch and/or S&P at issuance but will be assigned upon termination of the special rate period
when the VRDP Shares revert to remarketable securities.
VRDP Shares issued and outstanding remained constant for the year ended August 31,
2013.
Offering Costs: The Trusts incurred costs in connection with their issuance of VRDP Shares were recorded as a deferred charge and will be
amortized over 30-year life of the VRDP Shares with the exception of upfront fees paid to the liquidity provider which are amortized over the life of the liquidity agreement. Amortization of these costs is included in interest expense fees and
amortization of offering costs in the Statements 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 dates 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, BZM, MHE, BLJ, BQH, BSE, BFY and
BHV announced the following redemptions of AMPS at a price of $25,000 ($50,000 for MHE) per share plus any accrued and unpaid dividends through the redemption date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
|
Redemption
Date
|
|
|
Shares
Redeemed
|
|
|
Aggregate
Principal
|
|
BZM
|
|
|
R-7
|
|
|
|
7/06/12
|
|
|
|
640
|
|
|
$
|
16,000,000
|
|
MHE
|
|
|
A-7
|
|
|
|
6/21/12
|
|
|
|
185
|
|
|
$
|
9,250,000
|
|
|
|
|
B-7
|
|
|
|
6/20/12
|
|
|
|
185
|
|
|
$
|
9,250,000
|
|
BLJ
|
|
|
M-7
|
|
|
|
7/10/12
|
|
|
|
751
|
|
|
$
|
18,775,000
|
|
BQH
|
|
|
T-7
|
|
|
|
10/12/11
|
|
|
|
885
|
|
|
$
|
22,125,000
|
|
BSE
|
|
|
R-7
|
|
|
|
10/07/11
|
|
|
|
1,623
|
|
|
$
|
40,575,000
|
|
BFY
|
|
|
W-7
|
|
|
|
10/06/11
|
|
|
|
1,779
|
|
|
$
|
44,475,000
|
|
BHV
|
|
|
R-7
|
|
|
|
7/06/12
|
|
|
|
467
|
|
|
$
|
11,675,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ANNUAL REPORT
|
|
AUGUST 31, 2013
|
|
81
|
|
|
|
Notes to Financial Statements (concluded)
|
|
|
The Trusts financed the AMPS redemptions with proceeds received from the issuance of VRDP Shares as follows:
|
|
|
|
|
BZM
|
|
$
|
16,000,000
|
|
MHE
|
|
$
|
18,500,000
|
|
BLJ
|
|
$
|
18,700,000
|
|
BQH
|
|
$
|
22,100,000
|
|
BSE
|
|
$
|
40,500,000
|
|
BFY
|
|
$
|
44,400,000
|
|
BHV
|
|
$
|
11,600,000
|
|
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
|
|
BZM
|
|
$
|
0.0625
|
|
MHE
|
|
$
|
0.0625
|
|
MHN
|
|
$
|
0.0765
|
|
BLJ
|
|
$
|
0.0745
|
|
BQH
|
|
$
|
0.0665
|
|
BSE
|
|
$
|
0.0675
|
|
BFY
|
|
$
|
0.0700
|
|
BHV
|
|
$
|
0.0730
|
|
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 for the period September 1, 2013 to
September 30, 2013 for the Trusts were as follows:
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
|
Dividends
Declared
|
|
BZM
|
|
|
W-7
|
|
|
$
|
13,304
|
|
MHE
|
|
|
W-7
|
|
|
$
|
15,383
|
|
MHN
|
|
|
W-7
|
|
|
$
|
52,190
|
|
BLJ
|
|
|
W-7
|
|
|
$
|
15,549
|
|
BQH
|
|
|
W-7
|
|
|
$
|
2,937
|
|
BSE
|
|
|
W-7
|
|
|
$
|
5,381
|
|
BFY
|
|
|
W-7
|
|
|
$
|
5,900
|
|
BHV
|
|
|
W-7
|
|
|
$
|
9,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
ANNUAL REPORT
|
|
AUGUST 31, 2013
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
To the Shareholders and Board of Directors of
BlackRock MuniHoldings New York Quality Fund, Inc.
and to the Shareholders and Board of Trustees of:
BlackRock Maryland Municipal Bond Trust,
BlackRock Massachusetts Tax-Exempt Trust (formerly The Massachusetts Health & Education Tax-Exempt Trust),
BlackRock New Jersey Municipal Bond Trust,
BlackRock New York Municipal Bond Trust,
BlackRock New York Municipal Income Quality Trust,
BlackRock New York Municipal Income Trust II, and
BlackRock Virginia Municipal Bond Trust
(collectively, the Trusts):
We have audited the accompanying statements of assets and liabilities of BlackRock MuniHoldings New York Quality Fund, Inc., BlackRock Maryland Municipal Bond Trust, BlackRock Massachusetts Tax-Exempt Trust,
BlackRock New Jersey Municipal Bond Trust, BlackRock New York Municipal Bond Trust, BlackRock New York Municipal Income Quality Trust, BlackRock New York Municipal Income Trust II, and BlackRock Virginia Municipal Bond Trust, including the related
schedules of investments 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 the 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, such financial statements and financial highlights referred to above present fairly, in all material
respects, the financial positions of BlackRock MuniHoldings New York Quality Fund, Inc., BlackRock Maryland Municipal Bond Trust, BlackRock Massachusetts Tax-Exempt Trust, BlackRock New Jersey Municipal Bond Trust, BlackRock New York Municipal Bond
Trust, BlackRock New York Municipal Income Quality Trust, BlackRock New York Municipal Income Trust II, and BlackRock Virginia Municipal Bond Trust, 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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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
Maryland Municipal Bond Trust (BZM), BlackRock Massachusetts Tax-Exempt Trust (MHE), BlackRock MuniHoldings New York Quality Fund, Inc. (MHN), BlackRock New Jersey Municipal Bond Trust (BLJ), BlackRock
New York Municipal Bond Trust (BQH), BlackRock New York Municipal Income Quality Trust (BSE), BlackRock New York Municipal Income Trust II (BFY) and BlackRock Virginia Municipal Bond Trust (BHV and together with
BZM, MHE, MHN, BLJ, BQH, BSE and BFY, 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), the 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
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Disclosure of Investment Advisory Agreements and
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compared with a peer group of funds as determined by Lipper (Expense Peers) and the investment performance of the Funds as compared with a peer group of funds as determined by
Lipper
1
and, where applicable, 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 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
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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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Disclosure of Investment Advisory Agreements and
Sub-Advisory
Agreements
(continued)
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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 Lipper category and, where applicable, 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 BZM noted that BZM ranked in the second, second and first quartiles against its Lipper Performance Universe Composite for the one-, three- and five-year periods reported, respectively.
The Board of BHV noted that BHV ranked in the first quartile against its Lipper Performance Universe Composite for each of the one-, three- and
five-year periods reported.
BlackRock believes that the Lipper Performance Universe Composite is an appropriate performance metric for BZM and
BHV in that it measures a blend of total return and yield.
The Board of each of MHE, MHN and BLJ 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 BSE
noted that BSE ranked in the second, second and first 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 MHE, MHN, BLJ and BSE in that it measures a blend of total return and yield.
The Board of each of BQH and BFY noted that its respective Fund ranked in the third, third and first 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 BQH and BFY in that it measures a blend of total return and
yield. The Board of each of BQH and BFY and BlackRock reviewed and discussed the reasons for its respective Funds underperformance during the one- and three-year periods compared to the Funds Customized Lipper Peer Group Composite. The
Board of each of BQH and BFY was informed that, among other things, duration positioning was a negative contributor to one-year performance. For the one- and three-year periods, income was the significant driver of relative underperformance. During
the course of the past year, each of BQH and BFY increased its leverage, but this increase was not enough to improve BQHs and BFYs yield ranking as they were hit with an above average number of bond calls, requiring BQH and BFY to
replace this above average income stream with current significantly lower yielding bonds.
The Boards of BQH and BFY and BlackRock also discussed
BlackRocks strategy for improving the performance of BQH and BFY 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 BZM noted
that BZMs contractual management fee rate ranked in the fourth quartile relative to BZMs Expense Peers. The Board of BZM determined that BZMs total net operating expense ratio ranked in the third quartile and was reasonable
relative to the median total net operating expense ratio paid by BZMs Expense Peers. After discussions
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between the Board, including the Independent Board Members, and BlackRock, the Board of BZM and BlackRock agreed to a voluntary advisory fee reduction, which results in savings to shareholders,
effective June 6, 2013.
The Board of each of MHE, MHN, BSE and BFY noted that its respective Funds contractual management fee rate
ranked in the first quartile relative to the Funds Expense Peers.
The Board of BLJ noted that BLJs contractual management fee rate
ranked in the fourth quartile relative to BLJs Expense Peers. The Board of BLJ determined that BLJs contractual management fee rate was reasonable relative to the median contractual management fee rate paid by BLJs Expense Peers.
The Board of BQH noted that BQHs contractual management fee rate ranked in the second quartile relative to BQHs Expense Peers.
The Board of BHV noted that BHVs contractual management fee rate ranked in the fourth quartile relative to BHVs Expense Peers. The
Board of BHV also noted that BHVs total net operating expense ratio ranked in the second quartile relative to BHVs 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 Trusts (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 BZM, BLJ, BQH, BSE, BFY and BHV 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 MHE and MHN 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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