As filed
with the Securities and Exchange Commission on July 28,
2010
Securities Act Registration
No. 333-167434
Investment Company Act Registration
No. 811-22426
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form N-2
þ
Registration Statement under the Securities Act of 1933
þ
Pre-Effective Amendment No. 2
o
Post-Effective Amendment No.
and/or
þ
Registration Statement Under the Investment Company Act of
1940
þ
Amendment No. 2
BlackRock Build America Bond
Trust
(Exact Name of Registrant as
Specified in Declaration of Trust)
100 Bellevue Parkway
Wilmington, Delaware 19809
(Address of Principal
Executive Offices)
(800) 882-0052
(Registrants Telephone
Number, Including Area Code)
Anne F. Ackerley, President
BlackRock Build America Bond Trust
55 East
52
nd
Street
New York, New York 10055
(Name and Address of Agent
for Service)
Copies
to:
|
|
|
Michael K. Hoffman, Esq.
|
|
Sarah E. Cogan, Esq.
|
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
212-735-3000
|
|
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
212-455-2000
|
Approximate
Date of Proposed Public Offering:
As
soon as practicable after the effective date of this
Registration Statement.
CALCULATION
OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed Maximum
|
|
|
Proposed Maximum
|
|
|
Amount of
|
Title of Securities
|
|
|
Amount Being
|
|
|
Offering
|
|
|
Aggregate
|
|
|
Registration
|
Being Registered
|
|
|
Registered
|
|
|
Price per Unit
|
|
|
Offering Price
|
|
|
Fee
|
Common Shares, $0.001 par value
|
|
|
N/A
|
|
|
N/A
|
|
|
$1,000,000(1)
|
|
|
$71.30(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Estimated solely for purposes of
calculating the registration fee.
|
|
(2)
|
|
Previously paid.
|
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON
SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE
DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A)
OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATES AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
The information in
this preliminary prospectus is not complete and may be changed.
We may not sell these securities until the Registration
Statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
|
SUBJECT
TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 27, 2010
PROSPECTUS
Shares
BlackRock Build America
Bond Trust
Common Shares
$20.00 per share
Investment Objectives.
BlackRock Build
America Bond Trust (the Trust) is a non-diversified,
closed-end management investment company with no operating
history. The Trusts primary investment objective is to
seek high current income, with a secondary objective of capital
appreciation. There can be no assurance that the Trust will
achieve its investment objectives.
Investment Policies.
The Trust seeks to
achieve its investment objectives by investing primarily in a
portfolio of taxable municipal securities known as Build
America Bonds (or BABs). BABs are taxable
municipal securities issued by state and local governments to
finance capital projects such as public schools, roads,
transportation infrastructure, bridges, ports and public
buildings, among others, pursuant to the American Recovery and
Reinvestment Act of 2009 (the Act). Unlike
investments in most other municipal securities, interest
received on BABs is subject to federal income tax and may be
subject to state income tax. Issuers of direct pay BABs,
however, are eligible to receive a subsidy from the
U.S. Treasury of up to 35% of the interest paid on the
bonds, which allows such issuers to issue bonds that pay
interest rates that are expected to be competitive with the
rates typically paid by private bond issuers in the taxable
fixed income market.
No Prior History.
The Trusts
common shares have no history of public trading. Shares of
closed-end investment companies frequently trade at a discount
from their net asset value. This risk may be greater for
investors expecting to sell their shares in a relatively short
period after completion of the public offering.
The Trusts common shares are expected to be listed on the
New York Stock Exchange under the symbol BBN.
(continued
on next page)
Investing in the Trusts common shares involves certain
risks that are described in the Risks section
beginning on page 42 of this Prospectus.
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
Total(1)
|
|
Price to Public
|
|
$
|
20.00
|
|
|
$
|
|
|
Sales Load(2)
|
|
$
|
0.90
|
|
|
$
|
|
|
Estimated Offering Expenses
|
|
$
|
0.04
|
|
|
$
|
|
|
Proceeds to Trust(3) (4)
|
|
$
|
19.06
|
|
|
$
|
|
|
(notes
continued on next page)
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this Prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver the common shares to
purchasers on or
about ,
2010.
|
Ameriprise Financial Services,
Inc.
|
|
|
|
Raymond
James
|
RBC
Capital Markets
|
Stifel Nicolaus Weisel
|
|
|
|
|
|
J.J.B. Hilliard, W.L. Lyons, LLC
|
|
Janney Montgomery Scott
|
|
Maxim Group LLC
|
Morgan Keegan & Company, Inc.
|
|
Wedbush Securities Inc.
|
|
Wunderlich Securities
|
The date of this Prospectus
is ,
2010.
(continued from previous page)
Portfolio Contents.
Under normal market
conditions, the Trust will invest at least 80% of its Managed
Assets (as defined herein) in BABs. The Trust may invest up to
20% of its Managed Assets in securities other than BABs,
including taxable municipal securities that do not qualify for
federal subsidy payments under the Act, tax-exempt municipal
securities, U.S. Treasury securities and obligations of the
U.S. Government, its agencies and instrumentalities. See
The Trusts Investments. Under normal market
conditions, the Trust will invest at least 80% of its Managed
Assets in securities that at the time of investment are
investment grade quality. Investment grade quality securities
are securities rated within the four highest grades
(Baa or BBB or better) by Moodys
Investor Services, Inc. (Moodys),
Standard & Poors Corporation Ratings Group, a
division of The McGraw-Hill Companies, Inc.
(S&P), or Fitch Ratings, Inc.
(Fitch) or securities that are unrated but judged to
be of comparable quality by BlackRock Advisors, LLC
(BlackRock Advisors or the Advisor), the
Trusts investment advisor, or BlackRock Investment
Management, LLC (BlackRock Investment Management or
the
Sub-Advisor),
the Trusts
sub-advisor.
The Trust may invest up to 20% of its Managed Assets in
securities that at the time of investment are rated below
investment grade quality by Moodys, S&P or Fitch or
that are unrated but judged to be of comparable quality by the
Advisor or the
Sub-Advisor.
Securities of below investment grade quality are regarded as
having predominately speculative characteristics with respect to
the issuers capacity to pay interest and repay principal,
and are commonly referred to as junk bonds.
Build America Bonds.
BABs are taxable
municipal securities issued by state and local governments.
Municipal securities include, among other things, bonds, notes,
leases and certificates of participation. Municipal securities
may be structured as callable or non-callable, may have payment
forms that include fixed-coupon, variable rate and zero coupon,
and may include capital appreciation bonds, floating rate
securities, inverse floating rate securities (including residual
interest municipal tender option bonds), inflation-linked
securities and other derivative instruments that replicate
investment exposure to such securities. BABs, as municipal
securities, may be structured in any of the foregoing ways and
new versions of BABs may be offered in the future. The Trust may
invest in any of these BABs or municipal securities. Issuers of
direct pay BABs are eligible to receive a subsidy from the
U.S. Treasury of up to 35% of the interest paid on the
bonds. Subsidy payments received by issuers of BABs may be
subject to offset against amounts owed by them to the federal
government and may be reduced or eliminated. SeeThe
Trusts Investments Build America Bonds
for more details on the different types of subsidy payments BAB
issuers may receive.
(notes from previous page)
|
|
|
(1)
|
|
The Trust has granted the
underwriters an option to purchase up
to
additional common shares at the public offering price, less the
sales load, within 45 days of the date of this Prospectus
solely to cover overallotments, if any. If such option is
exercised in full, the price to the public, sales load,
estimated offering expenses and proceeds, after expenses, to the
Trust will be $ ,
$ , $
and $ , respectively. See
Underwriting.
|
|
|
|
(2)
|
|
BlackRock Advisors (and not the
Trust) has agreed to pay from its own assets a structuring fee
to each of Wells Fargo Securities, LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Citigroup Global Markets Inc.,
Morgan Stanley & Co. Incorporated, UBS Securities LLC,
Ameriprise Financial Services, Inc. and Raymond James &
Associates, Inc. BlackRock Advisors (and not the Trust) may also
pay certain qualifying underwriters a structuring fee, sales
incentive fee or additional compensation in connection with the
offering. BlackRock Advisors (and not the Trust) may pay
commissions to employees of its affiliates that participate in
the marketing of the Trusts common shares. See
Underwriting.
|
|
|
|
(3)
|
|
BlackRock Advisors has agreed to
pay such organizational and offering expenses of the Trust
(other than the sales load) to the extent that organizational
and offering expenses (other than the sales load) exceed $0.04
per common share. The Trust will pay organizational and offering
expenses of the Trust (other than the sales load) up to $0.04
per common share, which may include a reimbursement of BlackRock
Advisors expenses incurred in connection with this
offering. Any offering cost paid by the Trust will be deducted
from the proceeds of the offering received by the Trust. The
aggregate organizational and offering expenses (other than the
sales load) are estimated to be $1,265,034 or
$ per common share. The aggregate
offering expenses (other than the sales load) to be incurred by
the Trust are estimated to be $ or
$ per common share. The aggregate
organizational and offering expenses (other than the sales load)
to be incurred by BlackRock Advisors on behalf of the Trust are
estimated to be $ or
$ per common share.
|
|
|
|
(4)
|
|
The Trust will pay its
organizational costs in full out of its seed capital prior to
the completion of this offering.
|
(continued from previous page)
Although the U.S. Treasury subsidizes an issuers
payments of interest on BABs, it does not guarantee the issuer
will be able to make principal or interest payments. See
Risks Build America Bonds Risk.
The Trust believes there could be an opportunity to capitalize
on the market for BABs by investing in taxable municipal issues
at attractive market yields relative to the yields on
equivalently rated corporate bonds. BlackRock Advisors will use
its in-depth expertise in the municipal securities market to
assemble the Trusts portfolio. As market conditions permit
and based upon the Advisors assessment of the interest
rate environment, the Trust may opportunistically hedge its
duration in an attempt to protect against the risk of rising
interest rates, although no assurance can be given that this
strategy will be successful.
As described more fully herein, the Act authorizes state and
local governments to sell new BABs issues without limitation
through December 31, 2010. Currently, bonds issued after
December 31, 2010 will not qualify as BABs unless the
relevant provisions of the Act are extended. The Obama
administration and Congress are considering a variety of
proposals to extend or modify the BABs program, including
changes that would make it permanent, reduce the amount of the
subsidy, and allow proceeds to be used for certain private,
non-municipal activities or for refinancing capital
expenditures. It cannot be predicted whether these proposals or
other changes in the BABs program will be enacted, nor can it be
predicted whether such proposals or changes, if enacted, will
have a positive or negative effect on the Trust. See The
Trusts Investments.
Contingent Review Provision.
Under its
Declaration of Trust, the Trust has no limitation on its term of
existence. While the Advisors expect the Trust to maintain a
perpetual life, to accommodate the possibility that the BABs
program will not be extended, if for any twenty-four month
period ending on or prior to December 31, 2014, there are
no new issuances of BABs or other taxable municipal securities
with interest payments subsidized by the U.S. Government
through direct pay subsidies, the Trusts board of trustees
will undertake an evaluation of potential actions with respect
to the Trust (the Contingent Review Provision). Such
issuances may cease if the current legislation authorizing the
U.S. Government subsidy for the issuances is not extended
beyond December 31, 2010, and no similar legislation is
enacted. Currently there are several proposals either to make
such legislation permanent or to extend it beyond its scheduled
sunset date. Under the Contingent Review Provision, such
potential actions may include, among other things, changes to
the non-fundamental investment policies that govern the
Trusts permissible investments such that the Trust
broadens its primary investment focus to taxable municipal
securities generally. The board of trustees may also determine
to terminate the Trust. If the Trust is terminated, the Trust
will distribute all of its net assets to shareholders of record
as of the date of termination after providing for all
obligations of the Trust. No assurance can be given as to how
long it would take to liquidate the Trusts portfolio and
make a final liquidating distribution.
The Trusts
investment objectives and policies are not designed to seek to
return to investors who purchase common shares in this offering
the amount of their initial investment on any termination date
and such initial investors and any investors who purchase common
shares after the completion of the offering may receive more or
less than their original investment upon termination
. See
The Trusts Investments.
Leverage.
The Trust intends to use
leverage to seek to achieve its investment objectives. The Trust
may use leverage by investing in derivative instruments with
leverage imbedded in them, such as residual interest municipal
tender option bonds (TOBs Residuals). The Trust may
also use leverage by borrowing funds from banks or other
financial institutions, by investing in reverse repurchase
agreements, by issuing preferred shares or by any other means
permitted under the Investment Company Act of 1940, as amended.
The Trust currently intends to use combined economic leverage of
up to 54% of its net assets (35% of its Managed Assets),
although it may use combined economic leverage of up to 100% of
its net assets (50% of its Managed Assets), all or a portion of
which may be effected through the use of TOBs Residuals.
The use of leverage, including investments in TOBs Residuals, is
subject to numerous risks and will cause the Trusts net
asset value to be more volatile than if leverage was not used.
For example, a rise in short-term interest rates, which
currently are near historically low levels, will cause the
Trusts net asset
value to decline more than if the Trust had not used leverage.
A reduction in the Trusts net asset value may cause a
reduction in the market price of its common shares. See
Risks General Leverage Risk and
Risks Tender Option Bonds Risk.
Investment Advisor and
Sub-Advisor.
The
Trusts investment advisor is BlackRock Advisors and the
Trusts
sub-advisor
is BlackRock Investment Management. We sometimes refer to the
Advisor and the
Sub-Advisor
collectively as the Advisors.
You should read this Prospectus, which concisely sets forth
information about the Trust, before deciding whether to invest
in the common shares, and retain it for future reference. A
Statement of Additional Information,
dated ,
2010, containing additional information about the Trust, has
been filed with the Securities and Exchange Commission and, as
amended from time to time, is incorporated by reference in its
entirety into this Prospectus. You can review the table of
contents for the Statement of Additional Information on
page 72 of this Prospectus. You may request a free copy of
the Statement of Additional Information by calling
(800) 882-0052
or by writing to the Trust, or obtain a copy (and other
information regarding the Trust) from the Securities and
Exchange Commissions Public Reference Room in
Washington, D.C. Call
(202) 551-8090
for information. The Securities and Exchange Commission charges
a fee for copies. You can get the same information free from the
Securities and Exchange Commissions website
(http://www.sec.gov).
You may also
e-mail
requests for these documents to publicinfo@sec.gov or make a
request in writing to the Securities and Exchange
Commissions Public Reference Section,
100 F Street, N.E., Washington, D.C.
20549-0102.
The Trust does not post a copy of the Statement of Additional
Information on its website because the Trusts common
shares are not continuously offered, which means the Statement
of Additional Information will not be updated after completion
of this offering and the information contained in the Statement
of Additional Information will become outdated. In addition, you
may request copies of the Trusts semi-annual and annual
reports or other information about the Trust or make shareholder
inquiries by calling
(800) 882-0052.
The Trusts annual and semi-annual reports, when produced,
will be available at the Trusts website
(http://www.blackrock.com)
free of charge.
You should not construe the contents of this Prospectus as
legal, tax or financial advice. You should consult with your own
professional advisors as to the legal, tax, financial or other
matters relevant to the suitability of an investment in the
Trust.
The Trusts common shares do not represent a deposit or
obligation of, and are not guaranteed or endorsed by, any bank
or other insured depository institution, and are not federally
insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
TABLE OF
CONTENTS
|
|
|
|
|
Prospectus Summary
|
|
|
1
|
|
Summary of Trust Expenses
|
|
|
27
|
|
The Trust
|
|
|
29
|
|
Use of Proceeds
|
|
|
29
|
|
The Trusts Investments
|
|
|
29
|
|
Leverage
|
|
|
39
|
|
Risks
|
|
|
42
|
|
How the Trust Manages Risk
|
|
|
53
|
|
Management of the Trust
|
|
|
54
|
|
Net Asset Value
|
|
|
57
|
|
Distributions
|
|
|
57
|
|
Dividend Reinvestment Plan
|
|
|
59
|
|
Description of Shares
|
|
|
61
|
|
Certain Provisions in the Agreement and Declaration of Trust
|
|
|
63
|
|
Closed-End Fund Structure
|
|
|
65
|
|
Repurchase of Common Shares
|
|
|
65
|
|
Tax Matters
|
|
|
66
|
|
Underwriting
|
|
|
68
|
|
Custodian and Transfer Agent
|
|
|
71
|
|
Legal Opinions
|
|
|
71
|
|
Privacy Principles of the Trust
|
|
|
71
|
|
Table of Contents for the Statement of Additional Information
|
|
|
72
|
|
You should rely only on the information contained or
incorporated by reference in this Prospectus. The Trust has not,
and the underwriters have not, authorized any other person to
provide you with different information. If anyone provides you
with different or inconsistent information, you should not rely
on it. We are not, and the underwriters are not, making an offer
to sell these securities in any jurisdiction where the offer or
sale is not permitted. You should assume that the information in
this Prospectus is accurate only as of the date of this
Prospectus. Our business, financial condition and prospects may
have changed since that date.
(This page intentionally left blank)
PROSPECTUS
SUMMARY
This is only a summary. This summary may not contain all of
the information that you should consider before investing in our
common shares. You should review the more detailed information
contained in this Prospectus and in the Statement of Additional
Information.
|
|
|
The Trust
|
|
BlackRock Build America Bond Trust is a newly organized,
non-diversified, closed-end management investment company with
no operating history. Throughout the Prospectus, we refer to
BlackRock Build America Bond Trust simply as the
Trust or as we, us or
our. See The Trust.
|
|
|
|
The Offering
|
|
The Trust is offering common shares of beneficial interest at
$20.00 per share through a group of underwriters (the
Underwriters) led by Wells Fargo Securities, LLC,
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Citigroup Global Markets Inc., Morgan Stanley & Co.
Incorporated, UBS Securities LLC and Ameriprise Financial
Services, Inc. The common shares of beneficial interest are
called common shares in the rest of this Prospectus.
You must purchase at least 100 common shares ($2,000) in order
to participate in this offering. The Trust has given the
Underwriters an option to purchase up
to
additional common shares to cover orders in excess
of common
shares. BlackRock Advisors, LLC (BlackRock Advisors
or the Advisor), the Trusts investment
advisor, has agreed to pay organizational expenses and offering
costs (other than sales load) that exceed $0.04 per common
share. See Underwriting.
|
|
|
|
Investment Objectives
|
|
The Trusts primary investment objective is to seek high
current income, with a secondary objective of capital
appreciation. There can be no assurance that the Trust will
achieve its investment objectives.
|
|
|
|
Investment Policies
|
|
The Trust seeks to achieve its investment objectives by
investing primarily in a portfolio of taxable municipal
securities known as Build America Bonds (or
BABs), as discussed further in this Prospectus. The
Trust believes there could be an opportunity to capitalize on
the market for BABs by investing in taxable municipal issues at
attractive market yields relative to the yields on equivalently
rated corporate bonds. BlackRock Advisors will use its in-depth
expertise in the municipal securities market to assemble the
Trusts portfolio. As market conditions permit and based
upon the Advisors assessment of the interest rate
environment, the Trust may opportunistically hedge its duration
in an attempt to protect against the risk of rising interest
rates, although no assurance can be given that this strategy
will be successful. The Advisor will not manage duration to a
benchmark. The Trusts
sub-advisor
is BlackRock Investment Management, LLC (BlackRock
Investment Management or the
Sub-Advisor).
|
|
|
|
|
|
Under normal market conditions, the Trust will invest at least
80% of its Managed Assets (as defined herein) in BABs. This
investment policy may be changed by the Trusts board of
trustees upon 60 days prior notice to shareholders.
The Trust may
|
1
|
|
|
|
|
invest up to 20% of its Managed Assets in securities other than
BABs, including taxable municipal securities that do not qualify
for federal subsidy payments under the Act, municipal securities
the interest income from which is exempt from regular federal
income tax (sometimes referred to as tax-exempt municipal
securities), U.S. Treasury securities and obligations of
the U.S. Government, its agencies and instrumentalities. Under
normal market conditions, the Trust will invest at least 80% of
its Managed Assets in securities that at the time of investment
are investment grade quality. Investment grade quality
securities are securities rated within the four highest grades
(Baa or BBB or better) by Moodys
Investor Services, Inc. (Moodys),
Standard & Poors Corporation Ratings Group, a
division of The McGraw-Hill Companies, Inc.
(S&P), or Fitch Ratings, Inc.
(Fitch) or securities that are unrated but judged to
be of comparable quality by the Advisor or
Sub-Advisor.
The Trust may invest up to 20% of its Managed Assets in
securities that at the time of investment are rated below
investment grade quality by Moodys, S&P or Fitch or
that are unrated but judged to be of comparable quality by the
Advisor or
Sub-Advisor.
Certain of the Trusts investments may be illiquid. See
The Trusts Investments Investment
Objectives and Policies.
|
|
|
|
|
|
BABs are taxable municipal securities issued by state and local
governments. Municipal securities include, among other things,
bonds, notes, leases and certificates of participation.
Municipal securities may be structured as callable or
non-callable, may have payment forms that include fixed-coupon,
variable rate and zero coupon, and may include capital
appreciation bonds, floating rate securities, inverse floating
rate securities (including residual interest municipal tender
option bonds), inflation-linked securities and other derivative
instruments that replicate investment exposure to such
securities. BABs, as municipal securities, may be structured in
any of the foregoing ways and new versions of BABs may be
offered in the future. The Trust may invest in any of these BABs
or municipal securities, and may acquire them through
investments in pooled vehicles, partnerships or other investment
companies. The Trust may also purchase BABs and other municipal
securities representing a wide range of sectors and purposes.
See The Trusts Investments Investment
Objectives and Policies.
|
|
|
|
|
|
The Trust may engage in various strategic transactions for
hedging and risk management purposes or to enhance total return
(Strategic Transactions). Strategic Transactions
involve the use of derivative instruments. Such instruments may
include, but are not limited to, financial futures contracts,
swap contracts (including, but not limited to, credit default
swaps), options on financial futures, options on swap contracts
and other derivative instruments. If the Trust engages in
Strategic Transactions for hedging and risk management purposes,
it primarily intends to use strategies that include swaps
(including interest rate swaps), financial futures contracts,
options on financial futures or options based either on an index
of long-
|
2
|
|
|
|
|
term securities or on taxable debt securities whose prices, in
the opinion of the Advisors, correlate with the prices of the
Trusts investments. If the Trust engages in Strategic
Transactions to enhance total return, it primarily intends to
use the same strategies as discussed above for hedging and risk
management purposes and, in addition, to engage in credit
derivative transactions, including credit default swaps. There
is no assurance that these derivative strategies will be
available at any time or that the Advisors will determine to use
them for hedging or risk management purposes or to enhance total
return or, if used, that the strategies will be successful.
Using derivatives involves various risks. See The
Trusts Investments Strategic
Transactions and Risks Strategic
Transactions Risk. In addition, please see the
Trusts Statement of Additional Information for a more
detailed description of Strategic Transactions and the various
derivative instruments the Trust may use and the various risks
associated with them.
|
|
|
|
|
|
The Trust may purchase municipal securities that are
additionally secured by insurance, bank credit agreements or
escrow accounts. The credit quality of companies which provide
these credit enhancements will affect the value of those
securities. Although the insurance feature reduces certain
financial risks, the premiums for insurance and the higher
market price paid for insured obligations may reduce the
Trusts income. Insurance generally will be obtained from
insurers with a claims-paying ability rated Baa or BBB or better
by Moodys, S&P or Fitch. The insurance feature does
not guarantee the market value of the insured obligations or the
net asset value of the common shares. The Trust may purchase
insured bonds and may purchase insurance for securities in its
portfolio. See Risks Insurance Risk.
|
|
|
|
|
|
The Trust may implement various temporary defensive
strategies at times when the Advisor or
Sub-Advisor
determines that conditions in the markets or the termination of
the Trust makes pursuing the Trusts basic investment
strategy inconsistent with the best interests of its
shareholders. These strategies may include investing all or a
portion of the Trusts assets in U.S. Government
obligations and high-quality, short-term debt securities that
may be either tax-exempt or taxable. See The Trusts
Investments Portfolio Composition and Other
Information Short-Term Debt Securities; Temporary
Defensive Position;
Invest-Up
Period.
|
|
|
|
Build America Bonds
|
|
BABs are taxable municipal securities that include bonds issued
by state and local governments to finance capital projects such
as public schools, roads, transportation infrastructure,
bridges, ports and public buildings, among others, pursuant to
the American Recovery and Reinvestment Act of 2009 (the
Act). Unlike investments in most other municipal
securities, interest received on BABs is subject to federal
income tax and may be subject to state income tax.
|
3
|
|
|
|
|
Enacted in February 2009, the Act was intended in part to assist
state and local governments in financing capital projects at
lower net borrowing costs through direct subsidies designed to
stimulate state and local infrastructure projects, create jobs
and attract non-traditional municipal security investors. The
Act authorizes state and local governments to issue taxable
bonds on which, assuming certain specified conditions are
satisfied, issuers may either (i) receive payments from the
U.S. Treasury equal to a specified percentage of their interest
payments (direct pay), or (ii) cause investors
in the bonds to receive federal tax credits (tax
credit).
|
|
|
|
|
|
Based on current market conditions, the Trust currently intends
to invest in direct pay BABs and not in tax credit BABs. Under
the terms of the Act, issuers of direct pay BABs are entitled to
receive reimbursement from the U.S. Treasury currently equal to
35% (or 45% in the case of Recovery Zone Economic Development
Bonds) of the interest paid on the bonds, which allows such
issuers to issue bonds that pay interest rates that are expected
to be competitive with the rates typically paid by private bond
issuers in the taxable fixed income market. Although the U.S.
Treasury subsidizes an issuers payments of interest on
BABs, it does not guarantee the issuer will be able to make
principal or interest payments. Bonds issued after
December 31, 2010 (referred to as the sunset)
currently will not qualify as BABs unless the relevant
provisions of the Act are extended or similar legislation is
enacted that provides for municipal issuers to elect to issue
taxable municipal securities and receive from the U.S. Treasury
direct pay federal subsidies to offset a portion of the interest
costs incurred over the full term of such taxable municipal
securities. As currently enacted, the Act contains no budgetary
limit on issuances under the BABs program through the sunset.
Currently under the Act, BABs cannot be used to finance private,
non-municipal activities, and can only be used to fund capital
expenditures. The proceeds of BAB issuances are used for public
benefit and generally support facilities that meet such
essential needs as water, electricity, transportation, and
education. Moreover, many BABs are general obligation bonds,
which are backed by the full faith and taxing power of the state
and local governments issuing them.
|
|
|
|
|
|
The Obama administration and Congress are considering a variety
of proposals to extend or modify the BABs program, including
changes that would make it permanent, reduce the amount of the
subsidy, and allow proceeds to be used for certain private,
non-municipal activities or for refinancing capital
expenditures. It cannot be predicted whether these proposals or
other changes in the BABs program will be enacted, nor can it be
predicted whether such proposals or changes, if enacted, will
have a positive or negative effect on the Trust.
|
|
|
|
Contingent Review Provision
|
|
Under its Declaration of Trust, the Trust has no limitation on
its term of existence. While the Advisors expect the Trust to
maintain a perpetual life, to accommodate the possibility that
|
4
|
|
|
|
|
the BABs program will not be extended, if for any twenty-four
month period ending on or prior to December 31, 2014, there
are no new issuances of BABs or other taxable municipal
securities with interest payments subsidized by the U.S.
Government through direct pay subsidies, the Trusts board
of trustees will undertake an evaluation of potential actions
with respect to the Trust (the Contingent Review
Provision). Issuances of BABs may cease if the current
legislation authorizing the U.S. Government subsidy for the
issuances is not extended beyond December 31, 2010, and no
similar legislation is enacted. Under the Contingent Review
Provision, such potential actions may include, among other
things, changes to the non-fundamental investment policies that
govern the Trusts permissible investments such that the
Trust broadens its primary investment focus to taxable municipal
securities generally. The board of trustees may also determine
to terminate the Trust. If the Trust is terminated, the Trust
will distribute all of its net assets to shareholders of record
as of the date of termination after providing for all
obligations of the Trust. During such period, the Trust may not
be able to invest in accordance with its investment policies as
it winds down its portfolio. No assurance can be given as to how
long it would take to liquidate the Trusts portfolio and
make a final liquidating distribution.
The Trusts
investment objectives and policies are not designed to seek to
return to investors who purchase common shares in this offering
the amount of their initial investment on any termination date
and such initial investors and any investors who purchase common
shares after the completion of the offering may receive more or
less than their original investment upon termination
.
|
|
|
|
Special Tax Considerations
|
|
The Trust primarily invests in taxable municipal securities
whose income is subject to U.S. Federal income tax. Thus,
dividends with respect to the common shares will be taxable as
ordinary income for U.S. Federal income tax purposes (except in
the case of capital gain dividends). See Tax Matters.
|
|
|
|
Leverage
|
|
The Trust intends to use leverage to seek to achieve its
investment objectives. The Trust may use leverage by investing
in derivative instruments with leverage imbedded in them, such
as residual interest municipal tender option bonds (TOBs
Residuals). The Trust may also use leverage by borrowing
funds from banks or other financial institutions, by investing
in reverse repurchase agreements, by issuing preferred shares or
by any other means permitted under the Investment Company Act of
1940, as amended (the Investment Company Act). The
Trust currently intends to use combined economic leverage of up
to 54% of its net assets (35% of its Managed Assets), although
it may use combined economic leverage of up to 100% of its net
assets (50% of its Managed Assets), all or a portion of which
may be effected through the use of TOBs Residuals.
|
|
|
|
|
|
The use of leverage, including investments in TOBs Residuals, is
subject to numerous risks and will cause the Trusts net
asset
|
5
|
|
|
|
|
value to be more volatile than if leverage was not used. For
example, a rise in short-term interest rates, which currently
are near historically low levels, will cause the Trusts
net asset value to decline more than if the Trust had not used
leverage.
|
|
|
|
|
|
The use of borrowings to leverage the common shares can create
risks. Changes in the value of the Trusts portfolio,
including securities bought with the proceeds of leverage, will
be borne entirely by the holders of common shares. If there is a
net decrease or increase in the value of the Trusts
investment portfolio, leverage will decrease or increase, as the
case may be, the net asset value per common share to a greater
extent than if the Trust did not utilize leverage. A reduction
in the Trusts net asset value may cause a reduction in the
market price of its common shares. During periods in which the
Trust is using leverage, the fees paid to the Advisors for
advisory and
sub-advisory
services will be higher than if the Trust did not use leverage,
because the fees paid will be calculated on the basis of the
Trusts Managed Assets, which includes the proceeds from
leverage.
|
|
|
|
|
|
The use of TOBs Residuals will require the Trust to earmark or
segregate liquid assets in an amount equal to any TOBs Floaters
(as defined below) issued by TOBs Issuers (as defined below)
sponsored on behalf of the Trust that are not owned by the
Trust. The use of a reverse repurchase agreement will require
the Trust to earmark or segregate liquid assets in an amount
equal to the Trusts repurchase obligation under the
reverse repurchase agreement. The Trust will not earmark or
segregate assets transferred to a TOBs Issuer or a reverse
repurchase agreement counterparty.
|
|
|
|
|
|
There can be no assurance that the Trusts leverage
strategy will be successful or that the Trust will be able to
use leverage at all. Recent developments in the credit markets
may adversely affect the ability of the Trust to borrow for
investment purposes and may increase the costs of such
borrowings, which would reduce returns to the holders of common
shares. See Leverage and Risks
General Leverage Risk.
|
|
|
|
Tender Option Bonds
|
|
The Trust may leverage its assets through the use of tender
option bond trusts (each, a TOBs Issuer). A TOBs
Issuer is typically established by a third party sponsor forming
a special purpose trust into which the Trust, or an agent on
behalf of the Trust, transfers BABs or other municipal
securities. A TOBs Issuer typically issues two classes of
beneficial interests: short-term floating rate notes (TOBs
Floaters), which are sold to third party investors, and
TOBs Residuals, which are generally issued to the Trust. The
Trust may invest in both TOBs Floaters and TOBs Residuals. The
Trust does not currently intend to invest in TOBs Residuals
issued by a TOBs Issuer that was not formed for the Trust,
although it reserves the right to do so in
|
6
|
|
|
|
|
the future. Below is a diagram outlining the structure for a
typical TOBs Issuer.
|
|
|
|
|
|
As diagrammed above, the TOBs Issuer receives BABs or other
municipal securities from the Trust through the sponsor and then
issues TOBs Floaters to third party investors and a TOBs
Residual to the Trust. The Trust is paid the cash (less
transaction expenses, which are borne by the Trust and therefore
common shareholders indirectly) received by the TOBs Issuer from
the sale of the TOBs Floaters and typically will invest the cash
in additional BABs or other investments permitted by its
investment policies. TOBs Floaters may have first priority on
the cash flow from the securities held by the TOBs Issuer and
are enhanced with a liquidity support arrangement from a bank or
an affiliate of the sponsor (the liquidity provider)
which allows holders to tender their position at par (plus
accrued interest). The Trust, in addition to receiving cash from
the sale of the TOBs Floaters, also receives the TOBs Residual.
The TOBs Residual provides the Trust with the right (1) to
cause the holders of the TOBs Floaters to tender their notes to
the TOBs Issuer at par (plus accrued interest), and (2) to
acquire the BABs or other municipal securities from the TOBs
Issuer. In addition, all voting rights and decisions to be made
with respect to any other rights relating to the securities held
in the TOBs Issuer are passed through to the Trust, as the
holder of the TOBs Residual. This transaction, in effect,
creates exposure for the Trust to the entire return of the
securities in the TOBs
|
7
|
|
|
|
|
Issuer, with a net cash investment by the Trust that is less
than the value of the securities in the TOBs Issuer. This
multiplies the positive or negative impact of the
securities return within the Trust (thereby creating
leverage).
|
|
|
|
|
|
The TOBs Issuer may be terminated without the consent of the
Trust upon the occurrence of certain events, such as the
bankruptcy or default of the issuer of the securities in the
TOBs Issuer, a substantial downgrade in the credit quality of
the issuer of the securities in the TOBs Issuer, the inability
of the TOBs Issuer to obtain liquidity support for the TOBs
Floaters, a substantial decline in the market value of the
securities in the TOBs Issuer, or the inability of the sponsor
to remarket any TOBs Floaters tendered to it by holders of the
TOBs Floaters. In such an event, the TOBs Floaters would be
redeemed by the TOBs Issuer at par (plus accrued interest) out
of the proceeds from a sale of the securities in the TOBs
Issuer. If this happens, the Trust would be entitled to the
assets of the TOBs Issuer, if any, that remain after the TOBs
Floaters have been redeemed at par (plus accrued interest). If
there are insufficient proceeds from the sale of these
securities to redeem all of the TOBs Floaters at par (plus
accrued interest), the liquidity provider or holders of the TOBs
Floaters would bear the losses on those securities and there
would be no recourse to the Trusts assets (unless the
Trust held a recourse TOBs Residual). A recourse TOBs Residual
is generally a TOBs Residual issued by a TOBs Issuer in which
the TOBs Floaters represent greater than 75% of the market value
of the securities at the time they are deposited in the TOBs
Issuer. If the Trust were to invest in a recourse TOBs Residual
to leverage its portfolio, it would typically be required to
enter into an agreement pursuant to which the Trust is required
to pay to the liquidity provider the difference between the
purchase price of any TOBs Floaters put to the liquidity
provider by holders of the TOBs Floaters and the proceeds
realized from the remarketing of those TOBs Floaters or the sale
of the assets in the TOBs Issuer. The Trust currently does not
intend to use recourse TOBs Residuals to leverage the
Trusts portfolio, but reserves the right to do so
depending on future market conditions. See
Risks Tender Option Bonds Risk.
|
|
|
|
|
|
Under accounting rules, securities of the Trust that are
deposited into a TOBs Issuer are investments of the Trust and
are presented on the Trusts Schedule of Investments and
outstanding TOBs Floaters issued by a TOBs Issuer are presented
as liabilities in the Trusts Statement of Assets and
Liabilities. Interest income from the underlying security is
recorded by the Trust on an accrual basis. Interest expense
incurred on the TOBs Floaters and other expense related to
remarketing, administration and trustee services to a TOBs
Issuer are reported as expenses of the Trust.
|
|
|
|
|
|
For TOBs Floaters, generally, the interest rate earned will be
based upon the market rates for municipal securities with
|
8
|
|
|
|
|
maturities or remarketing provisions that are comparable in
duration to the periodic interval of the tender option, which
may vary from weekly, to monthly, to extended periods of one
year or multiple years. Since the option feature has a shorter
term than the final maturity or first call date of the
underlying securities deposited in the TOBs Issuer, the Trust as
the holder of the TOBs Floaters relies upon the terms of the
agreement with the financial institution furnishing the option
as well as the credit strength of that institution. As further
assurance of liquidity, the terms of the TOBs Issuer provide for
a liquidation of the municipal security deposited in the TOBs
Issuer and the application of the proceeds to pay off the TOBs
Floaters.
|
|
|
|
|
|
The Trust may invest in both TOBs Floaters and TOBs Residuals
issued by the same TOBs Issuer. See The Trusts
Investments Portfolio Composition and Other
Information Tender Option Bonds and
Risks Tender Option Bonds Risk.
|
|
|
|
Investment Advisor and Sub-Advisor
|
|
BlackRock Advisors will be the Trusts investment advisor
and BlackRock Advisors affiliate, BlackRock Investment
Management, will be the Trusts
sub-advisor.
Throughout the Prospectus, we sometimes refer to BlackRock
Advisors and BlackRock Investment Management collectively as the
Advisors. BlackRock Advisors will receive an annual fee, payable
monthly, in a maximum amount equal to 0.55% of the average daily
value of the Trusts Managed Assets (0.85% of the
Trusts net assets, assuming leverage of 35%).
Managed Assets means the total assets of the Trust
(including any assets attributable to money borrowed for
investment purposes) minus the sum of the Trusts accrued
liabilities (other than money borrowed for investment purposes).
For the avoidance of doubt, assets attributable to money
borrowed for investment purposes includes the portion of the
Trusts assets in a TOBs Issuer of which the Trust owns the
TOBs Residual. BlackRock Advisors will pay an annual
sub-advisory
fee to BlackRock Investment Management equal to 50% of the
management fee received by BlackRock Advisors. See
Management of the Trust Investment Management
Agreement.
|
|
|
|
Distributions
|
|
Commencing with the Trusts initial dividend, the Trust
intends to make regular monthly cash distributions of all or a
portion of its net investment income to common shareholders. We
expect to declare the initial monthly dividend on the
Trusts common shares within approximately 45 days
after completion of this offering and to pay that initial
monthly dividend approximately 60 to 90 days after
completion of this offering. The Trust will distribute to common
shareholders at least annually all or substantially all of its
investment company taxable income after the payment of dividends
and interest, if any, owed with respect to any outstanding
preferred shares or other forms of leverage utilized by the
Trust. The Trust intends to pay any capital gains distributions
at least annually. If the Trust realizes a long-term capital
gain, it will be required to allocate such gain between the
common shares and any preferred shares issued by the
|
9
|
|
|
|
|
Trust in proportion to the total dividends paid to each class
for the year in which the income is realized. See
Distributions and Leverage.
|
|
|
|
Various factors will affect the level of the Trusts
income, including the asset mix and average maturity of the
Trusts portfolio, the amount of leverage utilized by the
Trust and the cost of such leverage and the Trusts use of
hedging. To permit the Trust to maintain a more stable monthly
distribution, the Trust may from time to time distribute less
than the entire amount of income earned in a particular period.
The undistributed income would be available to supplement future
distributions. As a result, the distributions paid by the Trust
for any particular monthly period may be more or less than the
amount of income actually earned by the Trust during that
period. Undistributed income will add to the Trusts net
asset value (and indirectly benefits the Advisors by increasing
their fees) and, correspondingly, distributions from
undistributed income will reduce the Trusts net asset
value. See Distributions.
|
|
|
|
|
|
Shareholders will automatically have all dividends and
distributions reinvested in common shares of the Trust in
accordance with the Trusts Dividend Reinvestment Plan,
unless an election is made to receive cash by contacting
Computershare Trust Company, N.A., the plan agent, at
(800) 699-1BFM.
See Dividend Reinvestment Plan.
|
|
|
|
|
|
The Trust reserves the right to change its distribution policy
and the basis for establishing the rate of its monthly
distributions at any time and may do so without prior notice to
common shareholders.
|
|
|
|
Listing
|
|
The common shares are expected to be listed on the New York
Stock Exchange under the symbol BBN. See
Description of Shares Common Shares.
|
|
Custodian And Transfer Agent
|
|
State Street Bank and Trust Company will serve as the
Trusts Custodian, and Computershare Trust Company,
N.A., will serve as the Trusts Transfer Agent.
|
|
|
|
Market Price Of Shares
|
|
Common shares of closed-end investment companies frequently
trade at prices lower than their net asset value. Common shares
of closed-end investment companies like the Trust that invest
primarily in investment grade municipal securities have during
some periods traded at prices higher than their net asset value
and during other periods traded at prices lower than their net
asset value. The Trust cannot assure you that its common shares
will trade at a price higher than or equal to net asset value.
The value of a shareholders investment in the Trust will
be reduced immediately following this offering by the sales load
and the amount of the organizational and offering expenses paid
by the Trust. See Use of Proceeds. In addition to
net asset value, the market price of the Trusts common
shares may be affected by such factors as dividend levels, which
are in turn affected by expenses, call protection for portfolio
securities, dividend stability, portfolio credit quality,
liquidity and market
|
10
|
|
|
|
|
supply and demand. See Leverage, Risks,
Description of Shares and the section of the
Statement of Additional Information with the heading
Repurchase of Common Shares. The common shares are
designed primarily for long-term investors and you should not
purchase common shares of the Trust if you intend to sell them
shortly after purchase.
|
|
|
|
Special Risk Considerations
|
|
No Operating History.
The Trust is a
newly organized, non-diversified, closed-end management
investment company with no operating history. See
Risks No Operating History.
|
|
|
|
|
|
Investment and Market Discount Risk
. An
investment in the Trusts common shares is subject to
investment risk, including the possible loss of the entire
amount that you invest. As with any stock, the price of the
Trusts common shares will fluctuate with market conditions
and other factors. If shares are sold, the price received may be
more or less than the original investment. The value of a
shareholders investment in the Trust will be reduced
immediately following the initial offering by the amount of the
sales load and the amount of the organizational and offering
expenses paid by the Trust. Common shares are designed for
long-term investors and should not be treated as trading
vehicles. Shares of closed-end management investment companies
frequently trade at a discount from their net asset value. At
any point in time an investment in the Trusts common
shares may be worth less than the original amount invested, even
after taking into account distributions paid by the Trust. This
risk may be greater for investors who sell their common shares
in a relatively short period of time after completion of the
initial offering. The Trust anticipates using leverage, which
will magnify the Trusts investment, market and certain
other risks. See Risks Investment and Market
Discount Risk and Risks General Leverage
Risk.
|
|
|
|
|
|
Build America Bonds Risk.
The BABs
market is smaller and less diverse than the broader municipal
securities market. In addition, because BABs are a new form of
municipal financing and because bonds issued after
December 31, 2010 currently will not qualify as BABs unless
the relevant provisions of the Act are extended, it is difficult
to predict the extent to which a market for such bonds will
develop, meaning that BABs may experience greater illiquidity
than other types of municipal securities. If the ability to
issue BABs is not extended beyond December 31, 2010, the
number of BABs available in the market will be limited and there
can be no assurance that BABs will be actively traded. In
addition, illiquidity may negatively affect the value of the
bonds. If the ability to issue BABs is not extended beyond
December 31, 2010, the Trust will have a limited period of
time in which to purchase newly issued BABs and as such may not
be able to purchase the quantity and quality of BABs currently
intended at attractive prices.
|
|
|
|
|
|
Because issuers of direct pay BABs held in the Trusts
portfolio receive reimbursement from the U.S. Treasury with
respect to interest payment on bonds, there is a risk that those
municipal
|
11
|
|
|
|
|
issuers will not receive timely payment from the U.S. Treasury
and may remain obligated to pay the full interest due on direct
pay BABs held by the Trust. Furthermore, it is possible that a
municipal issuer may fail to comply with the requirements to
receive the direct pay subsidy or that a future Congress may
terminate the subsidy altogether. In addition, the Internal
Revenue Code of 1986, as amended (the Code) contains
a general offset rule (the IRS Offset Rule) which
allows for the possibility that subsidy payments received by
issuers of BABs may be subject to offset against amounts owed by
them to the federal government. Moreover, the Internal Revenue
Service (the IRS) may audit the agencies issuing
BABs and such audits may, among other things, examine the price
at which BABs are initially sold to investors. If the IRS
concludes that a BAB was mis-priced based on its audit, it could
disallow all or a portion of the interest subsidy received by
the issuer of the BAB. The IRS Offset Rule and the disallowance
of any interest subsidy as a result of an IRS audit could
potentially adversely affect a BABs issuers credit rating,
and adversely affect the issuers ability to repay or
refinance BABs. This, in turn, could adversely affect the
ratings and value of the BABs held by the Trust and the
Trusts net asset value. In this regard, the State of
Florida recently announced that it suspended the new issuance of
BABs as a result of its uncertainty relating to the IRS Offset
Rule and, in May 2010, the IRS withheld subsidies from several
states and municipalities, including Austin, Texas and the State
of Maryland.
|
|
|
|
|
|
Because the BABs program is new, certain aspects of the BABs
program may be subject to additional Federal or state level
guidance or subsequent legislation. For example, the IRS or U.S.
Treasury could impose restrictions or limitations on the
payments received. Aspects of the BABs program for which the IRS
and the U.S. Treasury have solicited public comment include, but
have not been limited to, methods for making direct payments to
issuers, the tax procedural framework for such payments, and
compliance safeguards. It is not known what additional
procedures will be implemented with respect to direct pay BABs,
if any, nor is it known what effect such possible procedures
would have on the BABs market.
|
|
|
|
|
|
Legislation extending the relevant provisions of the Act, if
any, may also modify the characteristics of BABs issued after
December 31, 2010, including the amount of subsidy paid to
issuers.
|
|
|
|
|
|
The Trust intends to invest primarily in BABs and therefore the
Trusts net asset value may be more volatile than the value
of a more broadly diversified portfolio and may fluctuate
substantially over short periods of time. Because BABs currently
do not include certain industries or types of municipal bonds
(e.g., tobacco bonds or private activity bonds), there may be
less diversification than with a broader pool of municipal
securities. See Risks Build America Bonds
Risk.
|
12
|
|
|
|
|
Contingent Review Provision Risk.
If,
for any twenty-four month period ending on or prior to
December 31, 2014, there are no new issuances of BABs or
other taxable municipal securities with interest payments
subsidized by the U.S. Government through direct pay subsidies,
the Contingent Review Provision provides that the Trusts
board of trustees may consider terminating the Trust or changing
the non-fundamental investment policies that govern the
Trusts permissible investments. The Advisors cannot
predict what effect the termination of the BABs program will
have on the market for BABs and, if the Trust terminates in such
a market, the price available for sales of BABs held in the
Trusts portfolio may be adversely affected. In addition,
the Advisors cannot predict what effect, if any, the termination
of the BABs program or the announcement of the termination of
the Trust as a result of the Contingent Review Provision will
have on the market price or liquidity of the Trusts common
shares, although such termination or announcement may adversely
affect both the market price and liquidity of the Trusts
common shares.
|
|
|
|
|
|
In the event the Trust terminates as a result of the Contingent
Review Provision, the Trust may be required to sell portfolio
securities when it otherwise would not, including at times when
interest rate or market conditions are not favorable, which may
cause the Trust to lose a substantial amount of money on its
investments. Further, the process of liquidating the
Trusts assets could result in a reduction in the
Trusts net investment income and monthly dividend
distributions during the liquidation period. As the Trust
approaches its termination date, the portfolio composition of
the Trust may change as more of its original securities mature
or are called or sold, which may cause the Trusts returns
to decrease and the net asset value of the common shares to
fall. If the Act is not extended by Congress, the market for
BABs may be adversely affected. BABs may become more illiquid
and their market prices may fall. As a result, the Trust may
have a more difficult time selling BABs at prices approximating
the value at which the Trust is carrying the securities on its
books. If the Trust is terminated, the Trust will distribute all
of its net assets to shareholders of record as of the date of
termination after providing for all obligations of the Trust.
During such period, the Trust may not be able to invest in
accordance with its investment policies as it winds down its
portfolio. No assurance can be given as to how long it would
take to liquidate the Trusts portfolio and make a final
liquidating distribution. Securities for which no market exists
or securities trading at depressed prices, if any, may be placed
in a liquidating trust. Securities placed in a liquidating trust
may be held for an indefinite period of time until they can be
sold or pay out all of their cash flows. The Trust cannot
predict the amount of securities that will be required to be
placed in a liquidating trust.
|
|
|
|
|
|
In the event the Trust terminates as a result of the Contingent
Review Provision, the Trusts investment objectives and
policies
|
13
|
|
|
|
|
are not designed to seek to return to investors who purchase
common shares in this offering their initial investment on any
anticipated termination date, and such initial investors and any
investors who purchase common shares after the completion of the
offering may receive more or less than their original investment
upon termination.
|
|
|
|
|
|
In the event the Trust changes the non-fundamental investment
policies that govern the Trusts permissible investments as
a result of the Contingent Review Provision, the Trust may be
subject to various additional risks that are not described
herein. For example, the Trust may decide to invest in certain
securities in which it currently does not intend to invest or
may, if it is already invested in such securities, decide to
invest in them to a greater degree, and such investments may
carry greater risks than the investments the Trust currently
intends to make. Moreover, the Trust may decide to sell
portfolio securities when it otherwise would not, including at
times when interest rate or market conditions are not favorable,
in order to facilitate a change in investment policies, which
may cause the Trust to lose money on its investments. See
Risks Contingent Review Provision Risk.
|
|
|
|
|
|
Interest Rate Risk.
Generally, when
market interest rates rise, prices of debt securities fall, and
vice versa. Interest rate risk is the risk that the debt
securities in the Trusts portfolio will decline in value
because of increases in market interest rates. As interest rates
increase, slower than expected principal payments may extend the
average life of securities, potentially locking in a
below-market interest rate and reducing the Trusts net
asset value. In typical market interest rate environments, the
prices of longer-term debt securities generally fluctuate more
than the prices of shorter-term debt securities as interest
rates change.
These risks may be greater in the current
market environment because certain interest rates are near
historically low levels.
As interest rates decline, issuers
of municipal securities that have the right to call those
securities may prepay principal earlier than scheduled, forcing
the Trust to reinvest in lower-yielding securities and
potentially reducing the Trusts income. Because the Trust
intends to invest primarily in longer-term municipal securities,
the common share net asset value and market price per common
share may fluctuate more in response to changes in market
interest rates than if the Trust invested primarily in
shorter-term municipal securities. The Trust may utilize certain
strategies, including taking positions in futures or interest
rate swaps, for the purpose of reducing the interest rate
sensitivity of the Trusts debt securities and decreasing
the Trusts exposure to interest rate risk. The Trust is
not required to hedge its exposure to interest rate risk and may
choose not to do so. In addition, there is no assurance that any
attempts by the Trust to reduce interest rate risk will be
successful.
|
14
|
|
|
|
|
The Trust may invest in variable and floating rate debt
securities. Rates on these securities typically reset only
periodically so changes in prevailing interest rates (and
particularly sudden and significant changes) can be expected to
cause some fluctuations in the Trusts net asset value,
although these types of securities generally are less sensitive
to interest rate changes than longer duration fixed-rate
instruments. Conversely, variable and floating rate debt
securities generally will not increase in value if interest
rates decline. See Risks Interest Rate
Risk.
|
|
|
|
|
|
Credit Risk.
Credit risk is the risk
that an issuer of a municipal security will become unable to
meet its obligation to make interest and principal payments. In
general, lower rated municipal securities carry a greater degree
of risk that the issuer will lose its ability to make interest
and principal payments, which could have a negative impact on
the Trusts net asset value or dividends. The Trust may
invest up to 20% of its Managed Assets in municipal securities
that are rated Ba/BB or below by Moodys, S&P or Fitch
or that are unrated but judged to be of comparable quality by
the Advisor or
Sub-Advisor.
Bonds rated Ba/BB or below are regarded as having predominately
speculative characteristics with respect to the issuers
capacity to pay interest and repay principal, and these bonds
are commonly referred to as junk bonds. These
securities are subject to a greater risk of default. The prices
of these lower grade securities are more sensitive to negative
developments, such as a decline in the issuers revenues or
a general economic downturn, than are the prices of higher grade
securities. Lower grade securities tend to be less liquid than
investment grade securities and the market values of lower grade
securities tend to be more volatile than investment grade
securities. See Risks Credit Risk.
|
|
|
|
|
|
General Municipal Securities Market
Risk.
Economic exposure to the municipal
securities market involves certain risks. The Trusts
economic exposure to municipal securities includes municipal
securities in the Trusts portfolio and municipal
securities to which the Trust is exposed through the ownership
of TOBs Residuals. The municipal market is one in which dealer
firms make markets in bonds on a principal basis using their
proprietary capital, and during the recent market turmoil these
firms capital was severely constrained. As a result, some
firms were unwilling to commit their capital to purchase and to
serve as a dealer for municipal securities. Certain municipal
securities may not be registered with the SEC or any state
securities commission and will not be listed on any national
securities exchange. The amount of public information available
about the municipal securities to which the Trust is
economically exposed is generally less than that for corporate
equities or bonds, and the investment performance of the Trust
may therefore be more dependent on the analytical abilities of
the Advisor or
Sub-Advisor
than would be, for example, a stock fund. The secondary market
for municipal securities, particularly the below investment
grade bonds to which the Trust may be economically exposed, also
tends to be less well-developed or liquid than
|
15
|
|
|
|
|
many other securities markets, which may adversely affect the
ability to sell such bonds at attractive prices. In addition,
many state and municipal governments that issue securities are
currently under significant economic and financial stress and
may not be able to satisfy their obligations. The ability of
municipal issuers to make timely payments of interest and
principal may be diminished during general economic downturns
and as governmental cost burdens are reallocated among federal,
state and local governments. The taxing power of any
governmental entity may be limited by provisions of state
constitutions or laws and an entitys credit will depend on
many factors, including the entitys tax base, the extent
to which the entity relies on federal or state aid, and other
factors which are beyond the entitys control. In addition,
laws enacted in the future by Congress or state legislatures or
referenda could extend the time for payment of principal and/or
interest, or impose other constraints on enforcement of such
obligations, or on the ability of municipalities to levy taxes.
|
|
|
|
|
|
Revenue bonds issued by state or local agencies to finance the
development of low-income, multi-family housing involve special
risks in addition to those generally associated with municipal
securities, including that the underlying properties may not
generate sufficient income to pay expenses and interest costs.
Such securities are generally non-recourse against the property
owner, may be junior to the rights of others with an interest in
the properties, may pay interest that changes based in part on
the financial performance of the property, may be prepayable
without penalty and may be used to finance the construction of
housing developments which, until completed and rented, do not
generate income to pay interest. Increases in interest rates
payable on senior obligations may make it more difficult for
issuers to meet payment obligations on subordinated bonds. See
Risks General Municipal Securities Market
Risk.
|
|
|
|
|
|
Special Risks Related to Certain Municipal
Securities.
The Trust may invest in municipal
leases and certificates of participation in such leases.
Municipal leases and certificates of participation involve
special risks not normally associated with general obligations
or revenue bonds. Such leases or contracts may be subject to the
temporary abatement of payments in the event the governmental
issuer is prevented from maintaining occupancy of the leased
premises or utilizing the leased equipment. Although the
obligations may be secured by the leased equipment or
facilities, the disposition of the property in the event of
non-appropriation or foreclosure might prove difficult, time
consuming and costly, and may result in a delay in recovering or
the failure to fully recover the Trusts original
investment. In the event of non-appropriation, the issuer would
be in default and taking ownership of the assets may be a remedy
available to the Trust, although the Trust does not anticipate
that such a remedy would normally be pursued. To the extent that
the Trust invests in unrated municipal leases or participates in
such leases, the credit quality rating and risk of
|
16
|
|
|
|
|
cancellation of such unrated leases will be monitored on an
ongoing basis. Certificates of participation, which represent
interests in unmanaged pools of municipal leases or installment
contracts, involve the same risks as the underlying municipal
leases. In addition, the Trust may be dependent upon the
municipal authority issuing the certificates of participation to
exercise remedies with respect to the underlying securities.
Certificates of participation also entail a risk of default or
bankruptcy, both of the issuer of the municipal lease and also
the municipal agency issuing the certificate of participation.
|
|
|
|
|
|
Call and Redemption Risk.
A
municipal securitys issuer may call the security for
redemption before it matures. If this happens to a municipal
security that the Trust holds, the Trust may lose income and may
have to invest the proceeds in municipal securities with lower
yields. See Risks Call and
Redemption Risk.
|
|
|
|
|
|
Below Investment Grade Securities
Risk.
The Trust may invest up to 20% of its
Managed Assets in securities that are rated below investment
grade, which are commonly referred to as junk bonds
and are regarded as predominately speculative with respect to
the issuers capacity to pay interest and repay principal.
|
|
|
|
|
|
Lower grade securities may be particularly susceptible to
economic downturns. It is likely that an economic recession
could disrupt severely the market for such securities and may
have an adverse impact on the value of such securities. In
addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities
to repay principal and pay interest thereon and increase the
incidence of default for such securities. See
Risks Current Economic Conditions
Credit Crisis Liquidity and Volatility Risk.
|
|
|
|
Lower grade securities, though high yielding, are characterized
by high risk. They may be subject to certain risks with respect
to the issuing entity and to greater market fluctuations than
certain lower yielding, higher rated securities. The retail
secondary market for lower grade securities may be less liquid
than that for higher rated securities. Adverse conditions could
make it difficult at times for the Trust to sell certain
securities or could result in lower prices than those used in
calculating the Trusts net asset value. Because of the
substantial risks associated with investments in lower grade
securities, you could lose money on your investment in common
shares of the Trust, both in the short-term and the long-term.
See Risks Below Investment Grade Securities
Risk.
|
|
|
|
|
|
Reinvestment Risk.
Reinvestment risk is
the risk that income from the Trusts portfolio will
decline if and when the Trust invests the proceeds from matured,
traded or called municipal securities at market interest rates
that are below the portfolios current earnings rate. A
decline in income could affect the
|
17
|
|
|
|
|
common shares market price or your overall returns. See
Risks Reinvestment Risk.
|
|
|
|
|
|
Tender Option Bonds Risk.
TOBs
Residuals are derivative municipal securities that have embedded
in them the risk of economic leverage. There is no assurance
that the Trusts strategy of using TOBs Residuals to
leverage its assets will be successful.
|
|
|
|
|
|
Distributions on TOBs Residuals will bear an inverse
relationship to short-term municipal bond interest rates.
Distributions on the TOBs Residuals paid to the Trust will be
reduced or, in the extreme, eliminated as short-term municipal
interest rates rise and will increase when short-term municipal
interest rates fall. The amount of such reduction or increase is
a function, in part, of the amount of TOBs Floaters sold by the
issuer of these securities relative to the amount of the TOBs
Residuals that it sells. The greater the amount of TOBs Floaters
sold relative to the TOBs Residuals, the more volatile the
distributions on the TOBs Residuals will be. Short-term interest
rates are at historic lows and may be more likely to rise in the
current market environment.
|
|
|
|
|
|
The Trusts use of TOBs Residuals will create economic
leverage. Any economic leverage achieved through the
Trusts investment in TOBs Residuals will create an
opportunity for increased common share net income and returns,
but will also create the possibility that common share long-term
returns will be diminished if the cost of the TOBs Floaters
exceeds the return on the securities in the TOBs Issuer. See
Risks General Leverage Risk. If the
income and gains earned on municipal securities owned by a TOBs
Issuer that issues TOBs Residuals to the Trust are greater than
the payments due on the TOBs Floaters, the Trusts returns
will be greater than if it had not invested in the TOBs Residual.
|
|
|
|
|
|
The Trust has no current intention of investing in recourse TOBs
Residuals. However, circumstances may change and it is possible
that in the future the Trust may elect to invest in recourse
TOBs Residuals to leverage its portfolio. If the Trust uses
recourse TOBs Residuals, the liquidity provider may seek
recourse against assets of the Trust, and the Trust may have to
pay the liquidity provider the difference between the purchase
price of any TOBs Floaters put to the liquidity provider by
third party investors and the proceeds realized by the liquidity
provider from the remarketing of those TOBs Floaters or the sale
of the assets in the TOBs Issuer, which could cause the Trust to
lose money in excess of its investment in a TOBs Issuer.
|
|
|
|
|
|
Although the Trust generally would unwind a TOBs transaction
rather than try to sell a TOBs Residual, if it did try to sell a
TOBs Residual, its ability to do so would depend on the
liquidity of the TOBs Residual. TOBs Residuals have varying
degrees of liquidity based, among other things, upon the
liquidity of the underlying securities deposited in the TOBs
Issuer. The market
|
18
|
|
|
|
|
price of TOBs Residuals are more volatile than the underlying
securities due to leverage. The leverage attributable to TOBs
Residuals may be called away on relatively short
notice and therefore may be less permanent than more traditional
forms of leverage. In certain circumstances, the likelihood of
an increase in the volatility of net asset value and market
price of the common shares may be greater for a fund that relies
primarily on TOBs Residuals to achieve a desired effective
leverage ratio. The Trust may be required to sell its TOBs
Residuals at less than favorable prices, or liquidate other
Trust portfolio holdings in certain circumstances, including,
but not limited to, the following:
|
|
|
|
|
|
If the Trust has a need for cash and the
securities in the TOBs Issuer are not actively trading due to
adverse market conditions;
|
|
|
|
|
|
If the sponsors of TOBs Issuers (as a
collective group or individually) experience financial hardship
and consequently seek to terminate TOBs Issuers sponsored by
them; and
|
|
|
|
|
|
If the value of an underlying security
declines significantly (to a level below the notional value of
the TOBs Floaters issued by the TOBs Issuer) and if additional
collateral has not been posted by the Trust.
|
|
|
|
|
|
The Trust may invest in taxable TOBs Residuals, issued by TOBs
Issuers formed with taxable municipal securities. The market for
such taxable TOBs Residuals is relatively new and undeveloped.
Initially, there may be a limited number of counterparties,
which may increase the credit risks, counterparty risks,
liquidity risks and other risks of investing in taxable TOBs
Residuals. See Risks Tender Option Bonds
Risk.
|
|
|
|
|
|
General Leverage Risk.
The use of
leverage creates an opportunity for increased common share net
investment income dividends, but also creates risks for the
holders of common shares. Leverage is a speculative technique
that exposes the Trust to greater risk and increased costs than
if it were not implemented. Increases and decreases in the value
of the Trusts portfolio will be magnified when the Trust
uses leverage. As a result, leverage may cause greater changes
in the Trusts net asset value. The Trust will also have to
pay interest on its borrowings, if any, which may reduce the
Trusts return. This interest expense may be greater than
the Trusts return on the underlying investment. The
Trusts leveraging strategy may not be successful.
|
|
|
|
|
|
If the Trust enters into a credit facility, the Trust may be
required to prepay outstanding amounts or incur a penalty rate
of interest upon the occurrence of certain events of default.
The Trust would also likely have to indemnify the lenders under
the credit facility against liabilities they may incur in
connection therewith. In addition, the Trust expects that any
credit facility would contain covenants that, among other
things, likely would
|
19
|
|
|
|
|
limit the Trusts ability to pay distributions in certain
circumstances, incur additional debt, change certain of its
investment policies and engage in certain transactions,
including mergers and consolidations, and require asset coverage
ratios in addition to those required by the Investment Company
Act. The Trust may be required to pledge its assets and to
maintain a portion of its assets in cash or high-grade
securities as a reserve against interest or principal payments
and expenses.
|
|
|
|
Reverse repurchase agreements involve the risks that the
interest income earned on the investment of the proceeds will be
less than the interest expense and Trust expenses, that the
market value of the securities sold by the Trust may decline
below the price of the securities the Trust is obligated to
repurchase and that the securities may not be returned to the
Trust. There is no assurance that reverse repurchase agreements
can be successfully employed.
|
|
|
|
|
|
Although the Trust does not have any immediate intention to do
so, the Trust may in the future issue preferred shares as a form
of financial leverage. Any such preferred shares of the Trust
would be senior to the Trusts common shares, such that
holders of preferred shares would have priority over the
distribution of the Trusts assets, including dividends and
liquidating distributions. If preferred shares are issued and
outstanding, holders of the preferred shares would elect two
trustees of the Trust, voting separately as a class.
|
|
|
|
|
|
The Trust may also use leverage through its investments in TOBs
Residuals. See Risks Tender Option Bonds
Risk.
|
|
|
|
|
|
The Trust anticipates that the money borrowed for investment
purposes will pay interest based on shorter-term interest rates
that would be periodically reset. So long as the Trusts
portfolio provides a higher rate of return, net of expenses,
than the interest rate on borrowed money as reset periodically,
the leverage may cause the holders of common shares to receive a
higher current rate of return than if the Trust were not
leveraged. If, however, long-term and/or short-term rates rise,
the interest rate on borrowed money could exceed the rate of
return on securities held by the Trust, reducing return to the
holders of common shares. Recent developments in the credit
markets may adversely affect the ability of the Trust to borrow
for investment purposes and may increase the costs of such
borrowings, which would reduce returns to the holders of common
shares.
|
|
|
|
|
|
There is no assurance that a leveraging strategy will be
successful. Leverage involves risks and special considerations
for common shareholders, including:
|
|
|
|
|
|
the likelihood of greater volatility of
net asset value, market price and dividend rate of the common
shares than a comparable portfolio without leverage;
|
|
|
|
|
|
the risk that fluctuations in interest
rates on borrowings and short-term debt or in the interest or
dividend rates on
|
20
|
|
|
|
|
any leverage that the Trust must pay will reduce the return to
the common shareholders;
|
|
|
|
|
|
the effect of leverage in a declining
market, which is likely to cause a greater decline in the net
asset value of the common shares than if the Trust were not
leveraged, which may result in a greater decline in the market
price of the common shares;
|
|
|
|
|
|
when the Trust uses financial leverage,
the investment advisory fees payable to the Advisors will be
higher than if the Trust did not use leverage; and
|
|
|
|
|
|
leverage may increase operating costs,
which may reduce total return.
|
|
|
|
|
|
The use of reverse repurchase agreements and TOBs Residuals will
require the Trust to segregate assets to cover its obligations
(or, if the Trust borrows money or issues preferred shares, to
maintain asset coverage in conformity with the requirements of
the Investment Company Act). While the segregated assets may be
invested in liquid securities, they may not be used for other
operational purposes. Consequently, the use of leverage may
limit the Trusts flexibility and may require that the
Trust sell other portfolio investments to pay Trust expenses, to
maintain assets in an amount sufficient to cover the
Trusts leveraged exposure or to meet other obligations at
a time when it may be disadvantageous to sell such assets.
|
|
|
|
|
|
Certain types of borrowings by the Trust may result in the Trust
being subject to covenants in credit agreements relating to
asset coverage and portfolio composition requirements. The Trust
may be subject to certain restrictions on investments imposed by
guidelines of one or more rating agencies, which may issue
ratings for the short-term corporate debt securities or
preferred shares issued by the Trust. These guidelines may
impose asset coverage or portfolio composition requirements that
are more stringent than those imposed by the Investment Company
Act. The Advisors do not believe that these covenants or
guidelines will impede them from managing the Trusts
portfolio in accordance with the Trusts investment
objectives and policies. See Leverage and
Risks General Leverage Risk.
|
|
|
|
|
|
The Trust may invest in the securities of other investment
companies. Such securities may also be leveraged, and will
therefore be subject to the leverage risks described above. This
additional leverage may in certain market conditions reduce the
net asset value of the Trusts common shares and the
returns to the holders of common shares.
|
|
|
|
|
|
Volatility Risk.
The use of leverage by
the Trust will cause the net asset value, and possibly the
market price, of the Trusts common shares to fluctuate
significantly in response to changes in interest rates and other
economic indicators. In addition, the Trust may invest up to 20%
of its Managed Assets in below investment grade municipal
securities, which may be less liquid
|
21
|
|
|
|
|
and therefore more volatile than investment grade municipal
securities. As a result, the net asset value and market price of
the common shares of the Trust will be more volatile than those
of a closed-end investment company that is not exposed to
leverage or that does not invest in below investment grade
municipal securities.
|
|
|
|
|
|
Current Economic Conditions Credit Crisis
Liquidity and Volatility Risk.
The markets
for credit instruments have experienced periods of extreme
illiquidity and volatility since the latter half of 2007.
General market uncertainty and consequent repricing of risk have
led to market imbalances of sellers and buyers, which in turn
have resulted in significant valuation uncertainties in a
variety of debt securities, including municipal securities.
These conditions resulted in, and in many cases continue to
result in, greater volatility, less liquidity, widening credit
spreads and a lack of price transparency, with many debt
securities remaining illiquid and of uncertain value. Such
market conditions may make valuation of some of the Trusts
municipal securities uncertain and/or result in sudden and
significant valuation increases or declines in its holdings. In
addition, illiquidity and volatility in the credit markets may
directly and adversely affect the setting of dividend rates on
the common shares.
|
|
|
|
|
|
In response to the recent national economic downturn,
governmental cost burdens may be reallocated among federal,
state and local governments. Also, as a result of the downturn,
many state and local governments have experienced significant
reductions in revenues and consequent difficulties meeting
ongoing expenses. As a result, certain of these state and local
governments may have difficulty paying principal or interest on
their outstanding debt and may experience ratings downgrades of
their debt. Also, issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy
of such an issuer, holders of municipal securities could
experience delays in collecting principal and interest, and such
holders may not, in all circumstances, be able to collect all
principal and interest to which they are entitled. To enforce
its rights in the event of a default in the payment of interest
or repayment of principal, or both, the Trust may take
possession of and manage the assets securing the issuers
obligations on such securities, which may increase the
Trusts operating expenses.
|
|
|
|
|
|
In addition, laws enacted in the future by Congress, state
legislatures or referenda could extend the time for payment of
principal and/or interest, or impose other constraints on
enforcement of such obligations or on the ability of
municipalities to levy taxes.
|
|
|
|
|
|
Inflation Risk.
Inflation risk is the
risk that the value of assets or income from investment will be
worth less in the future, as inflation decreases the value of
money. As inflation increases, the real value of the common
shares and distributions on those shares can decline. In
addition, during any periods of rising
|
22
|
|
|
|
|
inflation, interest rates on any borrowings by the Trust would
likely increase, which would tend to further reduce returns to
the holders of common shares. See Risks
Inflation Risk.
|
|
|
|
|
|
Non-Diversification Risk
. The Trust has
registered as a non-diversified investment company
under the Investment Company Act. For Federal income tax
purposes, the Trust, with respect to up to 50% of its total
assets, will be able to invest more than 5% (but not more than
25%, except for investments in government securities and
securities of other regulated investment companies, which are
not limited for tax purposes) of the value of its total assets
in the obligations of any single issuer or the securities of one
or more qualified publicly traded partnerships. To the extent
the Trust invests a relatively high percentage of its assets in
the obligations of a limited number of issuers, the Trust may be
more susceptible than a more widely diversified investment
company to any single economic, political or regulatory
occurrence. See Risks Non-Diversification
Risk.
|
|
|
|
|
|
Economic Sector and Geographic
Risk.
The Trust, as a fundamental policy, may
not invest 25% or more of the value of its Managed Assets in any
one industry. However, this limitation does not apply to
securities of the U.S. Government, any state government or
their respective agencies, or instrumentalities and securities
backed by the credit of any federal or state governmental
entity. As such, the Trust may invest 25% of more of its Managed
Assets in municipal securities of issuers in the same state (or
U.S. Territory) or in the same economic sector. If the Trust
does so, this may make it more susceptible to adverse economic,
political or regulatory occurrences affecting a particular state
or economic sector. See Risks Economic Sector
and Geographic Risk herein and Investment Objectives
and Policies Investment Restrictions in the
Trusts Statement of Additional Information.
|
|
|
|
|
|
Market Disruption and Geopolitical
Risk.
The aftermath of the war in Iraq,
instability in Afghanistan, Pakistan and the Middle East and
terrorist attacks in the United States and around the world may
result in market volatility, may have long-term effects on the
U.S. and worldwide financial markets and may cause further
economic uncertainties in the United States and worldwide.
The Trust does not know how long the securities markets may be
affected by these events and cannot predict the effects of these
events or similar events in the future on the U.S. economy and
securities markets. See Risks Market
Disruption and Geopolitical Risk.
|
|
|
|
|
|
U.S. Government-Sponsored Agencies
Risk.
While certain U.S. Government-sponsored
agencies, such as the Federal Home Loan Mortgage Corporation
(FHLMC) and the Federal National Mortgage
Association (FNMA), may be chartered or sponsored by
acts of Congress, their securities are neither issued nor
guaranteed by the U.S. Treasury, and therefore may lose value.
On September 7, 2008, the Federal Housing Finance
|
23
|
|
|
|
|
Agency (FHFA), a new independent regulatory agency,
placed FNMA and FHLMC into conservatorship, a statutory process
designed to stabilize a troubled institution with the objective
of returning the entity to normal business operations. In
addition, a July, 2009 congressional report issued by the
Committee on Oversight and Government Reform noted that the role
of the FNMA and FHLMC in the financial crisis was
significant and has received too little attention.
|
|
|
|
|
|
Strategic Transactions Risk.
The Trust
may engage in various Strategic Transactions for hedging and
risk management purposes or to enhance total return. Strategic
Transactions involve the use of derivative instruments. The use
of Strategic Transactions to enhance total return may be
particularly speculative. Strategic Transactions involve risks,
including the imperfect correlation between the value of such
instruments and the underlying assets, the possible default of
the other party to the transaction and illiquidity of the
derivative instruments. Furthermore, the Trusts ability to
successfully use Strategic Transactions depends on the
Advisors ability to predict pertinent market movements,
which cannot be assured. The use of Strategic Transactions may
result in losses greater than if they had not been used, may
require the Trust to sell or purchase portfolio securities at
inopportune times or for prices other than current market
values, may limit the amount of appreciation the Trust can
realize on an investment or may cause the Trust to hold a
security that it might otherwise sell. Additionally, amounts
paid by the Trust as premiums and cash or other assets held in
margin accounts with respect to Strategic Transactions are not
otherwise available to the Trust for investment purposes. See
Risks Strategic Transactions Risks. In
addition, please see the Trusts Statement of Additional
Information for a more detailed description of Strategic
Transactions and the various derivative instruments the Trust
may use and the various risks associated with them.
|
|
|
|
|
|
Counterparty Risk.
The Trust will be
subject to credit risk with respect to the counterparties to the
derivative contracts purchased by the Trust. If a counterparty
becomes bankrupt or otherwise fails to perform its obligations
under a derivative contract due to financial difficulties, the
Trust may experience significant delays in obtaining any
recovery under the derivative contract in bankruptcy or other
reorganization proceedings. The Trust may obtain only a limited
recovery, or may obtain no recovery, in such circumstances. See
Risks Counterparty Risk.
|
|
|
|
|
|
Insurance Risk.
The Trust may purchase
municipal securities that are secured by insurance, bank credit
agreements or escrow accounts. The credit quality of the
companies that provide such credit enhancements will affect the
value of those securities. Many significant providers of
insurance for municipal securities have recently incurred
significant losses as a result of exposure to
sub-prime
mortgages and other lower credit quality
|
24
|
|
|
|
|
investments that have experienced recent defaults or otherwise
suffered extreme credit deterioration. As a result, such losses
have reduced the insurers capital and called into question
their continued ability to perform their obligations under such
insurance if they are called upon to do so in the future. As
concern has increased about the balance sheets of insurers,
prices on insured bonds especially those bonds
issued by weaker underlying credits have declined.
Most insured bonds are currently being valued according to their
fundamentals as if they were uninsured. The insurance feature of
a municipal security normally provides that it guarantees the
full payment of principal and interest when due through the life
of an insured obligation, but does not guarantee the market
value of the insured obligation or the net asset value of the
common shares represented by such insured obligation. See
Risks Insurance Risk.
|
|
|
|
|
|
Legislation Risk.
At any time after the
date of this Prospectus, legislation may be enacted that could
negatively affect the assets of the Trust or the issuers of such
assets. Changing approaches to regulation may have a negative
impact on the entities in which the Trust invests. Legislation
or regulation may also change the way in which the Trust itself
is regulated. There can be no assurance that future legislation,
regulation or deregulation will not have a material adverse
effect on the Trust or will not impair the ability of the Trust
to achieve its investment objectives. See
Risks Legislation Risk.
|
|
|
|
|
|
Portfolio Turnover Risk.
The
Trusts annual portfolio turnover rate may vary greatly
from year to year. Portfolio turnover rate is not considered a
limiting factor in the execution of investment decisions for the
Trust. A higher portfolio turnover rate results in
correspondingly greater brokerage commissions and other
transactional expenses that are borne by the Trust. High
portfolio turnover may result in an increased realization of net
short-term capital gains by the Trust which, when distributed to
common shareholders, will be taxable as ordinary income.
Additionally, in a declining market, portfolio turnover may
create realized capital losses. See Risks
Portfolio Turnover Risk.
|
|
|
|
|
|
Deflation Risk.
Deflation risk is the
risk that prices throughout the economy decline over time, which
may have an adverse effect on the market valuation of companies,
their assets and their revenues. In addition, deflation may have
an adverse effect on the creditworthiness of issuers and may
make issuer default more likely, which may result in a decline
in the value of the Trusts portfolio. See
Risks Deflation Risk.
|
|
|
|
|
|
Illiquid Securities Risk.
The market
for municipal securities is generally smaller than other
markets, resulting in heightened liquidity risk. The Trust may
invest in municipal securities and other instruments that, at
the time of investment, are illiquid. Illiquid securities are
securities that are not readily marketable and may include some
restricted securities, which are securities that may not be
resold to the public without an effective registration statement
under the Securities Act of 1933, as amended
|
25
|
|
|
|
|
(the Securities Act), or may be sold only in a
privately negotiated transaction or pursuant to an exemption
from registration. Illiquid securities involve the risk that the
securities will not be able to be sold at the time desired by
the Trust or at prices approximating the values at which the
Trust is carrying the securities on its books. See
Risks Illiquid Securities Risk.
|
|
|
|
|
|
Anti-Takeover Provisions.
The
Trusts Agreement and Declaration of Trust includes
provisions that could limit the ability of other entities or
persons to acquire control of the Trust or convert the Trust to
open-end status. These provisions could deprive the holders of
common shares of opportunities to sell their common shares at a
premium over the then current market price of the common shares
or at net asset value. In addition, if the Trust issues
preferred shares, the holders of the preferred shares will have
voting rights that could deprive holders of common shares of
such opportunities. See Certain Provisions in the
Agreement and Declaration of Trust.
|
26
SUMMARY
OF TRUST EXPENSES
The following table assumes the use of leverage in an amount
equal to 54% of the Trusts net assets (35% of the
Trusts Managed Assets) (after the proceeds from the
leverage are invested), and shows Trust expenses as a percentage
of net assets attributable to common shares, and in footnote
(5), as a percentage of net assets attributable to common shares
assuming no leverage is utilized. The following table should not
be considered a representation of our future expenses. Actual
expenses may be greater or less than shown. Except where the
context suggests otherwise, whenever this Prospectus contains a
reference to fees or expenses paid by you or
us or that we will pay fees or expenses,
shareholders will indirectly bear such fees or expenses as
investors in the Trust.
Shareholder
Transaction Expenses
|
|
|
|
|
Sales load paid by you (as a percentage of offering price)
|
|
|
4.50
|
%
|
Offering expenses borne by the Trust (as a percentage of
offering price)(1)(2)
|
|
|
0.20
|
%
|
Dividend reinvestment plan fees
|
|
|
None
|
(3)
|
|
|
|
|
|
|
|
Percentage of net assets
|
|
|
attributable to common shares
|
|
|
(assuming the use of
|
|
|
leverage)(4)
|
|
Annual expenses
|
|
|
|
|
Management fees
|
|
|
0.85
|
%
|
Interest expenses
|
|
|
0.67
|
%
|
Other expenses
|
|
|
0.11
|
%
|
|
|
|
|
|
Total annual expenses
|
|
|
1.63
|
%(5)
|
|
|
|
|
|
|
|
|
(1)
|
|
The Trust will pay its organizational costs in full out of its
seed capital prior to completion of this offering. The Trust
will pay organizational and offering expenses of the Trust
(other than the sales load) up to $0.04 per common share, which
may include a reimbursement of BlackRock Advisors expenses
incurred in connection with this offering. BlackRock Advisors
has agreed to pay such organizational and offering expenses of
the Trust (other than the sales load) to the extent that
organizational and offering expenses (other than the sales load)
exceed $0.04 per common share. Any offering cost paid by the
Trust will be deducted from the proceeds of the offering
received by the Trust.
|
|
|
|
(2)
|
|
BlackRock Advisors (and not the Trust) has agreed to pay from
its own assets a structuring fee to each of Wells Fargo
Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Citigroup Global Markets Inc., Morgan
Stanley & Co. Incorporated, UBS Securities LLC,
Ameriprise Financial Services, Inc. and Raymond James &
Associates, Inc. BlackRock Advisors may pay certain qualifying
underwriters a structuring fee, sales incentive fee or
additional compensation in connection with the offering. See
Underwriting.
|
|
|
|
(3)
|
|
You will be charged a $2.50 sales fee and pay a $0.15 per
share sold fee (which includes brokerage commissions) if you
direct the Plan Administrator (as defined below) to sell your
common shares held in a dividend reinvestment account.
|
|
|
|
(4)
|
|
Assumes effective leverage of 54% of the Trusts net assets
attributable to common shares (35% of the Trusts Managed
Assets).
|
27
|
|
|
(5)
|
|
The table presented below estimates what the Trusts annual
expenses would be stated as percentages of the Trusts net
assets attributable to common shares. This table assumes the
Trust is the same size as in the table above, but unlike the
table above, assumes that no leverage is used. In accordance
with these assumptions, the Trusts expenses would be
estimated to be as follows:
|
|
|
|
|
|
|
|
Percentage of net assets
|
|
|
attributable to common shares
|
|
|
(assuming no leverage is
used)
|
|
Annual expenses
|
|
|
|
|
Management fees
|
|
|
0.55
|
%
|
Other expenses
|
|
|
0.11
|
%
|
|
|
|
|
|
Total annual expenses
|
|
|
0.66
|
%
|
|
|
|
|
|
The purpose of the table above and the example below is to help
you understand all fees and expenses that you, as a holder of
common shares, would bear directly or indirectly. The expenses
shown in the table under Interest expenses,
Other expenses and Total annual expenses
are based on estimated amounts for the Trusts first full
year of operations and assume that the Trust issues 12,500,000
common shares. If the Trust issues fewer common shares, all
other things being equal, these expenses would increase. See
Management of the Trust and Dividend
Reinvestment Plan.
The following example illustrates the expenses (including the
sales load of $45) that you would pay on a $1,000 investment in
common shares, assuming (1) total net annual expenses of
1.63% of net assets attributable to common shares in years 1
through 10, and (2) a 5% annual return(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
3 Years
|
|
5 Years
|
|
10 Years
|
|
Total expenses incurred
|
|
$
|
62.78
|
|
|
$
|
95.95
|
|
|
$
|
131.40
|
|
|
$
|
231.03
|
|
|
|
|
(1)
|
|
The example should not be considered a representation of future
expenses. The example assumes that the estimated Interest
expenses and Other expenses set forth in the
Annual expenses table are accurate and that all dividends and
distributions are reinvested at net asset value. Actual expenses
may be greater or less than those assumed. Moreover, the
Trusts actual rate of return may be greater or less than
the hypothetical 5% return shown in the example.
|
28
THE
TRUST
The Trust is a newly organized, non-diversified, closed-end
management investment company registered under the Investment
Company Act. The Trust was organized as a Delaware statutory
trust on June 7, 2010, pursuant to an Agreement and
Declaration of Trust, governed by the laws of the State of
Delaware. The Trust has no operating history. The Trusts
principal office is located at 100 Bellevue Parkway, Wilmington,
Delaware 19809, and its telephone number is
(800) 882-0052.
USE OF
PROCEEDS
The net proceeds of the offering of common shares will be
approximately $
($ if the Underwriters exercise
the over-allotment option in full) after payment of the
estimated organizational and offering costs. The Trust will
invest the net proceeds of the offering in accordance with the
Trusts investment objectives and policies as stated below.
We currently anticipate that the Trust will be able to invest
all of the net proceeds in accordance with the Trusts
investment objectives and policies within approximately three
months after the completion of this offering. Pending such
investment, it is anticipated that the proceeds will be invested
in short-term, tax-exempt or taxable investment grade securities.
THE
TRUSTS INVESTMENTS
Investment
Objectives and Policies
The Trusts primary investment objective is to seek high
current income, with a secondary objective of capital
appreciation. There can be no assurance that the Trust will
achieve its investment objectives. The Trusts investment
objectives are not fundamental and may be changed by its board
of trustees.
The Trust seeks to achieve its investment objectives by
investing primarily in a portfolio of BABs. The Trust believes
there could be an opportunity to capitalize on the market for
BABs by investing in taxable municipal issues at attractive
market yields relative to the yields on equivalently rated
corporate bonds. BlackRock Advisors will use its in-depth
expertise in the municipal securities market to assemble the
Trusts portfolio. As market conditions permit and based
upon the Advisors assessment of the interest rate
environment, the Trust may opportunistically hedge its duration
in an attempt to protect against the risk of rising interest
rates, although no assurance can be given that this strategy
will be successful. The Advisor will not manage duration to a
benchmark. Duration, in comparison to maturity (which is the
date on which the issuer of a debt instrument is obligated to
repay the principal amount), is a measure of the price
volatility of a debt instrument as a result in changes in market
rates of interest, based on the weighted average timing of the
instruments expected principal and interest payments.
Duration differs from maturity in that it takes into account a
securitys yield, coupon payments and its principal
payments in addition to the amount of time until the security
finally matures. As the value of a security changes over time,
so will its duration.
Under normal market conditions, the Trust will invest at least
80% of its Managed Assets in BABs. This investment policy may be
changed by the Trusts board of trustees upon
60 days prior notice to shareholders. The Trust may
invest up to 20% of its Managed Assets in securities other than
BABs, including taxable municipal securities that do not qualify
for federal subsidy payments under the Act, tax-exempt municipal
securities, U.S. Treasury securities and obligations of the
U.S. Government, its agencies and instrumentalities. Under
normal market conditions, the Trust will invest at least 80% of
its Managed Assets in securities that at the time of investment
are investment grade quality. Investment grade quality
securities are securities rated within the four highest grades
(Baa or BBB or better) by Moodys,
S&P or Fitch or securities that are unrated but judged to
be of comparable quality by the Advisor or the
Sub-Advisor.
The Trust may invest up to 20% of its Managed Assets in
securities that at the time of investment are rated below
investment grade quality by Moodys, S&P or Fitch or
that are unrated but judged to be of comparable quality by the
Advisor or the
Sub-Advisor.
Certain of the Trusts investments may be illiquid.
29
BABs are taxable municipal securities issued by state and local
governments. Municipal securities include, among other things,
bonds, notes, leases and certificates of participation.
Municipal securities may be structured as callable or
non-callable, may have payment forms that include fixed-coupon,
variable rate and zero coupon, and may include capital
appreciation bonds, floating rate securities, inverse floating
rate securities (including TOBs Residuals), inflation-linked
securities and other derivative instruments that replicate
investment exposure to such securities. BABs, as municipal
securities, may be structured in any of the foregoing ways and
new versions of BABs may be offered in the future. The Trust may
invest in any of these BABs or municipal securities, and may
acquire them through investments in pooled vehicles,
partnerships or other investment companies. The Trust may also
purchase BABs and other municipal securities representing a wide
range of sectors and purposes.
The Trust may purchase municipal securities that are
additionally secured by insurance, bank credit agreements or
escrow accounts. The credit quality of companies which provide
these credit enhancements will affect the value of those
securities. Although the insurance feature reduces certain
financial risks, the premiums for insurance and the higher
market price paid for insured obligations may reduce the
Trusts income. Insurance generally will be obtained from
insurers with a claims-paying ability rated Baa or BBB or better
by Moodys, S&P or Fitch. The insurance feature does
not guarantee the market value of the insured obligations or the
net asset value of the common shares. The Trust may purchase
insured securities and may purchase insurance for bonds in its
portfolio. See Risks Insurance Risk.
The credit quality policies noted above apply only at the time a
security is purchased, and the Trust is not required to dispose
of a security in the event that a rating agency downgrades its
assessment of the credit characteristics of a particular issue.
In determining whether to retain or sell such a security, the
Advisors may consider such factors as their assessment of the
credit quality of the issuer of such security, the price at
which such security could be sold and the rating, if any,
assigned to such security by other rating agencies. A general
description of the ratings of S&P, Moodys and Fitch
of municipal securities is set forth in Appendix A to the
Statement of Additional Information.
The Trust may implement various temporary defensive
strategies at times when the Advisor or
Sub-Advisor
determines that conditions in the markets or the termination of
the Trust makes pursuing the Trusts basic investment
strategy inconsistent with the best interests of its
shareholders. These strategies may include investing all or a
portion of the Trusts assets in U.S. Government
obligations and high-quality, short-term debt securities that
may be either tax-exempt or taxable. See The Trusts
Investments Portfolio Composition and Other
Information Short-Term Debt Securities; Temporary
Defensive Position;
Invest-Up
Period.
Unless otherwise stated herein or in the Statement of Additional
Information, the Trusts investment objectives and policies
are non-fundamental policies and may changed by the board of
trustees of the Trust.
Build
America Bonds
BABs are taxable municipal securities that include bonds issued
by state and local governments to finance capital projects such
as public schools, roads, transportation infrastructure,
bridges, ports and public buildings, among others, pursuant to
the Act. Unlike investments in most other municipal securities,
interest received on BABs is subject to federal income tax and
may be subject to state income tax.
Enacted in February 2009, the Act was intended in part to assist
state and local governments in financing capital projects at
lower net borrowing costs through direct subsidies designed to
stimulate state and local infrastructure projects, create jobs
and attract non-traditional municipal security investors. The
Act authorizes state and local governments to issue taxable
bonds on which, assuming certain specified conditions are
satisfied, issuers may either (i) receive payments from the
U.S. Treasury equal to
30
a specified percentage of its interest payments (direct pay
BABs) or (ii) cause investors in the bonds to receive
federal tax credits (tax credit BABs).
Based on current market conditions, the Trust currently intends
to invest in direct pay BABs and not in tax credit BABs. Under
the terms of the Act, issuers of direct pay BABs are entitled to
receive reimbursement from the U.S. Treasury currently
equal to 35% (or 45% in the case of Recovery Zone Economic
Development Bonds) of the interest paid on the bonds, which
allows such issuers to issue bonds that pay interest rates that
are expected to be competitive with the rates typically paid by
private bond issuers in the taxable fixed income market.
Although the U.S. Treasury subsidizes an issuers
payments of interest on BABs, it does not guarantee the issuer
will be able to make principal or interest payments. Bonds
issued after December 31, 2010 (referred to as the
sunset) currently will not qualify as BABs unless
the relevant provisions of the Act are extended or similar
legislation is enacted that provides for municipal issuers to
elect to issue taxable municipal securities and receive from the
U.S. Treasury direct pay federal subsidies to offset a
portion of the interest costs incurred over the full term of
such taxable municipal securities. As currently enacted, the Act
contains no budgetary limit on issuances under the BABs program
through the sunset. Currently under the Act, BABs cannot be used
to finance private, non-municipal activities, and can only be
used to fund capital expenditures. The proceeds of BAB issuances
are used for public benefit, and generally support facilities
that meet such essential needs as water, electricity,
transportation, and education. Moreover, many BABs are general
obligation bonds, which are backed by the full faith and taxing
power of the state and local governments issuing them.
The Obama administration and Congress are considering a variety
of proposals to extend or modify the BABs program, including
changes that would make it permanent, reduce the amount of the
subsidy, and allow proceeds to be used for certain private,
non-municipal activities or for refinancing capital
expenditures. It cannot be predicted whether these proposals or
other changes in the BABs program will be enacted, nor can it be
predicted whether such proposals or changes, if enacted, will
have a positive or negative effect on the Trust.
If, for any twenty-four month period ending on or prior to
December 31, 2014, there are no new issuances of BABs or
other taxable municipal securities with interest payments
subsidized by the U.S. Government through direct pay
subsidies, the Trust may, among other things, change the
non-fundamental investment policies that govern the Trusts
permissible investments
and/or
terminate the Trust. See Contingent Review
Provision below for additional information.
The State of Florida recently announced that it suspended the
new issuance of BABs as a result of its uncertainty relating to
the IRS Offset Rule, which allows for the possibility that
subsidy payments received by issuers of BABs may be subject to
offset against amounts owed by them to the federal government.
If other BAB issuers were to suspend the new issuance of BABs
due to the IRS Offset Rule, as Florida has done, this could then
have a negative impact on the BABs market. The possibility of
such offsets has been recognized since the inception of the BABs
program. The IRS has broad regulatory authority to develop
special rules to adapt or tailor the procedural framework
implementing the BABs program. In May 2010, the IRS withheld
subsidies from several states and municipalities, including
Austin, Texas and the State of Maryland. The IRS has stated that
less than 2% of all subsidy payments have been withheld for
offsets but has not provided an exact dollar figure. BlackRock
Advisors believes the IRS Offset Rule is understood by potential
BAB issuers. BlackRock Advisors does not believe that the State
of Floridas announcement or the May 2010 offsets will have
an adverse impact on the future of BAB issuance in general or on
the Trust, although no assurance can be given in this regard. In
addition, the IRS may audit the state agencies issuing BAB and
such audits may result in negative consequences for the BAB
issuers being audited. See Risks Build America
Bonds Risk.
31
Contingent
Review Provision
Under its Declaration of Trust, the Trust has no limitation on
its term of existence. While the Advisors expect the Trust to
maintain a perpetual life, to accommodate the possibility that
the BABs program will not be extended, if for any twenty-four
month period ending on or prior to December 31, 2014, there
are no new issuances of BABs or other taxable municipal
securities with interest payments subsidized by the
U.S. Government through direct pay subsidies, the
Trusts board of trustees will undertake an evaluation of
potential actions with respect to the Trust. Issuances of BABs
may cease if the current legislation authorizing the
U.S. Government subsidy for the issuances is not extended
beyond December 31, 2010, and no similar legislation is
enacted. Under the Contingent Review Provision, such potential
actions may include, among other things, changes to the
non-fundamental investment policies that govern the Trusts
permissible investments such that the Trust broadens its primary
investment focus to taxable municipal securities generally. The
board of trustees may also determine to terminate the Trust.
Pursuant to the terms of the Declaration of Trust, the Trust can
be terminated at any time by action of the board of trustees. If
the Trust is terminated, the Trust will distribute all of its
net assets to shareholders of record as of the date of
termination after providing for all obligations of the Trust.
During such period, the Trust may not be able to invest in
accordance with its investment policies as it winds down its
portfolio. No assurance can be given as to how long it will take
to liquidate the Trusts portfolio and make a final
liquidating distribution. The Trusts investment objectives
and policies are not designed to seek to return to investors who
purchase common shares in this offering the amount of their
initial investment on the termination date and such initial
investors and any investors who purchase common shares after the
completion of the offering may receive more or less than their
original investment upon termination.
Portfolio
Composition and Other Information
The Trusts portfolio will be composed principally of the
investments discussed below. Additional details of the
Trusts investment policies and restrictions and more
information about the Trusts portfolio investments are
contained in the Statement of Additional Information.
Municipal
Securities
The Trust may invest in taxable municipal securities and
tax-exempt municipal securities, including municipal bonds and
notes, certificates of participation, other securities issued to
finance and refinance public projects, and other related
securities and derivative instruments creating exposure to
municipal bonds, notes and securities. Municipal securities are
often issued by state and local governmental entities to finance
or refinance public projects such as roads, schools, and water
supply systems. Municipal securities may also be issued on
behalf of private entities or for private activities, such as
housing, medical and educational facility construction, or for
privately owned transportation, electric utility or pollution
control projects. Municipal securities may be issued on a long
term basis to provide permanent financing. The repayment of such
debt may be secured generally by a pledge of the full faith and
credit taxing power of the issuer, a limited or special tax, or
any other revenue source, including project revenues, which may
include tolls, fees and other user charges, lease payments and
mortgage payments. Municipal securities may also be issued to
finance projects on a short-term interim basis, anticipating
repayment with the proceeds of the later issuance of long-term
debt.
The yields on municipal securities are dependent on a variety of
factors, including prevailing interest rates and the condition
of the general money market and the municipal securities market,
the size of a particular offering, the maturity of the
obligation and the rating of the issue. A municipal
securitys market value generally will depend upon its
form, maturity, call features and interest rate, as well as the
credit quality of the issuer, all such factors examined in the
context of the municipal securities market and interest rate
levels and trends. The market value of municipal securities will
vary with changes in interest rate levels and as a result of
changing evaluations of the ability of bond issuers to meet
interest and principal payments.
32
BABs offer an alternative form of financing for state and local
government entities whose primary means for accessing the
capital markets traditionally has been through issuance of
tax-exempt municipal securities. BABs are taxable municipal
obligations issued pursuant to the Act or other legislation
providing for the issuance of taxable municipal securities on
which the issuer receives federal subsidy payments. Enacted in
February 2009 with the intent to assist state and local
governments in financing capital projects at lower borrowing
costs, the Act authorizes state and local governments to issue
taxable bonds on which, assuming certain specified conditions
are satisfied, issuers may either (i) receive payments from
the U.S. Treasury equal to a specified percentage of their
interest payments (in the case of direct pay BABs) or
(ii) cause investors in the bonds to receive federal tax
credits (in the case of tax credit BABs). Unlike most other
municipal obligations, interest received on BABs is subject to
federal income tax and may be subject to state income tax. Under
the terms of the Act, issuers of direct pay BABs are entitled to
receive payments from the U.S. Treasury currently equal to
35% (or 45% in the case of Recovery Zone Economic Development
Bonds) of the interest paid on the bonds. Holders of tax credit
BABs receive a federal tax credit currently equal to 35% of the
coupon interest received. While the U.S. Treasury
subsidizes the interest paid on BABs, it does not guarantee
their principal or interest payments. Under current market
conditions, because the Trust currently intends to invest in
direct pay BABs and not in tax credit BABs, the Trust does not
expect to receive (or pass through to common shareholders) tax
credits as a result of its investments. The federal interest
subsidy or tax credit continues for the life of the bonds.
Issuance of BABs commenced in April 2009 and bonds issued after
December 31, 2010 will not qualify as BABs unless the
relevant provisions of the Act are extended.
Tender Option Bonds.
The Trust may
leverage its assets through TOBs Issuers. A TOBs Issuer is
typically established by a third party sponsor forming a special
purpose trust into which the Trust, or an agent on behalf of the
Trust, transfers BABs or other municipal securities. A TOBs
Issuer typically issues two classes of beneficial interests:
TOBs Floaters, which are sold to third party investors, and TOBs
Residuals, which are generally issued to the Trust. The Trust
may invest in both TOBs Floaters and TOBs Residuals. The Trust
does not currently intend to invest in TOBs Residuals issued by
a TOBs Issuer that was not formed for the Trust, although it
reserves the right to do so in the future. Below is a diagram
outlining the structure for a typical TOBs Issuer:
33
As diagrammed above, the TOBs Issuer receives BABs or other
municipal securities from the Trust through the sponsor and then
issues TOBs Floaters to third party investors and a TOBs
Residual to the Trust. The Trust is paid the cash (less
transaction expenses, which are borne by the Trust and therefore
common shareholders indirectly) received by the TOBs Issuer from
the sale of the TOBs Floaters and typically will invest the cash
in additional BABs or other investments permitted by its
investment policies. TOBs Floaters may have first priority on
the cash flow from the securities held by the TOBs Issuer and
are enhanced with a liquidity support arrangement from the
liquidity provider which allows holders to tender their position
at par (plus accrued interest). The Trust, in addition to
receiving cash from the sale of the TOBs Floaters, also receives
the TOBs Residual. The TOBs Residual provides the Trust with the
right (1) to cause the holders of the TOBs Floaters to
tender their notes to the TOBs Issuer at par (plus accrued
interest), and (2) to acquire the BABs or other municipal
securities from the TOBs Issuer. In addition, all voting rights
and decisions to be made with respect to any other rights
relating to the securities held in the TOBs Issuer are passed
through to the Trust, as the holder of the TOBs Residual. This
transaction, in effect, creates exposure for the Trust to the
entire return of the securities in the TOBs Issuer, with a net
cash investment by the Trust that is less than the value of the
securities in the TOBs Issuer. This multiplies the positive or
negative impact of the securities return within the Trust
(thereby creating leverage). The leverage within a TOBs Issuer
depends on the value of the securities deposited in the TOBs
Issuer relative to the value of the TOBs Floaters it issues. In
the diagram above, the TOBs Issuer receives BABs or other
municipal securities worth $60, issues TOBs Floaters worth $45
and the Trust receives a TOBs Residual worth $15. The leverage
ratio in the TOBs Issuer described in the example is thus 3:1.
Increasing the value of the TOBs Floaters issued would increase
the leverage ratio of the TOBs Issuer. A TOBs Issuer is
generally considered highly leveraged if the TOBs Floaters
represent greater than 75% of the market value of the municipal
securities at the time they are deposited into the TOBs Issuer
(and the TOBs Residuals issued by such highly leveraged TOBs
Issuers are referred to as recourse TOBs Residuals).
The TOBs Issuer may be terminated without the consent of the
Trust upon the occurrence of certain events, such as the
bankruptcy or default of the issuer of the securities in the
TOBs Issuer, a substantial downgrade in the credit quality of
the issuer of the securities in the TOBs Issuer, the inability
of the TOBs Issuer to obtain liquidity support for the TOBs
Floaters, a substantial decline in the market value of the
securities in the TOBs Issuer, or the inability of the sponsor
to remarket any TOBs Floaters tendered to it by holders of the
TOBs Floaters. In such an event, the TOBs Floaters would be
redeemed by the TOBs Issuer at par (plus accrued interest) out
of the proceeds from a sale of the securities in the TOBs
Issuer. If this happens, the Trust would be entitled to the
assets of the TOBs Issuer, if any, that remain after the TOBs
Floaters have been redeemed at par (plus accrued interest). If
there are insufficient proceeds from the sale of these
securities to redeem all of the TOBs Floaters at par (plus
accrued interest), the liquidity provider or the holders of the
TOBs Floaters would bear the losses on those securities and
there would be no recourse to the Trusts assets (unless it
was a recourse TOBs Residual).
If the Trust were to invest in a recourse TOBs Residual to
leverage its portfolio, it would typically be required to enter
into an agreement pursuant to which the Trust is required to pay
to the liquidity provider the difference between the purchase
price of any TOBs Floaters put to the liquidity provider by
holders of the TOBs Floaters and the proceeds realized from the
remarketing of those TOBs Floaters or the sale of the assets in
the TOBs Issuer. The Trust currently does not intend to use
recourse TOBs Residuals to leverage the Trusts portfolio,
but reserves the right to do so depending on future market
conditions. See Risks Tender Option Bonds
Risk.
Under accounting rules, securities of the Trust that are
deposited into a TOBs Issuer are investments of the Trust and
are presented on the Trusts Schedule of Investments and
outstanding TOBs Floaters issued by a TOBs Issuer are presented
as liabilities in the Trusts Statement of Assets and
Liabilities. Interest income from the underlying security is
recorded by the Trust on an accrual basis. Interest expense
incurred on the TOBs Floaters and other expense related to
remarketing, administration and trustee services to a TOBs
Issuer are reported as expenses of the Trust.
34
For TOBs Floaters, generally, the interest rate earned will be
based upon the market rates for municipal securities with
maturities or remarketing provisions that are comparable in
duration to the periodic interval of the tender option, which
may vary from weekly, to monthly, to extended periods of one
year or multiple years. Since the option feature has a shorter
term than the final maturity or first call date of the
underlying securities deposited in the TOBs Issuer, the Trust as
the holder of the TOBs Floaters relies upon the terms of the
agreement with the financial institution furnishing the option
as well as the credit strength of that institution. As further
assurance of liquidity, the terms of the TOBs Issuer provide for
a liquidation of the municipal security deposited in the TOBs
Issuer and the application of the proceeds to pay off the TOBs
Floaters.
The Trust may invest in both TOBs Floaters and TOBs Residuals
issued by the same TOBs Issuer. See Risks
Tender Option Bonds Risk for a description of the risks
involved with a TOBs Issuer.
Municipal Lease Obligations.
Also
included within the general category of municipal securities
described in the Prospectus are participations in lease
obligations or installment purchase contract obligations
(hereinafter collectively called Municipal Lease
Obligations) of municipal authorities or entities.
Although a Municipal Lease Obligation does not constitute a
general obligation of the municipality for which the
municipalitys taxing power is pledged, a Municipal Lease
Obligation is ordinarily backed by the municipalitys
covenant to budget for, appropriate and make the payments due
under the Municipal Lease Obligation. However, certain Municipal
Lease Obligations contain non-appropriation clauses,
which provide that the municipality has no obligation to make
lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. In the
case of a non-appropriation lease, the Trusts
ability to recover under the lease in the event of
non-appropriation or default will be limited solely to the
repossession of the leased property, without recourse to the
general credit of the lessee, and the disposition or re-leasing
of the property might prove difficult. In order to reduce this
risk, the Trust will only purchase Municipal Lease Obligations
where the Advisor or Sub-Advisor believes the issuer has a
strong incentive to continue making appropriations until
maturity.
Certificates of Participation.
A
certificate of participation represents an undivided interest in
an unmanaged pool of municipal leases, installment purchase
agreements or other instruments. The certificates are typically
issued by a municipal agency, a trust or other entity that has
received an assignment of the payments to be made by the state
or political subdivision under such leases or installment
purchase agreements. Such certificates provide the Trust with
the right to a pro rata undivided interest in the underlying
municipal securities. In addition, such participations generally
provide the Trust with the right to demand payment, on not more
than seven days notice, of all or any part of the
Trusts participation interest in the underlying municipal
securities, plus accrued interest.
Pre-Refunded Municipal Securities.
The
principal of, and interest on, pre-refunded municipal securities
are no longer paid from the original revenue source for the
securities. Instead, the source of such payments is typically an
escrow fund consisting of U.S. Government securities. The
assets in the escrow fund are derived from the proceeds of
refunding bonds issued by the same issuer as the pre-refunded
municipal securities. Issuers of municipal securities use this
advance refunding technique to obtain more favorable terms with
respect to securities that are not yet subject to call or
redemption by the issuer. For example, advance refunding enables
an issuer to refinance debt at lower market interest rates,
restructure debt to improve cash flow or eliminate restrictive
covenants in the indenture or other governing instrument for the
pre-refunded municipal securities. However, except for a change
in the revenue source from which principal and interest payments
are made, the pre-refunded municipal securities remain
outstanding on their original terms until they mature or are
redeemed by the issuer.
Private Activity Bonds.
Private
activity bonds, formerly referred to as industrial development
bonds, are issued by or on behalf of public authorities to
obtain funds to provide privately operated housing facilities,
airport, mass transit or port facilities, sewage disposal, solid
waste disposal or hazardous waste treatment or disposal
facilities and certain local facilities for water supply, gas or
electricity. Other types of private activity bonds, the proceeds
of which are used for the construction,
35
equipment, repair or improvement of privately operated
industrial or commercial facilities, may constitute municipal
securities, although the current federal tax laws place
substantial limitations on the size of such issues.
Special Taxing Districts.
Special
taxing districts are organized to plan and finance
infrastructure developments to induce residential, commercial
and industrial growth and redevelopment. The bond financing
methods such as tax increment finance, tax assessment, special
services district and Mello-Roos bonds (a type of municipal bond
established by the Mello-Roos Community Facilities District Act
of 1982), are generally payable solely from taxes or other
revenues attributable to the specific projects financed by the
bonds without recourse to the credit or taxing power of related
or overlapping municipalities. They often are exposed to real
estate development-related risks and can have more taxpayer
concentration risk than general tax-supported bonds, such as
general obligation bonds.
Further, the fees, special taxes, or tax allocations and other
revenues that are established to secure such financings are
generally limited as to the rate or amount that may be levied or
assessed and are not subject to increase pursuant to rate
covenants or municipal or corporate guarantees. The bonds could
default if development failed to progress as anticipated or if
larger taxpayers failed to pay the assessments, fees and taxes
as provided in the financing plans of the districts.
When-Issued
and Forward Commitment Securities
The Trust may purchase securities on a when-issued
basis and may purchase or sell securities on a forward
commitment basis in order to acquire the security or to
hedge against anticipated changes in interest rates and prices.
When such transactions are negotiated, the price, which is
generally expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities
take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the
Trust will enter into when-issued and forward commitments only
with the intention of actually receiving or delivering the
securities, as the case may be. If the Trust disposes of the
right to acquire a when-issued security prior to its acquisition
or disposes of its right to deliver or receive against a forward
commitment, it might incur a gain or loss. At the time the Trust
enters into a transaction on a when-issued or forward commitment
basis, it will designate on its books and records cash or liquid
debt securities equal to at least the value of the when-issued
or forward commitment securities. The value of these assets will
be monitored daily to ensure that their marked to market value
will at all times equal or exceed the corresponding obligations
of the Trust. There is always a risk that the securities may not
be delivered and that the Trust may incur a loss. Settlements in
the ordinary course, which may take substantially more than five
business days, are not treated by the Trust as when-issued or
forward commitment transactions and accordingly are not subject
to the foregoing restrictions.
Zero
Coupon Bonds
A zero coupon bond is a bond that does not pay interest either
for the entire life of the obligation or for an initial period
after the issuance of the obligation. When held to its maturity,
its return comes from the difference between the purchase price
and its maturity value. A zero coupon bond is normally issued
and traded at a deep discount from face value. Zero coupon bonds
allow an issuer to avoid or delay the need to generate cash to
meet current interest payments and, as a result, may involve
greater credit risk than bonds that pay interest currently or in
cash. The market prices of zero coupon bonds are affected to a
greater extent by changes in prevailing levels of interest rates
and thereby tend to be more volatile in price than securities
that pay interest periodically. In addition, the Trust would be
required to distribute the income on any of these instruments as
it accrues, even though the Trust will not receive all of the
income on a current basis or in cash. Thus, the Trust may have
to sell other investments, including when it may not be
advisable to do so, to make income distributions to its common
shareholders.
36
Strategic
Transactions
The Trust may engage in various Strategic Transactions for
hedging and risk management purposes or to enhance total return.
Strategic Transactions involve the use of derivative
instruments. Such instruments may include, but are not limited
to, financial futures contracts, swap contracts (including, but
not limited to, credit default swaps), options on financial
futures, options on swap contracts and other derivative
instruments. If the Trust engages in Strategic Transactions for
hedging and risk management purposes, it primarily intends to
use strategies that include swaps (including interest rate
swaps), financial futures contracts, options on financial
futures or options based either on an index of long-term
securities or on taxable debt securities whose prices, in the
opinion of the Advisors, correlate with the prices of the
Trusts investments. If the Trust engages in Strategic
Transactions to enhance total return, it primarily intends to
use the same strategies as discussed above for hedging and risk
management purposes and, in addition, to engage in credit
derivative transactions, including credit default swaps. There
is no assurance that these derivative strategies will be
available at any time or that the Advisors will determine to use
them for hedging or risk management purposes or to enhance total
return or, if used, that the strategies will be successful.
The use of Strategic Transactions to enhance total return may be
particularly speculative. Strategic Transactions involve risks,
including the imperfect correlation between the value of such
instruments and the underlying assets, the possible default of
the other party to the transaction and illiquidity of the
derivative instruments. Furthermore, the Trusts ability to
successfully use Strategic Transactions depends on the
Advisors ability to predict pertinent market movements,
which cannot be assured. The use of Strategic Transactions may
result in losses greater than if they had not been used, may
require the Trust to sell or purchase portfolio securities at
inopportune times or for prices other than current market
values, may limit the amount of appreciation the Trust can
realize on an investment or may cause the Trust to hold a
security that it might otherwise sell. Additionally, amounts
paid by the Trust as premiums and cash or other assets held in
margin accounts with respect to Strategic Transactions are not
otherwise available to the Trust for investment purposes. See
Risks Strategic Transactions Risk. In
addition, please see the Trusts Statement of Additional
Information for a more detailed description of Strategic
Transactions and the various derivative instruments the Trust
may use and the various risks associated with them.
Other
Investment Companies
The Trust may invest up to 10% of its total assets in securities
of other open- or closed-end investment companies (including
exchange traded funds) that invest primarily in securities of
the types in which the Trust may invest directly. The Trust may
invest in investment companies that are advised by the Advisors
or their affiliates to the extent permitted by applicable law
and/or
pursuant to exemptive relief from the Securities and Exchange
Commission. The Trust generally expects to invest in other
investment companies either during periods when it has large
amounts of uninvested cash, such as the period shortly after the
Trust receives the proceeds of the offering of its common shares
or any offering of preferred shares, or during periods when
there is a shortage of attractive, high-yielding municipal
securities available in the market. As a shareholder in an
investment company, the Trust will bear its ratable share of
that investment companys expenses, and will remain subject
to payment of the Trusts advisory and other fees and
expenses with respect to assets so invested. Holders of common
shares will therefore be subject to duplicative expenses to the
extent the Trust invests in other investment companies. The
Advisors will take expenses into account when evaluating the
investment merits of an investment in an investment company
relative to available municipal securities investments. In
addition, the securities of other investment companies may also
be leveraged and will therefore be subject to the same leverage
risks to which the Trust is subject. As described in this
Prospectus in the sections entitled Risks and
Leverage, the net asset value and market value of
leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield
generated by unleveraged shares. Investment companies may have
investment policies that differ from those of the Trust. In
addition, to
37
the extent the Trust invests in other investment companies, the
Trust will be dependent upon the investment and research
abilities of persons other than the Advisors. The Trust treats
its investments in such open- or closed-end investment companies
as investments in municipal securities.
Short-Term
Debt Securities; Temporary Defensive Position;
Invest-Up
Period
During the period in which the net proceeds of this offering of
common shares are being invested or during periods in which the
Advisors determine that they are temporarily unable to follow
the Trusts investment strategy or that it is impractical
to do so, the Trust may deviate from its investment strategy and
invest all or any portion of its assets in cash, cash
equivalents or short-term debt securities that may be either
tax-exempt or taxable. See Investment Policies and
Techniques Short-Term Taxable Fixed Income
Securities and Short-Term Tax-Exempt
Fixed Income Securities in the Statement of Additional
Information. The Advisors determination that they are
temporarily unable to follow the Trusts investment
strategy or that it is impractical to do so will generally occur
only in situations in which a market disruption event has
occurred and where trading in the securities selected through
application of the Trusts investment strategy is extremely
limited or absent or in connection with the termination of the
Trust.
Preferred
Securities of Other Investment Funds
The Trust may also invest up to 10% of its total assets in
preferred interests of other investment funds, including those
which may pay dividends that are exempt from regular Federal
income tax. A portion of such dividends may be capital gain
distributions subject to Federal capital gains tax. Such
tax-exempt funds, in turn, invest in municipal securities and
other assets that generally pay interest or make distributions
that are exempt from regular Federal income tax, such as revenue
bonds issued by state or local agencies to fund the development
of low-income, multi-family housing. Investing in such
tax-exempt preferred shares involves many of the same issues as
investing in other open- or closed-end investment companies as
discussed above. These investments also have additional risks,
including liquidity risk, the absence of regulation governing
investment practices, capital structure and leverage, affiliated
transactions and other matters, and concentration of investments
in particular issuers or industries.
Below
Investment Grade Securities
The Trust may invest up to 20% of its Managed Assets in
securities rated below investment grade such as those rated Ba
or below by Moodys and BB or below by S&P or Fitch or
in unrated securities determined by the Advisor or
Sub-Advisor
to be of comparable quality. These lower grade securities are
commonly known as junk bonds. Securities rated below
investment grade are judged to have speculative characteristics
with respect to their interest and principal payments. Such
securities may face major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and
principal payments.
Lower grade securities, though high yielding, are characterized
by high risk. They may be subject to certain risks with respect
to the issuing entity and to greater market fluctuations than
certain lower yielding, higher rated securities. The retail
secondary market for lower grade securities may be less liquid
than that of higher rated securities; adverse conditions could
make it difficult at times for the Trust to sell certain of
these securities or could result in lower prices than those used
in calculating the Trusts net asset value.
38
LEVERAGE
The Trust intends to use leverage to seek to achieve its
investment objectives. The Trust may use leverage by investing
in derivative instruments with leverage imbedded in them, such
as TOBs Residuals. The Trust may also use leverage by borrowing
funds from banks or other financial institutions, by investing
in reverse repurchase agreements, by issuing preferred shares or
by any other means permitted under the Investment Company Act.
The Trust currently intends to use combined economic leverage of
up to 54% of its net assets (35% of its Managed Assets),
although it may use combined economic leverage of up to 100% of
its net assets (50% of its Managed Assets), all or a portion of
which may be effected through the use of TOBs Residuals.
The use of leverage, including investment in TOBs Residuals, is
subject to numerous risks and will cause the Trusts net
asset value to be more volatile than if leverage was not used.
For example, a rise in short-term interest rates, which
currently are at historically low levels, will cause the
Trusts net asset value to decline more than if the Trust
had not used leverage.
The use of leverage can create risks. Changes in the value of
the Trusts portfolio, including securities bought with the
proceeds of leverage, will be borne entirely by the holders of
common shares. If there is a net decrease or increase in the
value of the Trusts investment portfolio, leverage will
decrease or increase, as the case may be, the net asset value
per common share to a greater extent than if the Trust did not
utilize leverage. A reduction in the Trusts net asset
value may cause a reduction in the market price of its shares.
During periods in which the Trust is using leverage, the fees
paid to the Advisors for advisory and
sub-advisory
services will be higher than if the Trust did not use leverage,
because the fees paid will be calculated on the basis of the
Trusts Managed Assets, which includes the proceeds from
leverage. The Trusts leveraging strategy may not be
successful.
Certain types of borrowings by the Trust may result in the Trust
being subject to covenants in credit agreements relating to
asset coverage and portfolio composition requirements. The Trust
may be subject to certain restrictions on investments imposed by
one or more lenders or by guidelines of one or more rating
agencies, which may issue ratings for any short-term debt
securities or preferred shares issued by the Trust. These
guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the
Investment Company Act. The Advisors do not believe that these
covenants or guidelines will impede them from managing the
Trusts portfolio in accordance with its investment
objectives and policies if the Trust were to utilize leverage.
To the extent permitted, the board of trustees may modify the
Trusts borrowing policies, including the purposes of
borrowings, and the length of time that the Trust may hold
portfolio securities purchased with borrowed money. The rights
of any lenders to the Trust to receive payments of interest or
repayments of principal may be senior to those of the
shareholders.
Under the Investment Company Act, the Trust is not permitted to
borrow for any purposes if, immediately after such borrowing,
the Trust would have an asset coverage ratio (as defined in the
Investment Company Act) of less than 300% with respect to
indebtedness or less than 200% with respect to preferred stock.
The Investment Company Act also provides that the Trust may not
declare distributions, or purchase its stock (including through
tender offers), if immediately after doing so it will have an
asset coverage ratio of less than 300% or 200%, as applicable.
Under the Investment Company Act, certain short-term borrowings
(such as for cash management purposes) are not subject to these
limitations if (i) repaid within 60 days,
(ii) not extended or renewed, and (iii) which are not
in excess of 5% of the total assets of a Trust.
The use of TOBs Residuals will require the Trust to earmark or
segregate liquid assets in an amount equal to any TOBs Floaters
issued by TOBs Issuers sponsored on behalf of the Trust that are
not owned by the Trust. The use of a reverse repurchase
agreement will require the Trust to earmark or segregate liquid
assets in an amount equal to the Trusts repurchase
obligation under the reverse repurchase agreement. The Trust
will not earmark or segregate assets transferred to a TOBs
Issuer or a reverse repurchase agreement counterparty. The Trust
reserves the right to modify its asset segregation
39
policies in the future to the extent that such changes are in
accordance with applicable regulations or interpretations.
The following table is furnished in response to requirements of
the Securities and Exchange Commission. It is designed to
illustrate the effect of leverage on common share total return,
assuming investment portfolio total returns (comprised of income
and changes in the value of investments held in the Trusts
portfolio) of −10%, −5%, 0%, 5% and 10%. These
assumed investment portfolio returns are hypothetical figures
and are not necessarily indicative of the investment portfolio
returns experienced or expected to be experienced by the Trust.
See Risks. The table further reflects the use of
leverage representing 35% of the Trusts Managed Assets and
an assumed annual cost of leverage of 1.25%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Portfolio Total Return (Net of Expenses)
|
|
|
(10.00
|
)%
|
|
|
(5.00
|
)%
|
|
|
0
|
%
|
|
|
5.00
|
%
|
|
|
10.00
|
%
|
|
|
Common Share Total Return
|
|
|
(16.05
|
)%
|
|
|
(8.36
|
)%
|
|
|
(0.67
|
)%
|
|
|
7.02
|
%
|
|
|
14.71
|
%
|
Although the Trust currently anticipates using leverage of up to
35% of its Managed Assets, it is permitted to use leverage up to
50% of its Managed Assets, which would magnify the gains and
losses set forth in the preceding table.
Common share total return is composed of two elements: the
common share dividends paid by the Trust (the amount of which is
largely determined by the net investment income of the Trust
after paying for any leverage used by the Trust) and gains or
losses on the value of the securities the Trust owns. As
required by Securities and Exchange Commission rules, the table
assumes that the Trust is more likely to suffer capital losses
than to enjoy capital appreciation. For example, to assume a
total return of 0% the Trust must assume that the interest it
receives on its municipal security investments is entirely
offset by losses in the value of those securities.
Residual
Interest Municipal Tender Option Bonds
The Trust may use economic leverage through its investments in
TOBs Residuals, which are derivative municipal bond securities
that have economic leverage embedded in them. TOBs Residuals and
the risks associated with them are described elsewhere in this
Prospectus. The Trust cannot assure you that the use of economic
leverage will result in a higher return on its common shares.
Credit
Facility
The Trust may borrow through a credit facility. If the Trust
enters into a credit facility, the Trust may be required to
prepay outstanding amounts or incur a penalty rate of interest
upon the occurrence of certain events of default. The Trust
would also likely have to indemnify the lenders under the credit
facility against liabilities they may incur in connection
therewith. In addition, the Trust expects that any credit
facility would contain covenants that, among other things,
likely would limit the Trusts ability to pay distributions
in certain circumstances, incur additional debt, change certain
of its investment policies and engage in certain transactions,
including mergers and consolidations, and require asset coverage
ratios in addition to those required by the Investment Company
Act. The Trust may be required to pledge its assets and to
maintain a portion of its assets in cash or high-grade
securities as a reserve against interest or principal payments
and expenses. The Trust expects that any credit facility would
have customary covenant, negative covenant and default
provisions. There can be no assurance that the Trust will enter
into an agreement for a credit facility or one on terms and
conditions representative of the foregoing, or that additional
material terms will not apply. In addition, if entered into, a
credit facility may in the future be replaced or refinanced by
one or more credit facilities having substantially different
terms or by the issuance of preferred shares.
Reverse
Repurchase Agreements
Borrowings may be made by the Trust through reverse repurchase
agreements under which the Trust sells portfolio securities to
financial institutions, such as banks and broker-dealers, and
agrees to
40
repurchase them at an agreed upon date and price. Such
agreements are considered to be borrowings under the Investment
Company Act. The Trust may utilize reverse repurchase agreements
when it is anticipated that the interest income to be earned
from the investment of the proceeds of the transaction is
greater than the interest expense of the transaction.
The Trust may also borrow money as a temporary measure for
extraordinary or emergency purposes, including the payment of
dividends and the settlement of securities transactions which
otherwise might require untimely dispositions of Trust
securities.
41
RISKS
The net asset value of, and dividends paid on, the common shares
will fluctuate with and be affected by, among other things, the
risks more fully described below.
No
Operating History
The Trust is a newly organized, non-diversified, closed-end
management investment company with no operating history.
Investment
and Market Discount Risk
An investment in the Trusts common shares is subject to
investment risk, including the possible loss of the entire
amount that you invest. As with any stock, the price of the
Trusts common shares will fluctuate with market conditions
and other factors. If shares are sold, the price received may be
more or less than the original investment. The value of a
shareholders investment in the Trust will be reduced
immediately following the initial offering by the amount of the
sales load and the amount of the organizational and offering
expenses paid by the Trust. Common shares are designed for
long-term investors and should not be treated as trading
vehicles. Shares of closed-end management investment companies
frequently trade at a discount from their net asset value. At
any point in time an investment in the Trusts common
shares may be worth less than the original amount invested, even
after taking into account distributions paid by the Trust. This
risk may be greater for investors who sell their common shares
in a relatively short period of time after completion of the
initial offering. The Trust anticipates using leverage, which
will magnify the Trusts investment, market and certain
other risks.
Build
America Bonds Risk
The BABs market is smaller and less diverse than the broader
municipal securities market. In addition, because BABs are a new
form of municipal financing and because bonds issued after
December 31, 2010 currently will not qualify as BABs unless
the relevant provisions of the Act are extended, it is difficult
to predict the extent to which a market for such bonds will
develop, meaning that BABs may experience greater illiquidity
than other types of municipal securities. If the ability to
issue BABs is not extended beyond December 31, 2010, the
number of BABs available in the market will be limited and there
can be no assurance that BABs will be actively traded. In
addition, illiquidity may negatively affect the value of the
bonds. If the ability to issue BABs is not extended beyond
December 31, 2010, the Trust will have a limited period of
time in which to purchase newly issued BABs and as such may not
be able to purchase the quantity and quality of BABs currently
intended at attractive prices.
Because issuers of direct pay BABs held in the Trusts
portfolio receive reimbursement from the U.S. Treasury with
respect to interest payment on bonds, there is a risk that those
municipal issuers will not receive timely payment from the
U.S. Treasury and may remain obligated to pay the full
interest due on direct pay BABs held by the Trust. Furthermore,
it is possible that a municipal issuer may fail to comply with
the requirements to receive the direct pay subsidy or that a
future Congress may terminate the subsidy altogether. In
addition, the Code contains a general offset rule (the IRS
Offset Rule) which allows for the possibility that subsidy
payments received by issuers of BABs may be subject to offset
against amounts owed by them to the federal government.
Moreover, the IRS may audit the agencies issuing BABs and such
audits may, among other things, examine the price at which BABs
are initially sold to investors. If the IRS concludes that a BAB
was mis-priced based on its audit, it could disallow all or a
portion of the interest subsidy received by the issuer of the
BAB. The IRS Offset Rule and the disallowance of any interest
subsidy as a result of an IRS audit could potentially adversely
affect a BABs issuers credit rating, and adversely affect
the issuers ability to repay or refinance BABs. This, in
turn, could adversely affect the ratings and value of the BABs
held by the Trust and the Trusts net asset value. In this
regard, the State of Florida recently announced that it
suspended the new issuance of BABs as a result of its
uncertainty relating to the IRS Offset Rule and, in May 2010,
the IRS withheld subsidies from several states and
municipalities, including Austin, Texas and the State of
Maryland.
42
Because the BABs program is new, certain aspects of the BABs
program may be subject to additional Federal or state level
guidance or subsequent legislation. For example, the IRS or
U.S. Treasury could impose restrictions or limitations on
the payments received. Aspects of the BABs program for which the
IRS and the U.S. Treasury have solicited public comment
include, but have not been limited to, methods for making direct
payments to issuers, the tax procedural framework for such
payments, and compliance safeguards. It is not known what
additional procedures will be implemented with respect to direct
pay BABs, if any, nor is it known what effect such possible
procedures would have on the BABs market.
Legislation extending the relevant provisions of the Act, if
any, may also modify the characteristics of BABs issued after
December 31, 2010, including the amount of subsidy paid to
issuers.
The Trust intends to invest primarily in BABs and therefore the
Trusts net asset value may be more volatile than the value
of a more broadly diversified portfolio and may fluctuate
substantially over short periods of time. Because BABs currently
do not include certain industries or types of municipal bonds
(e.g., tobacco bonds or private activity bonds), there may be
less diversification than with a broader pool of municipal
securities.
Contingent
Review Provision Risk
If, for any twenty-four month period ending on or prior to
December 31, 2014, there are no new issuances of BABs or
other taxable municipal securities with interest payments
subsidized by the U.S. Government through direct pay
subsidies, the Contingent Review Provision provides that the
Trusts board of trustees may consider terminating the
Trust or changing the non-fundamental investment policies that
govern the Trusts permissible investments. The Advisors
cannot predict what effect the termination of the BABs program
will have on the market for BABs and, if the Trust terminates in
such a market, the price available for sales of BABs held in the
Trusts portfolio may be adversely affected. In addition,
the Advisors cannot predict what effect, if any, the termination
of the BABs program or the announcement of the termination of
the Trust as a result of the Contingent Review Provision will
have on the market price or liquidity of the Trusts common
shares, although such termination or announcement may adversely
affect both the market price and liquidity of the Trusts
common shares.
In the event the Trust terminates as a result of the Contingent
Review Provision, the Trust may be required to sell portfolio
securities when it otherwise would not, including at times when
interest rate or market conditions are not favorable, which may
cause the Trust to lose a substantial amount of money on its
investments. Further, the process of liquidating the
Trusts assets could result in a reduction in the
Trusts net investment income and monthly dividend
distributions during the liquidation period. As the Trust
approaches its termination date, the portfolio composition of
the Trust may change as more of its original securities mature
or are called or sold, which may cause the Trusts returns
to decrease and the net asset value of the common shares to
fall. If the Act is not extended by Congress, the market for
BABs may be adversely affected. BABs may become more illiquid
and their market prices may fall. As a result, the Trust may
have a more difficult time selling BABs at prices approximating
the value at which the Trust is carrying the securities on its
books. If the Trust is terminated, the Trust will distribute all
of its net assets to shareholders of record as of the date of
termination after providing for all obligations of the Trust.
During such period, the Trust may not be able to invest in
accordance with its investment policies as it winds down its
portfolio. No assurance can be given as to how long it would
take to liquidate the Trusts portfolio and make a final
liquidating distribution. Securities for which no market exists
or securities trading at depressed prices, if any, may be placed
in a liquidating trust. Securities placed in a liquidating trust
may be held for an indefinite period of time until they can be
sold or pay out all of their cash flows. The Trust cannot
predict the amount of securities that will be required to be
placed in a liquidating trust.
In the event the Trust terminates as a result of the Contingent
Review Provision, the Trusts investment objectives and
policies are not designed to seek to return to investors who
purchase common shares in this offering their initial investment
on any anticipated termination date, and such initial investors
and any investors who purchase common shares after the
completion of the offering may receive more or less than their
original investment upon termination.
43
In the event the Trust changes the non-fundamental investment
policies that govern the Trusts permissible investments as
a result of the Contingent Review Provision, the Trust may be
subject to various additional risks that are not described
herein. For example, the Trust may decide to invest in certain
securities in which it currently does not intend to invest or
may, if it is already invested in such securities, decide to
invest in them to a greater degree, and such investments may
carry greater risks than the investments the Trust currently
intends to make. Moreover, the Trust may decide to sell
portfolio securities when it otherwise would not, including at
times when interest rate or market conditions are not favorable,
in order to facilitate a change in investment policies, which
may cause the Trust to lose money on its investments.
Interest
Rate Risk
Generally, when market interest rates rise, prices of debt
securities fall, and vice versa. Interest rate risk is the risk
that the debt securities in the Trusts portfolio will
decline in value because of increases in market interest rates.
As interest rates increase, slower than expected principal
payments may extend the average life of securities, potentially
locking in a below-market interest rate and reducing the
Trusts net asset value. In typical market interest rate
environments, the prices of longer-term debt securities
generally fluctuate more than the prices of shorter-term debt
securities as interest rates change.
These risks may be
greater in the current market environment because certain
interest rates are near historically low levels.
As interest
rates decline, issuers of municipal securities that have the
right to call those securities may prepay principal earlier than
scheduled, forcing the Trust to reinvest in lower-yielding
securities and potentially reducing the Trusts income.
Because the Trust intends to invest primarily in longer-term
municipal securities, the common share net asset value and
market price per common share may fluctuate more in response to
changes in market interest rates than if the Trust invested
primarily in shorter-term municipal securities. The Trust may
utilize certain strategies, including taking positions in
futures or interest rate swaps, for the purpose of reducing the
interest rate sensitivity of the Trusts debt securities
and decreasing the Trusts exposure to interest rate risk.
The Trust is not required to hedge its exposure to interest rate
risk and may choose not to do so. In addition, there is no
assurance that any attempts by the Trust to reduce interest rate
risk will be successful.
The Trust may invest in variable and floating rate debt
securities. Rates on these securities typically reset only
periodically so changes in prevailing interest rates (and
particularly sudden and significant changes) can be expected to
cause some fluctuations in the Trusts net asset value,
although these types of securities generally are less sensitive
to interest rate changes than longer duration fixed-rate
instruments. Conversely, variable and floating rate debt
securities generally will not increase in value if interest
rates decline.
Credit
Risk
Credit risk is the risk that an issuer of a municipal security
will become unable to meet its obligation to make interest and
principal payments. In general, lower rated municipal securities
carry a greater degree of risk that the issuer will lose its
ability to make interest and principal payments, which could
have a negative impact on the Trusts net asset value or
dividends. The Trust may invest up to 20% of its Managed Assets
in municipal securities that are rated Ba/BB or below by
Moodys, S&P or Fitch or that are unrated but judged
to be of comparable quality by the Advisor or
Sub-Advisor.
Bonds rated Ba/BB or below are regarded as having predominately
speculative characteristics with respect to the issuers
capacity to pay interest and repay principal, and these bonds
are commonly referred to as junk bonds. These
securities are subject to a greater risk of default. The prices
of these lower grade securities are more sensitive to negative
developments, such as a decline in the issuers revenues or
a general economic downturn, than are the prices of higher grade
securities. Lower grade securities tend to be less liquid than
investment grade securities and the market values of lower grade
securities tend to be more volatile than investment grade
securities.
44
General
Municipal Securities Market Risk
Economic exposure to the municipal securities market involves
certain risks. The Trusts economic exposure to municipal
securities includes municipal securities in the Trusts
portfolio and municipal securities to which the Trust is exposed
through the ownership of TOBs Residuals. The municipal market is
one in which dealer firms make markets in bonds on a principal
basis using their proprietary capital, and during the recent
market turmoil these firms capital was severely
constrained. As a result, some firms were unwilling to commit
their capital to purchase and to serve as a dealer for municipal
securities. Certain municipal securities may not be registered
with the SEC or any state securities commission and will not be
listed on any national securities exchange. The amount of public
information available about the municipal securities to which
the Trust is economically exposed is generally less than that
for corporate equities or bonds, and the investment performance
of the Trust may therefore be more dependent on the analytical
abilities of the Advisor or
Sub-Advisor
than would be, for example, a stock fund. The secondary market
for municipal securities, particularly the below investment
grade bonds to which the Trust may be economically exposed, also
tends to be less well-developed or liquid than many other
securities markets, which may adversely affect the ability to
sell such bonds at attractive prices. In addition, many state
and municipal governments that issue securities are currently
under significant economic and financial stress and may not be
able to satisfy their obligations. The ability of municipal
issuers to make timely payments of interest and principal may be
diminished during general economic downturns and as governmental
cost burdens are reallocated among federal, state and local
governments. The taxing power of any governmental entity may be
limited by provisions of state constitutions or laws and an
entitys credit will depend on many factors, including the
entitys tax base, the extent to which the entity relies on
federal or state aid, and other factors which are beyond the
entitys control. In addition, laws enacted in the future
by Congress or state legislatures or referenda could extend the
time for payment of principal
and/or
interest, or impose other constraints on enforcement of such
obligations, or on the ability of municipalities to levy taxes.
Revenue bonds issued by state or local agencies to finance the
development of low-income, multi-family housing involve special
risks in addition to those generally associated with municipal
securities, including that the underlying properties may not
generate sufficient income to pay expenses and interest costs.
Such securities are generally non-recourse against the property
owner, may be junior to the rights of others with an interest in
the properties, may pay interest that changes based in part on
the financial performance of the property, may be prepayable
without penalty and may be used to finance the construction of
housing developments which, until completed and rented, do not
generate income to pay interest. Increases in interest rates
payable on senior obligations may make it more difficult for
issuers to meet payment obligations on subordinated bonds.
Special
Risks Related to Certain Municipal Securities
The Trust may invest in municipal leases and certificates of
participation in such leases. Municipal leases and certificates
of participation involve special risks not normally associated
with general obligations or revenue bonds. Leases and
installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means
for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements
for the issuance of debt. The debt issuance limitations are
deemed to be inapplicable because of the inclusion in many
leases or contracts of non-appropriation clauses
that relieve the governmental issuer of any obligation to make
future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis. In addition, such
leases or contracts may be subject to the temporary abatement of
payments in the event the governmental issuer is prevented from
maintaining occupancy of the leased premises or utilizing the
leased equipment. Although the obligations may be secured by the
leased equipment or facilities, the disposition of the property
in the event of non-appropriation or foreclosure might prove
difficult, time consuming and costly, and may result in a delay
in recovering or the failure to fully recover the Trusts
original investment. In the event of non-appropriation, the
issuer would be in
45
default and taking ownership of the assets may be a remedy
available to the Trust, although the Trust does not anticipate
that such a remedy would normally be pursued. To the extent that
the Trust invests in unrated municipal leases or participates in
such leases, the credit quality rating and risk of cancellation
of such unrated leases will be monitored on an ongoing basis.
Certificates of participation, which represent interests in
unmanaged pools of municipal leases or installment contracts,
involve the same risks as the underlying municipal leases. In
addition, the Trust may be dependent upon the municipal
authority issuing the certificates of participation to exercise
remedies with respect to the underlying securities. Certificates
of participation also entail a risk of default or bankruptcy,
both of the issuer of the municipal lease and also the municipal
agency issuing the certificate of participation.
Call and
Redemption Risk
A municipal securitys issuer may call the security for
redemption before it matures. If this happens to a municipal
security that the Trust holds, the Trust may lose income and may
have to invest the proceeds in municipal securities with lower
yields.
Below
Investment Grade Securities Risk
The Trust may invest up to 20% of its Managed Assets in
securities that are rated below investment grade, which are
commonly referred to as junk bonds and are regarded
as predominately speculative with respect to the issuers
capacity to pay interest and repay principal.
Lower grade securities may be particularly susceptible to
economic downturns. It is likely that an economic recession
could disrupt severely the market for such securities and may
have an adverse impact on the value of such securities. In
addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities
to repay principal and pay interest thereon and increase the
incidence of default for such securities.
Lower grade securities, though high yielding, are characterized
by high risk. They may be subject to certain risks with respect
to the issuing entity and to greater market fluctuations than
certain lower yielding, higher rated securities. The retail
secondary market for lower grade securities may be less liquid
than that for higher rated securities. Adverse conditions could
make it difficult at times for the Trust to sell certain
securities or could result in lower prices than those used in
calculating the Trusts net asset value. Because of the
substantial risks associated with investments in lower grade
securities, you could lose money on your investment in common
shares of the Trust, both in the short-term and the long-term.
Reinvestment
Risk
Reinvestment risk is the risk that income from the Trusts
portfolio will decline if and when the Trust invests the
proceeds from matured, traded or called municipal securities at
market interest rates that are below the portfolios
current earnings rate. A decline in income could affect the
common shares market price or your overall returns.
Tender
Option Bonds Risk
TOBs Residuals are derivative municipal securities that have
embedded in them the risk of economic leverage. There is no
assurance that the Trusts strategy of using TOBs Residuals
to leverage its assets will be successful.
Distributions on TOBs Residuals will bear an inverse
relationship to short-term municipal bond interest rates.
Distributions on the TOBs Residuals paid to the Trust will be
reduced or, in the extreme, eliminated as short-term municipal
interest rates rise and will increase when short-term municipal
interest rates fall. The amount of such reduction or increase is
a function, in part, of the amount of TOBs Floaters sold by the
issuer of these securities relative to the amount of the TOBs
Residuals that it sells.
46
The greater the amount of TOBs Floaters sold relative to the
TOBs Residuals, the more volatile the distributions on the TOBs
Residuals will be. Short-term interest rates are at historic
lows and may be more likely to rise in the current market
environment.
The Trusts use of TOBs Residuals will create economic
leverage. Any economic leverage achieved through the
Trusts investment in TOBs Residuals will create an
opportunity for increased common share net income and returns,
but will also create the possibility that common share long-term
returns will be diminished if the cost of the TOBs Floaters
exceeds the return on the securities in the TOBs Issuer. See
Risks General Leverage Risk. If the
income and gains earned on municipal securities owned by a TOBs
Issuer that issues TOBs Residuals to the Trust are greater than
the payments due on the TOBs Floaters, the Trusts returns
will be greater than if it had not invested in the TOBs Residual.
The Trust has no current intention of investing in recourse TOBs
Residuals. However, circumstances may change and it is possible
that in the future the Trust may elect to invest in recourse
TOBs Residuals to leverage its portfolio. If the Trust uses
recourse TOBs Residuals, the liquidity provider may seek
recourse against assets of the Trust, and the Trust may have to
pay the liquidity provider the difference between the purchase
price of any TOBs Floaters put to the liquidity provider by
third party investors and the proceeds realized by the liquidity
provider from the remarketing of those TOBs Floaters or the sale
of the assets in the TOBs Issuer, which could cause the Trust to
lose money in excess of its investment in a TOBs Issuer.
Although the Trust generally would unwind a TOBs transaction
rather than try to sell a TOBs Residual, if it did try to sell a
TOBs Residual, its ability to do so would depend on the
liquidity of the TOBs Residual. TOBs Residuals have varying
degrees of liquidity based, among other things, upon the
liquidity of the underlying securities deposited in the TOBs
Issuer. The market price of TOBs Residuals are more volatile
than the underlying securities due to leverage. The leverage
attributable to TOBs Residuals may be called away on
relatively short notice and therefore may be less permanent than
more traditional forms of leverage. In certain circumstances,
the likelihood of an increase in the volatility of net asset
value and market price of the common shares may be greater for a
fund that relies primarily on TOBs Residuals to achieve a
desired effective leverage ratio. The Trust may be required to
sell its TOBs Residuals at less than favorable prices, or
liquidate other Trust portfolio holdings in certain
circumstances, including, but not limited to, the following:
|
|
|
|
|
If the Trust has a need for cash and the securities in the TOBs
Issuer are not actively trading due to adverse market conditions;
|
|
|
|
If the sponsors of TOBs Issuers (as a collective group or
individually) experience financial hardship and consequently
seek to terminate TOBs Issuers sponsored by them; and
|
|
|
|
If the value of an underlying security declines significantly
(to a level below the notional value of the TOBs Floaters issued
by the TOBs Issuer) and if additional collateral has not been
posted by the Trust.
|
The Trust may invest in taxable TOBs Residuals, issued by TOBs
Issuers formed with taxable municipal securities. The market for
such taxable TOBs Residuals is relatively new and undeveloped.
Initially, there may be a limited number of counterparties,
which may increase the credit risks, counterparty risks,
liquidity risks and other risks of investing in taxable TOBs
Residuals.
General
Leverage Risk
The use of leverage creates an opportunity for increased common
share net investment income dividends, but also creates risks
for the holders of common shares. Leverage is a speculative
technique that exposes the Trust to greater risk and increased
costs than if it were not implemented. Increases and decreases
in the value of the Trusts portfolio will be magnified
when the Trust uses leverage. As a result, leverage may cause
greater changes in the Trusts net asset value. The Trust
will also have to pay interest
47
on its borrowings, if any, which may reduce the Trusts
return. This interest expense may be greater than the
Trusts return on the underlying investment. The
Trusts leveraging strategy may not be successful.
If the Trust enters into a credit facility, the Trust may be
required to prepay outstanding amounts or incur a penalty rate
of interest upon the occurrence of certain events of default.
The Trust would also likely have to indemnify the lenders under
the credit facility against liabilities they may incur in
connection therewith. In addition, the Trust expects that any
credit facility would contain covenants that, among other
things, likely would limit the Trusts ability to pay
distributions in certain circumstances, incur additional debt,
change certain of its investment policies and engage in certain
transactions, including mergers and consolidations, and require
asset coverage ratios in addition to those required by the
Investment Company Act. The Trust may be required to pledge its
assets and to maintain a portion of its assets in cash or
high-grade securities as a reserve against interest or principal
payments and expenses.
Reverse repurchase agreements involve the risks that the
interest income earned on the investment of the proceeds will be
less than the interest expense and Trust expenses, that the
market value of the securities sold by the Trust may decline
below the price of the securities the Trust is obligated to
repurchase and that the securities may not be returned to the
Trust. There is no assurance that reverse repurchase agreements
can be successfully employed.
Although the Trust does not have any immediate intention to do
so, the Trust may in the future issue preferred shares as a form
of financial leverage. Any such preferred shares of the Trust
would be senior to the Trusts common shares, such that
holders of preferred shares would have priority over the
distribution of the Trusts assets, including dividends and
liquidating distributions. If preferred shares are issued and
outstanding, holders of the preferred shares would elect two
trustees of the Trust, voting separately as a class.
The Trust may also use leverage through its investments in TOBs
Residuals. See Tender Option Bonds Risk.
The Trust anticipates that the money borrowed for investment
purposes will pay interest based on shorter-term interest rates
that would be periodically reset. So long as the Trusts
portfolio provides a higher rate of return, net of expenses,
than the interest rate on borrowed money as reset periodically,
the leverage may cause the holders of common shares to receive a
higher current rate of return than if the Trust were not
leveraged. If, however, long-term
and/or
short-term rates rise, the interest rate on borrowed money could
exceed the rate of return on securities held by the Trust,
reducing return to the holders of common shares. Recent
developments in the credit markets may adversely affect the
ability of the Trust to borrow for investment purposes and may
increase the costs of such borrowings, which would reduce
returns to the holders of common shares.
There is no assurance that a leveraging strategy will be
successful. Leverage involves risks and special considerations
for common shareholders, including:
|
|
|
|
|
the likelihood of greater volatility of net asset value, market
price and dividend rate of the common shares than a comparable
portfolio without leverage;
|
|
|
|
the risk that fluctuations in interest rates on borrowings and
short-term debt or in the interest or dividend rates on any
leverage that the Trust must pay will reduce the return to the
common shareholders;
|
|
|
|
the effect of leverage in a declining market, which is likely to
cause a greater decline in the net asset value of the common
shares than if the Trust were not leveraged, which may result in
a greater decline in the market price of the common shares;
|
|
|
|
when the Trust uses financial leverage, the investment advisory
fees payable to the Advisors will be higher than if the Trust
did not use leverage; and
|
|
|
|
leverage may increase operating costs, which may reduce total
return.
|
The use of reverse repurchase agreements and TOBs Residuals will
require the Trust to segregate assets to cover its obligations
(or, if the Trust borrows money or issues preferred shares, to
maintain
48
asset coverage in conformity with the requirements of the
Investment Company Act). While the segregated assets may be
invested in liquid securities, they may not be used for other
operational purposes. Consequently, the use of leverage may
limit the Trusts flexibility and may require that the
Trust sell other portfolio investments to pay Trust expenses, to
maintain assets in an amount sufficient to cover the
Trusts leveraged exposure or to meet other obligations at
a time when it may be disadvantageous to sell such assets.
Certain types of borrowings by the Trust may result in the Trust
being subject to covenants in credit agreements relating to
asset coverage and portfolio composition requirements. The Trust
may be subject to certain restrictions on investments imposed by
guidelines of one or more rating agencies, which may issue
ratings for the short-term corporate debt securities or
preferred shares issued by the Trust. These guidelines may
impose asset coverage or portfolio composition requirements that
are more stringent than those imposed by the Investment Company
Act. The Advisors do not believe that these covenants or
guidelines will impede them from managing the Trusts
portfolio in accordance with the Trusts investment
objectives and policies.
The Trust may invest in the securities of other investment
companies. Such securities may also be leveraged, and will
therefore be subject to the leverage risks described above. This
additional leverage may in certain market conditions reduce the
net asset value of the Trusts common shares and the
returns to the holders of common shares.
Volatility
Risk
The use of leverage by the Trust will cause the net asset value,
and possibly the market price, of the Trusts common shares
to fluctuate significantly in response to changes in interest
rates and other economic indicators. In addition, the Trust may
invest up to 20% of its Managed Assets in below investment grade
municipal securities, which may be less liquid and therefore
more volatile than investment grade municipal securities. As a
result, the net asset value and market price of the common
shares of the Trust will be more volatile than those of a
closed-end investment company that is not exposed to leverage or
that does not invest in below investment grade municipal
securities.
Current
Economic Conditions Credit Crisis Liquidity and
Volatility Risk
The markets for credit instruments have experienced periods of
extreme illiquidity and volatility since the latter half of
2007. General market uncertainty and consequent repricing of
risk have led to market imbalances of sellers and buyers, which
in turn have resulted in significant valuation uncertainties in
a variety of debt securities, including municipal securities.
These conditions resulted in, and in many cases continue to
result in, greater volatility, less liquidity, widening credit
spreads and a lack of price transparency, with many debt
securities remaining illiquid and of uncertain value. Such
market conditions may make valuation of some of the Trusts
municipal securities uncertain
and/or
result in sudden and significant valuation increases or declines
in its holdings. In addition, illiquidity and volatility in the
credit markets may directly and adversely affect the setting of
dividend rates on the common shares.
In response to the recent national economic downturn,
governmental cost burdens may be reallocated among federal,
state and local governments. Also, as a result of the downturn,
many state and local governments have experienced significant
reductions in revenues and consequent difficulties meeting
ongoing expenses. As a result, certain of these state and local
governments may have difficulty paying principal or interest on
their outstanding debt and may experience ratings downgrades of
their debt. Also, issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy
of such an issuer, holders of municipal securities could
experience delays in collecting principal and interest, and such
holders may not, in all circumstances, be able to collect all
principal and interest to which they are entitled. To enforce
its rights in the event of a default in the payment of interest
or repayment of principal, or both, the Trust may take
possession of and manage the assets securing the issuers
obligations on such securities, which may increase the
Trusts operating expenses.
49
In addition, laws enacted in the future by Congress, state
legislatures or referenda could extend the time for payment of
principal
and/or
interest, or impose other constraints on enforcement of such
obligations or on the ability of municipalities to levy taxes.
Inflation
Risk
Inflation risk is the risk that the value of assets or income
from investment will be worth less in the future, as inflation
decreases the value of money. As inflation increases, the real
value of the common shares and distributions on those shares can
decline. In addition, during any periods of rising inflation,
interest rates on any borrowings by the Trust would likely
increase, which would tend to further reduce returns to the
holders of common shares.
Non-Diversification
Risk
The Trust has registered as a non-diversified
investment company under the Investment Company Act. For Federal
income tax purposes, the Trust, with respect to up to 50% of its
total assets, will be able to invest more than 5% (but not more
than 25%, except for investments in government securities and
securities of other regulated investment companies, which are
not limited for tax purposes) of the value of its total assets
in the obligations of any single issuer or the securities of one
or more qualified publicly traded partnerships. To the extent
the Trust invests a relatively high percentage of its assets in
the obligations of a limited number of issuers, the Trust may be
more susceptible than a more widely diversified investment
company to any single economic, political or regulatory
occurrence.
Economic
Sector and Geographic Risk
The Trust, as a fundamental policy, may not invest 25% or more
of the value of its Managed Assets in any one industry. However,
this limitation does not apply to securities of the
U.S. Government, any state government or their respective
agencies, or instrumentalities and securities backed by the
credit of any federal or state governmental entity. As such, the
Trust may invest 25% of more of its Managed Assets in municipal
securities of issuers in the same state (or U.S. Territory)
or in the same economic sector. If the Trust does so, this may
make it more susceptible to adverse economic, political or
regulatory occurrences affecting a particular state or economic
sector. As concentration increases, so does the potential for
fluctuation in the net asset value of the Trusts common
shares. See Investment Objectives and Policies
Investment Restrictions in the Trusts Statement of
Additional Information.
Market
Disruption and Geopolitical Risk
The aftermath of the war in Iraq, instability in Afghanistan,
Pakistan and the Middle East and terrorist attacks in the United
States and around the world may result in market volatility, may
have long-term effects on the U.S. and worldwide financial
markets and may cause further economic uncertainties in the
United States and worldwide. The Trust does not know how long
the securities markets may be affected by these events and
cannot predict the effects of these events or similar events in
the future on the U.S. economy and securities markets.
U.S.
Government-Sponsored Agencies Risk
While certain U.S. Government-sponsored agencies, such as
the FHLMC and the FNMA, may be chartered or sponsored by acts of
Congress, their securities are neither issued nor guaranteed by
the U.S. Treasury, and therefore may lose value. On
September 7, 2008, the FHFA, a new independent regulatory
agency, placed FNMA and FHLMC into conservatorship, a statutory
process designed to stabilize a troubled institution with the
objective of returning the entity to normal business operations.
A July, 2009 congressional report issued by the Committee on
Oversight and Government Reform noted
50
that the role of the FNMA and FHLMC in the financial crisis
was significant and has received too little
attention. In addition, the U.S. Treasury has been
purchasing mortgage-backed securities issued by FNMA and FHLMC
in the open market to create market liquidity and, in part, to
stabilize their market values. The U.S. Treasury has also
entered into a new secured lending credit facility with both of
those corporations to provide liquidity if needed, and a
Preferred Stock Purchase Agreement, which will ensure that each
corporation maintains a positive net worth.
Strategic
Transactions Risk
The Trust may engage in various Strategic Transactions for
hedging and risk management purposes or to enhance total return.
Strategic Transactions involve the use of derivative
instruments. The use of Strategic Transactions to enhance total
return may be particularly speculative. Strategic Transactions
involve risks, including the imperfect correlation between the
value of such instruments and the underlying assets, the
possible default of the other party to the transaction and
illiquidity of the derivative instruments. Furthermore, the
Trusts ability to successfully use Strategic Transactions
depends on the Advisors ability to predict pertinent
market movements, which cannot be assured. The use of Strategic
Transactions may result in losses greater than if they had not
been used, may require the Trust to sell or purchase portfolio
securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Trust
can realize on an investment or may cause the Trust to hold a
security that it might otherwise sell. Additionally, amounts
paid by the Trust as premiums and cash or other assets held in
margin accounts with respect to Strategic Transactions are not
otherwise available to the Trust for investment purposes. In
addition, please see the Trusts Statement of Additional
Information for a more detailed description of Strategic
Transactions and the various derivative instruments the Trust
may use and the various risks associated with them.
Counterparty
Risk
The Trust will be subject to credit risk with respect to the
counterparties to the derivative contracts purchased by the
Trust. If a counterparty becomes bankrupt or otherwise fails to
perform its obligations under a derivative contract due to
financial difficulties, the Trust may experience significant
delays in obtaining any recovery under the derivative contract
in bankruptcy or other reorganization proceedings. The Trust may
obtain only a limited recovery, or may obtain no recovery, in
such circumstances.
Insurance
Risk
The Trust may purchase municipal securities that are secured by
insurance, bank credit agreements or escrow accounts. The credit
quality of the companies that provide such credit enhancements
will affect the value of those securities. Many significant
providers of insurance for municipal securities have recently
incurred significant losses as a result of exposure to
sub-prime
mortgages and other lower credit quality investments that have
experienced recent defaults or otherwise suffered extreme credit
deterioration. As a result, such losses have reduced the
insurers capital and called into question their continued
ability to perform their obligations under such insurance if
they are called upon to do so in the future. These events may
presage one or more rating reductions for any other insurer in
the future. While an insured municipal security will typically
be deemed to have the rating of its insurer, if the insurer of a
municipal security suffers a downgrade in its credit rating or
the market discounts the value of the insurance provided by the
insurer, the rating of the underlying municipal security will be
more relevant and the value of the municipal security will more
closely, if not entirely, reflect such rating. In such a case,
the value of insurance associated with a municipal security
would decline and the insurance may not add any value. As
concern has increased about the balance sheets of insurers,
prices on insured bonds especially those bonds
issued by weaker underlying credits have declined.
Most insured bonds are currently being valued according to their
fundamentals as if they were uninsured. The insurance feature of
a municipal security normally provides that it guarantees the
full payment of principal and interest when due through the life
of an insured obligation, but does not guarantee the market
value of
51
the insured obligation or the net asset value of the common
shares represented by such insured obligation.
Legislation
Risk
At any time after the date of this Prospectus, legislation may
be enacted that could negatively affect the assets of the Trust
or the issuers of such assets. Changing approaches to regulation
may have a negative impact on the entities in which the Trust
invests. Legislation or regulation may also change the way in
which the Trust itself is regulated. There can be no assurance
that future legislation, regulation or deregulation will not
have a material adverse effect on the Trust or will not impair
the ability of the Trust to achieve its investment objectives.
Portfolio
Turnover Risk
The Trusts annual portfolio turnover rate may vary greatly
from year to year. Portfolio turnover rate is not considered a
limiting factor in the execution of investment decisions for the
Trust. A higher portfolio turnover rate results in
correspondingly greater brokerage commissions and other
transactional expenses that are borne by the Trust. High
portfolio turnover may result in an increased realization of net
short-term capital gains by the Trust which, when distributed to
common shareholders, will be taxable as ordinary income.
Additionally, in a declining market, portfolio turnover may
create realized capital losses.
Deflation
Risk
Deflation risk is the risk that prices throughout the economy
decline over time, which may have an adverse effect on the
market valuation of companies, their assets and their revenues.
In addition, deflation may have an adverse effect on the
creditworthiness of issuers and may make issuer default more
likely, which may result in a decline in the value of the
Trusts portfolio.
Illiquid
Securities Risk
The market for municipal securities is generally smaller than
other markets, resulting in heightened liquidity risk. The Trust
may invest in municipal securities and other instruments that,
at the time of investment, are illiquid. Illiquid securities are
securities that are not readily marketable and may include some
restricted securities, which are securities that may not be
resold to the public without an effective registration statement
under the Securities Act, or may be sold only in a privately
negotiated transaction or pursuant to an exemption from
registration. Illiquid securities involve the risk that the
securities will not be able to be sold at the time desired by
the Trust or at prices approximating the values at which the
Trust is carrying the securities on its books.
Anti-Takeover
Provisions
The Trusts Agreement and Declaration of Trust includes
provisions that could limit the ability of other entities or
persons to acquire control of the Trust or convert the Trust to
open-end status. These provisions could deprive the holders of
common shares of opportunities to sell their common shares at a
premium over the then current market price of the common shares
or at net asset value. In addition, if the Trust issues
preferred shares, the holders of the preferred shares will have
voting rights that could deprive holders of common shares of
such opportunities.
52
HOW THE
TRUST MANAGES RISK
Investment
Limitations
The Trust has adopted certain investment limitations designed to
limit investment risk. These limitations are fundamental and may
not be changed without the approval of the holders of a majority
of the outstanding common shares and, if issued, preferred
shares voting together as a single class, and the approval of
the holders of a majority of any preferred shares voting as a
separate class. Among other restrictions, the Trust may not
invest 25% or more of the value of its Managed Assets in any one
industry, provided that this limitation does not apply to
securities of the U.S. Government, any state government or
their respective agencies, or instrumentalities and securities
backed by the credit of any federal or state governmental entity.
Quality
of Investments
Under normal market conditions, the Trust will invest at least
80% of its Managed Assets in securities of investment grade
quality at the time of investment. Investment grade quality
securities are securities rated within the four highest grades
(Baa or BBB or better) by Moodys,
S&P or Fitch or securities that are unrated but judged to
be of comparable quality by the Advisor or the
Sub-Advisor.
Management
of Investment Portfolio and Capital Structure to Limit Leverage
Risk
The Trust may take certain actions if short-term interest rates
increase or market conditions otherwise change (or the Trust
anticipates such an increase or change) and the Trusts
leverage begins (or is expected) to adversely affect common
shareholders. In order to attempt to offset such a negative
impact of leverage on common shareholders, the Trust may shorten
the average maturity of its investment portfolio (by investing
in short-term securities) or may reduce its leverage. The Trust
may also attempt to reduce leverage by limiting its investment
in TOBs Residuals and by terminating reverse repurchase
agreements to which it is a party. As explained above under
Risks General Leverage Risk, the success
of any such attempt to limit leverage risk depends on the
Advisors ability to accurately predict interest rate or
other market changes. Because of the difficulty of making such
predictions, the Trust may never attempt to manage its capital
structure in the manner described in this paragraph.
Strategic
Transactions
The Trust may use certain Strategic Transactions designed to
limit the risk of bond price fluctuations and to preserve
capital. These strategies include using swaps, financial futures
contracts, options on financial futures or options based on
either an index of long-term securities or on taxable debt
securities whose prices, in the opinion of the Advisors,
correlate with the prices of the Trusts investments. There
can be no assurance that Strategic Transactions will be used or
used effectively to limit risk, and Strategic Transactions may
be subject to their own risks. Please see the Trusts
Statement of Additional Information for a more detailed
description of Strategic Transactions and the various derivative
instruments the Trust may use and the various risks associated
with them.
53
MANAGEMENT
OF THE TRUST
Trustees
and Officers
The board of trustees is responsible for the overall management
of the Trust, including supervision of the duties performed by
the Advisors. There are ten trustees of the Trust. A majority of
the trustees will not be interested persons (as
defined in the Investment Company Act) of the Trust. The name
and business address of the trustees and officers of the Trust
and their principal occupations and other affiliations during
the past five years are set forth under Management of the
Trust in the Statement of Additional Information.
Investment
Advisor and
Sub-Advisor
BlackRock Advisors acts as the Trusts investment advisor.
BlackRock Advisors is responsible for the management of the
Trusts portfolio and provides the necessary personnel,
facilities, equipment and certain other services necessary to
the operation of the Trust. BlackRock Investment Management acts
as the Trusts
sub-advisor.
BlackRock Investment Management will perform certain of the
day-to-day investment management of the Trust. BlackRock
Advisors, located at 100 Bellevue Parkway, Wilmington, Delaware
19809, and BlackRock Investment Management, located at 55 East
52
nd
Street,
New York, New York 10055, are wholly owned subsidiaries of
BlackRock, Inc. (BlackRock), which is a leader in
investment management, risk management and advisory services for
institutional and retail clients worldwide. At June 30, 2010,
BlackRocks assets under management was $3.151 trillion.
BlackRock participated in the first BAB issuance and currently
manages approximately $4.5 billion in BABs across its
entire fixed income platform, as of June 30, 2010. The
BlackRock organization has over 20 years of experience
managing closed-end funds and, as of June 30, 2010, advised
a registered
closed-end
fund family of 95 exchange-listed active funds with
approximately $36.6 billion in assets. In addition,
BlackRock advised 3
non-exchange-listed
closed-end
funds with approximately $815 million in assets.
BlackRock offers products that span the risk spectrum to meet
clients needs, including active, enhanced and index
strategies across markets and asset classes. Products are
offered in a variety of structures including separate accounts,
mutual funds,
iShares
®
(exchange traded funds), and other pooled investment vehicles.
BlackRock also offers risk management, advisory and enterprise
investment system services to a broad base of institutional
investors through
BlackRock
Solutions
®
.
Headquartered in New York City, as of June 30, 2010,
the firm has approximately 8,500 employees in 24 countries
and a major presence in key global markets, including North and
South America, Europe, Asia, Australia and the Middle East and
Africa.
Investment
Philosophy
BlackRocks investment decision-making process for the
municipal bond sector is subject to the same discipline,
oversight and investment philosophy that the firm applies to
other sectors of the fixed income market.
BlackRock uses a relative value strategy that evaluates the
trade-off between risk and return to seek to achieve the
Trusts investment objectives. This strategy is combined
with disciplined risk control techniques and applied in sector,
sub-sector
and individual security selection decisions. BlackRocks
extensive personnel and technology resources are the key drivers
of the investment philosophy.
BlackRocks
Municipal Securities Team
BlackRock uses a team approach in managing municipal portfolios.
BlackRock believes that this approach offers substantial
benefits over one that is dependent on the market wisdom or
investment expertise of only a few individuals. BlackRocks
municipal bond team includes 27 portfolio managers with an
average experience of 17 years and 12 credit research
analysts with an average experience of 15 years.
54
As of June 30, 2010, BlackRocks fundamental fixed
income municipal bond portfolio managers were responsible for
municipal bond portfolios valued at approximately
$108.5 billion. Municipal mandates include the management
of open- and closed-end mutual funds, municipal-only separate
accounts, municipal allocations within larger institutional
mandates or municipal liquidity accounts. The team currently
manages 61 closed-end municipal funds, with over
$22.5 billion in assets under management.
Portfolio
Managers
Peter Hayes
, Managing Director, is head of the
Municipal Bonds Group within BlackRock Fundamental Fixed Income
and a member of the Fixed Income Executive Committee. He leads
the Municipal Bond Management Committee, which oversees
municipal bond portfolio management, research and trading
activities, and is a member of the firms Leadership and
Operating Committees.
Mr. Hayes service with the firm dates back to 1987,
including his years with Merrill Lynch Investment Managers
(MLIM), which merged with BlackRock in 2006. At MLIM, he was
head of the short term tax-exempt trading desk, and managed the
CMA Tax-Exempt Fund and other short term municipal bond
portfolios. Prior to joining MLIM, Mr. Hayes was a trader
for Shawmut Bank.
Theodore R. Jaeckel, Jr.
, CFA, Managing
Director, is co-head of the Municipal Mutual Funds Team within
BlackRocks Municipal Fixed Income Portfolio Management
Group. He is also a member of BlackRocks Municipal Bond
Management Committee, which oversees all municipal bond
portfolio management, research and trading activities.
Mr. Jaeckels service with the firm dates back to
1990, including his years with MLIM, which merged with BlackRock
in 2006. At MLIM, he was a portfolio manager for municipal bond
alternative and high yield strategies. Prior to joining MLIM,
Mr. Jaeckel was a municipal bond trader with Chemical Bank.
James Pruskowski
, Managing Director, is a member
of the Municipals Group within BlackRock Fundamental Fixed
Income. He is head of Institutional and Wealth Management
Municipal Portfolios. He is a member of BlackRocks
Municipal Bond Management Committee, which oversees all
municipal bond portfolio management, research and trading
activities.
Prior to joining the Municipal Bond Portfolio Team in 2003,
Mr. Pruskowski focused on interest rate products within
BlackRocks Fixed Income Portfolio Management Group. From
1996 to 2000, Mr. Pruskowski was a member of
BlackRocks Portfolio Analytics Group, where he began his
career.
Michael Kalinoski
, CFA, Director, is a member of
the Municipals Investment Team within BlackRock Fundamental
Fixed Income.
Mr. Kalinoskis service with the firm dates back to
1999, including his years with MLIM, which merged with BlackRock
in 2006. At MLIM, he was a member of the tax-exempt fixed income
team responsible for managing a number of national and state
funds. Prior to joining MLIM in 1999, Mr. Kalinoski was a
municipal trader with Strong Capital Management.
BlackRocks
Investment Process
BlackRock has in-depth expertise in the fixed income market.
BlackRock applies the same risk-controlled, active sector
rotation style to the management process for all of its fixed
income portfolios. BlackRock believes that it is unique in its
integration of taxable and municipal bond specialists. Both
taxable and municipal bond portfolio managers share the same
trading floor and interact frequently for determining the
firms overall investment strategy. This interaction allows
each portfolio manager to access the combined experience and
expertise of the entire portfolio management group at BlackRock.
BlackRocks portfolio management process emphasizes
research and analysis of specific sectors and securities, not
interest rate speculation. BlackRock believes that market-timing
strategies can be
55
highly volatile and potentially produce inconsistent results.
Instead, BlackRock thinks that value over the long-term is best
achieved through a risk-controlled approach, focusing on sector
allocation, security selection and yield curve management.
In the municipal market, BlackRock believes one of the most
important determinants of value is supply and demand.
BlackRocks ability to monitor investor flows and frequency
and seasonality of issuance is helpful in anticipating the
supply and demand for sectors. BlackRock believes that the
breadth and expertise of its municipal bond team allow it to
anticipate issuance flows, forecast which sectors are likely to
have the most supply and plan its investment strategy
accordingly.
BlackRocks approach to credit risk incorporates a
combination of sector-based, top-down macro-analysis of industry
sectors to determine relative weightings with a name-specific
(issuer-specific),
bottom-up
detailed credit analysis of issuers and structures. The
sector-based approach focuses on rotating into sectors that are
undervalued and exiting sectors when fundamentals or technicals
become unattractive. The name-specific approach focuses on
identifying special opportunities where the market undervalues a
credit, and devoting concentrated resources to research the
credit and monitor the position. BlackRocks analytical
process focuses on anticipating change in credit trends before
market recognition. Credit research is a critical, independent
element of BlackRocks municipal process.
Investment
Management Agreement
Pursuant to an investment management agreement between BlackRock
Advisors and the Trust (the Investment Management
Agreement), the Trust has agreed to pay BlackRock Advisors
a management fee at an annual rate equal to 0.55% of the average
daily value of the Trusts Managed Assets (0.85% of the
Trusts net assets, assuming leverage of 35%).
Managed Assets means the total assets of the Trust,
(including any assets attributable to money borrowed for
investment purposes) minus the sum of the Trusts accrued
liabilities (other than money borrowed for investment purposes).
For the avoidance of doubt, assets attributable to money
borrowed for investment purposes includes the portion of the
Trusts assets in a TOBs Issuer of which the Trust owns the
TOBs Residual. This means that during periods in which the Trust
is using leverage, the fee paid to BlackRock Advisors will be
higher than if the Trust did not use leverage because the fee is
calculated as a percentage of the Trusts Managed Assets,
which include those assets purchased with leverage.
BlackRock Advisors will pay an annual
sub-advisory
fee to the
Sub-Advisor
equal to 50% of the management fee received by BlackRock
Advisors.
A discussion regarding the basis for the approval of the
investment management agreements by the board of trustees will
be available in the Trusts first report to shareholders.
In addition to the fees paid to BlackRock Advisors, the Trust
pays all other costs and expenses of its operations, including
compensation of its trustees (other than those affiliated with
the Advisors), custodian, leveraging expenses, transfer and
dividend disbursing agent expenses, legal fees, rating agency
fees, listing fees and expenses, expenses of independent
auditors, expenses of repurchasing shares, expenses of
preparing, printing and distributing shareholder reports,
notices, proxy statements and reports to governmental agencies
and taxes, if any.
56
NET ASSET
VALUE
The net asset value of the common shares of the Trust will be
computed based upon the value of the Trusts portfolio
securities and other assets. Net asset value per common share
will be determined as of the close of the regular trading
session on the New York Stock Exchange (NYSE) on
each business day on which the NYSE is open for trading. The
Trust calculates net asset value per common share by subtracting
the Trusts liabilities (including accrued expenses,
dividends payable and any borrowings of the Trust), and the
liquidation value of any outstanding preferred shares of the
Trust from the Trusts total assets (the value of the
securities the Trust holds plus cash or other assets, including
interest accrued but not yet received) and dividing the result
by the total number of common shares of the Trust outstanding.
The Trusts policy is to fair value its financial
instruments at market value using independent dealers or pricing
services selected under the supervision of the board of
trustees. The Trust values its fixed income securities 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 transaction in comparable investments
and information with respect to various relationships between
investments. Short-term securities with remaining maturities of
60 days or less may be valued at amortized cost, which
approximates fair value. In the event that application of these
methods of valuation results in a price for an investment which
is deemed not to be representative of the market value of such
investment or is not available, the investment will be valued by
a method approved by the board of trustees as reflecting fair
value (Fair Value Assets). When determining the
price for Fair Value Assets, the Advisor and/or Sub-Advisor
seeks to determine the price that the 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 Advisor
and/or
Sub-advisor
deems relevant. The pricing of all Fair Value Assets is
subsequently reported to the board of trustees or a committee
thereof.
DISTRIBUTIONS
Commencing with the Trusts initial dividend, the Trust
intends to make regular monthly cash distributions of all or a
portion of its net investment income to common shareholders. We
expect to declare the initial monthly dividend on the
Trusts common shares within approximately 45 days
after completion of this offering and to pay that initial
monthly dividend approximately 60 to 90 days after
completion of this offering. The Trust will pay common
shareholders at least annually all or substantially all of its
investment company taxable income after the payment of dividends
and interest, if any, owed with respect to any outstanding
preferred shares or other forms of leverage utilized by the
Trust. The Trust intends to pay any capital gains distributions
at least annually. If the Trust realizes a long-term capital
gain, it will be required to allocate such gain between the
common shares and any preferred shares issued by the Trust in
proportion to the total dividends paid to each class for the
year in which the income is realized. The Investment Company Act
generally limits the Trust to one capital gain distribution per
year, subject to certain exceptions.
The tax treatment and characterization of the Trusts
distributions may vary significantly from time to time because
of the varied nature of the Trusts investments. In light
of the Trusts investment policies, the Trust anticipates
that the Investment Company Act will require it to accompany
each monthly distribution with a statement setting forth the
estimated source (as between net income, capital gains and
return of capital) of the distribution made. The Trust will
indicate the proportion of its capital gains distributions that
constitute long-term and short-term gains annually. The ultimate
tax characterization of the Trusts distributions made in a
calendar or fiscal year cannot finally be determined until after
the end of that fiscal year. As a result, there is a possibility
that the Trust may make total distributions during a calendar or
fiscal year in an amount that exceeds the Trusts net
investment income and net capital gains for the relevant fiscal
year. In such situations, the amount by which the Trusts
total distributions exceed its net investment income and net
capital gains would generally be
57
treated as a tax-free return of capital reducing the amount of a
shareholders tax basis in such shareholders shares,
with any amounts exceeding such basis treated as gain from the
sale of shares.
Various factors will affect the level of the Trusts
income, including the asset mix and average maturity of the
Trusts portfolio, the amount of leverage utilized by the
Trust and the cost of such leverage and the Trusts use of
hedging. To permit the Trust to maintain a more stable monthly
distribution, the Trust may from time to time distribute less
than the entire amount of income earned in a particular period.
The undistributed income would be available to supplement future
distributions. As a result, the distributions paid by the Trust
for any particular monthly period may be more or less than the
amount of income actually earned by the Trust during that
period. Undistributed income will add to the Trusts net
asset value and, correspondingly, distributions from
undistributed income will deduct from the Trusts net asset
value.
Shareholders will automatically have all dividends and
distributions reinvested in common shares of the Trust issued by
the Trust or purchased in the open market in accordance with the
Trusts dividend reinvestment plan unless an election is
made to receive cash. See Dividend Reinvestment Plan.
58
DIVIDEND
REINVESTMENT PLAN
Unless the registered owner of common shares elects to receive
cash by contacting the Plan Administrator, all dividends
declared for your common shares of the Trust will be
automatically reinvested by Computershare Trust Company,
N.A. (the Plan Administrator), administrator for
shareholders in administering the Trusts Dividend
Reinvestment Plan (the Plan), in additional common
shares of the Trust. Shareholders who elect not to participate
in the Plan will receive all dividends and other distributions
in cash paid by check mailed directly to the shareholder of
record (or, if the common shares are held in street or other
nominee name, then to such nominee) by Computershare
Trust Company, N.A, as dividend disbursing agent. You may
elect not to participate in the Plan and to receive all
dividends in cash by contacting Computershare
Trust Company, N.A, as dividend disbursing agent, at the
address set forth below. Participation in the Plan is completely
voluntary and may be terminated or resumed at any time without
penalty by notice if received and processed by the Plan
Administrator prior to the dividend record date; otherwise such
termination or resumption will be effective with respect to any
subsequently declared dividend or other distribution. Some
brokers may automatically elect to receive cash on your behalf
and may re-invest that cash in additional common shares of the
Trust for you. If you wish for all dividends declared on your
common shares of the Trust to be automatically reinvested
pursuant to the Plan, please contact your broker.
The Plan Administrator will open an account for each common
shareholder under the Plan in the same name in which such common
shareholders common shares are registered. Whenever the
Trust declares a dividend or other distribution (together, a
Dividend) payable in cash, non-participants in the
Plan will receive cash and participants in the Plan will receive
the equivalent in common shares. The common shares will be
acquired by the Plan Administrator for the participants
accounts, depending upon the circumstances described below,
either (i) through receipt of additional unissued but
authorized common shares from the Trust (Newly Issued
Common Shares) or (ii) by purchase of outstanding
common shares on the open market (Open-Market
Purchases) on the NYSE or elsewhere. If, on the payment
date for any Dividend, the closing market price per common share
plus estimated per share fees, which include any brokerage
commissions the Plan Administrator is required to pay, is equal
to or greater than the net asset value per common share, the
Plan Administrator will invest the Dividend amount in Newly
Issued Common Shares on behalf of the participants. The number
of Newly Issued Common Shares to be credited to each
participants account will be determined by dividing the
dollar amount of the Dividend by the net asset value per common
share on the payment date; provided that, if the net asset value
is less than or equal to 95% of the closing market value on the
payment date, the dollar amount of the Dividend will be divided
by 95% of the closing market price per common share on the
payment date. If, on the payment date for any Dividend, the net
asset value per common share is greater than the closing market
value plus estimated per share fees, the Plan Administrator will
invest the Dividend amount in common shares acquired on behalf
of the participants in Open-Market Purchases. In the event of a
market discount on the payment date for any Dividend, the Plan
Administrator will have until the last business day before the
next date on which the common shares trade on an
ex-dividend basis or 30 days after the payment
date for such Dividend, whichever is sooner (the Last
Purchase Date), to invest the Dividend amount in common
shares acquired in Open-Market Purchases. It is contemplated
that the Trust will pay monthly income Dividends. Therefore, the
period during which Open-Market Purchases can be made will exist
only from the payment date of each Dividend through the date
before the next ex-dividend date which typically
will be approximately ten days. If, before the Plan
Administrator has completed its Open-Market Purchases, the
market price per common share exceeds the net asset value per
common share, the average per common share purchase price paid
by the Plan Administrator may exceed the net asset value of the
common shares, resulting in the acquisition of fewer common
shares than if the Dividend had been paid in Newly Issued Common
Shares on the Dividend payment date. Because of the foregoing
difficulty with respect to Open-Market Purchases, the Plan
provides that if the Plan Administrator is unable to invest the
full Dividend amount in Open-Market Purchases during the
purchase period or if the market discount shifts to a market
premium during the purchase period, the Plan Administrator may
cease making Open-Market Purchases and may invest the uninvested
portion of the Dividend amount in Newly Issued Common Shares at
the
59
net asset value per common share at the close of business on the
Last Purchase Date provided that, if the net asset value per
common share is less than or equal to 95% of the then current
market price per common share; the dollar amount of the Dividend
will be divided by 95% of the market price per common share on
the payment date.
The Plan Administrator maintains all shareholders accounts
in the Plan and furnishes written confirmation of all
transactions in the accounts, including information needed by
shareholders for tax records. Common shares in the account of
each Plan participant will be held by the Plan Administrator on
behalf of the Plan participant, and each shareholder proxy will
include those shares purchased or received pursuant to the Plan.
The Plan Administrator will forward all proxy solicitation
materials to participants and vote proxies for shares held under
the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees
which hold shares for others who are the beneficial owners, the
Plan Administrator will administer the Plan on the basis of the
number of common shares certified from time to time by the
record shareholders name and held for the account of
beneficial owners who participate in the Plan.
There will be no charges with respect to common shares issued
directly by the Trust as a result of dividends or capital gains
distributions payable either in common shares or in cash. The
Plan Agents fees for the handling of the reinvestment of
dividends and distributions will be paid by the Trust. However,
each participant will pay a per share fee incurred in connection
with Open-Market Purchases. The automatic reinvestment of
Dividends will not relieve participants of any Federal, state or
local income tax that may be payable (or required to be
withheld) on such dividends. See Tax Matters.
Participants that request a sale of shares through the Plan
Administrator are subject to a $2.50 sales fee and a $0.15 per
share sold fee. All per share fees include any brokerage
commission the Plan Administrator is required to pay.
The Trust reserves the right to amend or terminate the Plan.
There is no direct service charge to participants with regard to
purchases in the Plan; however, the Trust reserves the right to
amend the Plan to include a service charge payable by the
participants.
All correspondence or questions concerning the Plan should be
directed to the Plan Administrator, Computershare
Trust Company, N.A, at P.O. Box 43078,
Providence, Rhode Island
02940-3078,
or by telephone at
(800) 699-1BFM.
60
DESCRIPTION
OF SHARES
Common
Shares
The Trust is an unincorporated statutory trust organized under
the laws of Delaware pursuant to an Amended and Restated
Agreement and Declaration of Trust dated as of July 16,
2010 (the Agreement and Declaration of Trust). The
Trust is authorized to issue an unlimited number of common
shares of beneficial interest, par value $0.001 per share. Each
common share has one vote and, when issued and paid for in
accordance with the terms of this offering, will be fully paid
and non-assessable, except that the trustees shall have the
power to cause shareholders to pay expenses of the Trust by
setting off charges due from shareholders from declared but
unpaid dividends or distributions owed the shareholders
and/or
by
reducing the number of common shares owned by each respective
shareholder. If and whenever preferred shares are outstanding,
the holders of common shares will not be entitled to receive any
distributions from the Trust unless all accrued dividends on
preferred shares have been paid, unless asset coverage (as
defined in the Investment Company Act) with respect to preferred
shares would be at least 200% after giving effect to the
distributions and unless certain other requirements imposed by
any rating agencies rating the preferred shares have been met.
See Description of Shares Preferred
Shares in the Statement of Additional Information. All
common shares are equal as to dividends, assets and voting
privileges and have no conversion, preemptive or other
subscription rights. The Trust will send annual and semi-annual
reports, including financial statements, to all holders of its
shares.
The Trust has no present intention to offer preferred shares.
Any additional offering of common shares will be subject to the
requirements of the Investment Company Act, which provides that
shares may not be issued at a price below the then current net
asset value, exclusive of sales load, except in connection with
an offering to existing holders of common shares or with the
consent of a majority of the Trusts outstanding voting
securities.
The Trusts common shares are expected to be listed on the
NYSE under the symbol BBN.
The Trusts net asset value per share generally increases
when interest rates decline and decreases when interest rates
rise, and these changes are likely to be greater because the
Trust intends to have a leveraged capital structure. The value
of a shareholders investment in the Trust will be reduced
immediately following the offering of common shares by the
amount of the sales load and organizational and offering
expenses paid by the Trust. See Use of Proceeds.
Unlike open-end funds, closed-end funds like the Trust do not
continuously offer shares and do not provide daily redemptions.
Rather, if a shareholder determines to buy additional common
shares or sell shares already held, the shareholder may do so by
trading through a broker on the NYSE or otherwise. Shares of
closed-end investment companies frequently trade on an exchange
at prices lower than net asset value. Shares of closed-end
investment companies like the Trust that invest predominantly in
investment grade municipal securities have during some periods
traded at prices higher than net asset value and during other
periods have traded at prices lower than net asset value.
Because the market value of the common shares may be influenced
by such factors as dividend levels (which are in turn affected
by expenses), call protection on its portfolio securities,
dividend stability, portfolio credit quality, net asset value,
relative demand for and supply of such shares in the market,
general market and economic conditions and other factors beyond
the control of the Trust, the Trust cannot assure you that
common shares will trade at a price equal to or higher than net
asset value in the future. The common shares are designed
primarily for long-term investors and you should not purchase
the common shares if you intend to sell them soon after
purchase. See Leverage in this Prospectus and
Repurchase of Common Shares in the Statement of
Additional Information.
61
Preferred
Shares
Under the Investment Company Act, the Trust is not permitted to
issue preferred shares unless immediately after such issuance
the value of the Trusts total assets is at least 200% of
the liquidation value of the outstanding preferred shares (i.e.,
the liquidation value may not exceed 50% of the Trusts
total assets). In addition, the Trust is not permitted to
declare any cash dividend or other distribution on its common
shares unless, at the time of such declaration, the value of the
Trusts total assets is at least 200% of such liquidation
value. If the Trust issues preferred shares, it may be subject
to restrictions imposed by guidelines of one or more rating
agencies that may issue ratings for preferred shares issued by
the Trust. These guidelines may impose asset coverage or
portfolio composition requirements that are more stringent than
those imposed on the Trust by the Investment Company Act. It is
not anticipated that these covenants or guidelines would impede
the Advisor from managing the Trusts portfolio in
accordance with the Trusts investment objectives and
policies. Please see the Trusts Statement of Additional
Information for more information. The Trust has no current
intention of issuing preferred shares.
62
CERTAIN
PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Agreement and Declaration of Trust includes provisions that
could have the effect of limiting the ability of other entities
or persons to acquire control of the Trust or to change the
composition of its board of trustees. This could have the effect
of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control over the Trust. Such
attempts could have the effect of increasing the expenses of the
Trust and disrupting the normal operation of the Trust. The
board of trustees is divided into three classes, with the terms
of one class expiring at each annual meeting of shareholders. At
each annual meeting, one class of trustees is elected to a
three-year term. This provision could delay for up to two years
the replacement of a majority of the board of trustees. A
trustee may be removed from office for cause only, and only by
the action of a majority of the remaining trustees followed by a
vote of the holders of at least 75% of the shares then entitled
to vote for the election of the respective trustee.
In addition, the Trusts Agreement and Declaration of Trust
requires the favorable vote of a majority of the Trusts
board of trustees followed by the favorable vote of the holders
of at least 75% of the outstanding shares of each affected class
or series of the Trust, voting separately as a class or series,
to approve, adopt or authorize certain transactions with 5% or
greater holders of a class or series of shares and their
associates, unless the transaction has been approved by at least
80% of the trustees, in which case a majority of the
outstanding voting securities (as defined in the
Investment Company Act) of the Trust shall be required. For
purposes of these provisions, a 5% or greater holder of a class
or series of shares (a Principal Shareholder) refers
to any person who, whether directly or indirectly and whether
alone or together with its affiliates and associates,
beneficially owns 5% or more of the outstanding shares of all
outstanding classes or series of shares of beneficial interest
of the Trust.
The 5% holder transactions subject to these special approval
requirements are:
|
|
|
|
|
the merger or consolidation of the Trust or any subsidiary of
the Trust with or into any Principal Shareholder;
|
|
|
|
|
|
the issuance of any securities of the Trust to any Principal
Shareholder for cash (other than pursuant to any automatic
dividend reinvestment plan);
|
|
|
|
|
|
the sale, lease or exchange of all or any substantial part of
the assets of the Trust to any Principal Shareholder, except
assets having an aggregate fair market value of less than 2% of
the total assets of the Trust, aggregating for the purpose of
such computation all assets sold, leased or exchanged in any
series of similar transactions within a twelve-month
period; or
|
|
|
|
the sale, lease or exchange to the Trust or any subsidiary of
the Trust, in exchange for securities of the Trust, of any
assets of any Principal Shareholder, except assets having an
aggregate fair market value of less than 2% of the total assets
of the Trust, aggregating for purposes of such computation all
assets sold, leased or exchanged in any series of similar
transactions within a twelve-month period.
|
To convert the Trust to an open-end investment company, the
Trusts Agreement and Declaration of Trust requires the
favorable vote of a majority of the board of the trustees
followed by the favorable vote of the holders of at least 75% of
the outstanding shares of each affected class or series of
shares of the Trust, voting separately as a class or series,
unless such amendment has been approved by at least 80% of the
trustees, in which case a majority of the outstanding
voting securities (as defined in the Investment Company
Act) of the Trust shall be required. The foregoing vote would
satisfy a separate requirement in the Investment Company Act
that any conversion of the Trust to an open-end investment
company be approved by the shareholders. If approved in the
foregoing manner, we anticipate conversion of the Trust to an
open-end investment company might not occur until 90 days
after the shareholders meeting at which such conversion
was approved and would also require at least 10 days
prior notice to all shareholders. Conversion of the Trust to an
open-end investment company would require the redemption of any
outstanding preferred shares, which could eliminate or alter the
leveraged capital structure of the Trust with respect to the
common shares. Following any such conversion, it is
63
also possible that certain of the Trusts investment
policies and strategies would have to be modified to assure
sufficient portfolio liquidity. In the event of conversion, the
common shares would cease to be listed on the New York Stock
Exchange or other national securities exchanges or market
systems. Shareholders of an open-end investment company may
require the company to redeem their shares at any time, except
in certain circumstances as authorized by or under the
Investment Company Act, at their net asset value, less such
redemption charge, if any, as might be in effect at the time of
a redemption. The Trust expects to pay all such redemption
requests in cash, but reserves the right to pay redemption
requests in a combination of cash or securities. If such partial
payment in securities were made, investors may incur brokerage
costs in converting such securities to cash. If the Trust were
converted to an open-end fund, it is likely that new shares
would be sold at net asset value plus a sales load. The board of
trustees believes, however, that the closed-end structure is
desirable in light of the Trusts investment objectives and
policies. Therefore, you should assume that it is not likely
that the board of trustees would vote to convert the Trust to an
open-end fund.
For the purposes of calculating a majority of the
outstanding voting securities under the Trusts
Agreement and Declaration of Trust, each class and series of the
Trust shall vote together as a single class, except to the
extent required by the Investment Company Act or the
Trusts Agreement and Declaration of Trust with respect to
any class or series of shares. If a separate vote is required,
the applicable proportion of shares of the class or series,
voting as a separate class or series, also will be required.
The board of trustees has determined that provisions with
respect to the board of trustees and the shareholder voting
requirements described above, which voting requirements are
greater than the minimum requirements under Delaware law or the
Investment Company Act, are in the best interests of
shareholders generally. Reference should be made to the
Agreement and Declaration of Trust on file with the Securities
and Exchange Commission for the full text of these provisions.
64
CLOSED-END
FUND STRUCTURE
The Trust is a non-diversified, closed-end management investment
company with no operating history (commonly referred to as a
closed-end fund). Closed-end funds differ from open-end funds
(which are generally referred to as mutual funds) in that
closed-end funds generally list their shares for trading on a
stock exchange and do not redeem their shares at the request of
the shareholder. This means that if you wish to sell your shares
of a closed-end fund you must trade them on the market like any
other stock at the prevailing market price at that time. In a
mutual fund, if the shareholder wishes to sell shares of the
fund, the mutual fund will redeem or buy back the shares at
net asset value. Also, mutual funds generally offer
new shares on a continuous basis to new investors, and
closed-end funds generally do not. The continuous inflows and
outflows of assets in a mutual fund can make it difficult to
manage the Trusts investments. By comparison, closed-end
funds are generally able to stay more fully invested in
securities that are consistent with their investment objective,
and also have greater flexibility to make certain types of
investments, and to use certain investment strategies, such as
financial leverage and investments in illiquid securities.
Shares of closed-end funds frequently trade at a discount to
their net asset value. Because of this possibility and the
recognition that any such discount may not be in the interest of
shareholders, the Trusts board of trustees might consider
from time to time engaging in open-market repurchases, tender
offers for shares or other programs intended to reduce the
discount. We cannot guarantee or assure, however, that the
Trusts board of trustees will decide to engage in any of
these actions. Nor is there any guarantee or assurance that such
actions, if undertaken, would result in the shares trading at a
price equal or close to net asset value per share. The board of
trustees might also consider converting the Trust to an open-end
mutual fund, which would also require a vote of the shareholders
of the Trust.
REPURCHASE
OF COMMON SHARES
Shares of closed-end investment companies often trade at a
discount to their net asset values, and the Trusts common
shares may also trade at a discount to their net asset value,
although it is possible that they may trade at a premium above
net asset value. The market price of the Trusts common
shares will be determined by such factors as relative demand for
and supply of such common shares in the market, the Trusts
net asset value, general market and economic conditions and
other factors beyond the control of the Trust. See Net
Asset Value. Although the Trusts common shareholders
will not have the right to redeem their common shares, the Trust
may take action to repurchase common shares in the open market
or make tender offers for its common shares. This may have the
effect of reducing any market discount from net asset value.
There is no assurance that, if action is undertaken to
repurchase or tender for common shares, such action will result
in the common shares trading at a price which approximates
their net asset value. Although share repurchases and tenders
could have a favorable effect on the market price of the
Trusts common shares, you should be aware that the
acquisition of common shares by the Trust will decrease the
capital of the Trust and, therefore, may have the effect of
increasing the Trusts expense ratio and decreasing the
asset coverage with respect to any preferred shares outstanding.
Any share repurchases or tender offers will be made in
accordance with the requirements of the Securities Exchange Act
of 1934, as amended, the Investment Company Act and the
principal stock exchange on which the common shares are traded.
65
TAX
MATTERS
Federal
Tax Matters
The following is a description of certain U.S. Federal
income tax consequences to a shareholder of acquiring, holding
and disposing of common shares of the Trust. The discussion
reflects applicable tax laws of the United States as of the date
of this prospectus, which tax laws may be changed or subject to
new interpretations by the courts or the IRS retroactively or
prospectively. No ruling has been or will be sought from the IRS
regarding any matter discussed herein. No assurance can be given
that the IRS would not assert, or that a court would not
sustain, a position different from any of the tax aspects set
forth below. No attempt is made to present a detailed
explanation of all U.S. Federal, state, local and foreign
tax concerns affecting the Trust and its shareholders (including
shareholders owning large positions in the Trust). The
discussion set forth herein does not constitute tax advice.
Shareholders are urged to consult their own tax advisors to
determine the tax consequences to them of investing in the Trust.
The Trust intends to elect to be treated as, and to qualify each
year for special tax treatment afforded to, a regulated
investment company under Subchapter M of the Code. In order to
qualify as a regulated investment company, the Trust must, among
other things, satisfy income, asset diversification and
distribution requirements. As long as it so qualifies, the Trust
will not be subject to U.S. Federal income tax to the
extent that it distributes its investment company taxable income
and net recognized capital gains. The Trust intends to
distribute at least annually substantially all of such income.
The Trust primarily invests in taxable municipal securities
whose income is subject to U.S. Federal income tax. Thus,
distributions paid to you by the Trust from its investment
company taxable income (including the excess of net short-term
capital gain over net long-term capital losses) are generally
taxable to you as ordinary income to the extent of the
Trusts current and accumulated earnings and profits. The
Trust does not expect that its ordinary income dividends will be
treated as qualified dividend income, which is
eligible for taxation at the rates applicable to long-term
capital gains in the case of individual shareholders, or that a
corporate shareholder will be able to claim a dividends received
reduction with respect to Trust distributions.
Distributions made to you from an excess of net long-term
capital gain over net short-term capital loss (capital
gain dividends), including capital gain dividends credited
to you but retained by the Trust, are taxable to you as
long-term capital gain if they have been properly designated by
the Trust, regardless of the length of time you have owned Trust
shares. For individuals, long-term capital gain is generally
taxed at a reduced maximum rate.
If, for any calendar year, the Trusts total distributions
exceed both the current taxable years earnings and profits
and accumulated earnings and profits from prior years, the
excess will generally be treated as a tax-free return of capital
up to the amount of a shareholders tax basis in the common
shares, reducing that basis accordingly. Such distributions
exceeding the shareholders basis will be treated as gain
from the sale or exchange of the shares. When you sell your
shares in the Trust, the amount, if any, by which your sales
price exceeds your basis in the shares is gain subject to tax.
Because a return of capital reduces your basis in the shares, it
will increase the amount of your gain or decrease the amount of
your loss when you sell the shares. Generally, on or before
January 31st of each year, the Trust will provide you
with a written notice designating the amount of ordinary
dividend income, capital gain dividends and other distributions
(if relevant).
The sale or other disposition of shares of the Trust will
generally result in capital gain or loss to you (provided that
the shares were held as a capital asset), which will be
long-term capital gain or loss if the shares have been held for
more than one year at the time of sale. Any loss upon the sale
or exchange of Trust shares held for six months or less will be
treated as long-term capital loss to the extent of any capital
gain dividends received (including amounts credited as an
undistributed capital gain dividend) by you. Any loss realized
on a sale or exchange of shares of the Trust will be disallowed
if other
66
substantially identical shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a
61-day
period beginning 30 days before and ending 30 days
after the date of disposition of the shares. In such case, the
basis of the shares acquired will be adjusted to reflect the
disallowed loss. Present law taxes both long-term and short-term
capital gain of corporations at the rates applicable to ordinary
income. For non-corporate taxpayers, short-term capital gain
will currently be taxed at the U.S. Federal income tax
rates applicable to ordinary income, while long-term capital
gain generally will be taxed at a reduced maximum
U.S. Federal income tax rate.
The IRS currently requires that a regulated investment company
that has two or more classes of stock allocate to each such
class proportionate amounts of each type of its income (such as
ordinary income and net capital gain) based upon the percentage
of total dividends paid to each class for the tax year.
Accordingly, if the Trust issues preferred shares, then the
Trust intends each year to allocate its ordinary income, net
capital gain and other relevant items (if any) between its
common shares and preferred shares in proportion to the total
dividends paid to each class with respect to such tax year.
Dividends and other taxable distributions are taxable to
shareholders. If the Trust pays you a dividend in January that
was declared in the previous October, November or December to
shareholders of record on a specified date in one of such
months, then such dividend will be treated for tax purposes as
being paid by the Trust and received by you on December 31 of
the year in which the dividend was declared.
The Trust is required in certain circumstances to withhold, for
U.S. Federal backup withholding purposes, on taxable
dividends and certain other payments paid to non-exempt holders
of the Trusts shares who do not furnish the Trust with
their correct taxpayer identification number (in the case of
individuals, their social security number) and certain
certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any
amounts withheld from payments made to you may be refunded or
credited against your U.S. Federal income tax liability, if
any, provided that the required information is furnished to the
IRS. In addition, the Trust may be required to withhold on
distributions to
non-U.S. Shareholders.
The foregoing is a general and abbreviated summary of the
provisions of the Code and the Treasury regulations in effect as
they directly govern the taxation of the Trust and its
shareholders. These provisions are subject to change by
legislative, judicial or administrative action, and any such
change may be retroactive. A more complete discussion of the tax
rules applicable to the Trust and its shareholders can be found
in the Statement of Additional Information that is incorporated
by reference into this prospectus. Shareholders are urged to
consult their tax advisors regarding specific questions as to
U.S. Federal, foreign, state, local income or other
taxes
.
67
UNDERWRITING
Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, Citigroup Global Markets Inc., Morgan
Stanley & Co. Incorporated, UBS Securities LLC and
Ameriprise Financial Services, Inc. are acting as the
representatives of the underwriters named below. Subject to the
terms and conditions stated in the underwriting agreement dated
the date of the final Prospectus, each underwriter named below
has agreed to purchase, and the Trust has agreed to sell to that
underwriter, the number of common shares set forth opposite the
underwriters name.
|
|
|
|
|
|
|
Number of
|
|
Underwriters
|
|
Common Shares
|
|
|
Wells Fargo Securities, LLC
|
|
|
|
|
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
|
|
|
|
|
Citigroup Global Markets Inc.
|
|
|
|
|
Morgan Stanley & Co. Incorporated
|
|
|
|
|
UBS Securities LLC
|
|
|
|
|
Ameriprise Financial Services, Inc.
|
|
|
|
|
Raymond James & Associates, Inc.
|
|
|
|
|
RBC Capital Markets Corporation
|
|
|
|
|
Stifel, Nicolaus & Company, Incorporated
|
|
|
|
|
J.J.B. Hilliard, W.L. Lyons, LLC
|
|
|
|
|
Janney Montgomery Scott LLC
|
|
|
|
|
Maxim Group LLC
|
|
|
|
|
Morgan Keegan & Company, Inc.
|
|
|
|
|
Wedbush Securities Inc.
|
|
|
|
|
Wunderlich Securities, Inc.
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
The underwriting agreement provides that the obligations of the
underwriters to purchase the common shares included in this
offering are subject to approval of legal matters by counsel and
to other conditions. The underwriters are obligated to purchase
all the common shares (other than those covered by the
over-allotment option described below) shown above if any of the
common shares are purchased.
The underwriters propose to offer some of the common shares
directly to the public at the public offering price set forth on
the cover page of this prospectus and some of the common shares
to dealers at the public offering price less a concession not to
exceed $ per share. The sales load
the Trust will pay of $0.90 per share is equal to 4.5% of the
initial offering price. If all of the common shares are not sold
at the initial offering price, the representatives may change
the public offering price and other selling terms. Investors
must pay for any common shares purchased on or
before ,
2010. The representatives have advised the Trust that the
underwriters do not intend to confirm any sales to any accounts
over which they exercise discretionary authority.
Additional
Compensation
The Advisor (and not the Trust) has agreed to pay to each of
Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, Citigroup Global Markets Inc., Morgan
Stanley & Co. Incorporated, Ameriprise Financial Services,
Inc. and Raymond James & Associates, Inc. from its own
assets, a structuring fee for advice relating to the structure,
design and organization of the Trust as well as services related
to the sale and distribution of the Trusts common shares
in the amount of $ ,
$ ,
$ ,
$ , $
and $ , respectively. If the
over-allotment option is not exercised, the structuring fees
paid to Wells Fargo Securities, LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Citigroup Global Markets Inc.,
Morgan Stanley & Co. Incorporated, Ameriprise Financial
Services, Inc. and Raymond James & Associates, Inc. will
not
exceed %, %, %, %, %
and %, respectively, of the total
public offering price.
68
The Advisor (and not the Trust) has agreed to pay to UBS
Securities LLC, from its own assets, a structuring fee for
certain financial advisory services in assisting the Advisor in
structuring and organizing the Trust in the amount of
$ .
If the over-allotment option is not exercised, the structuring
fee paid to UBS Securities LLC will not
exceed % of the total public
offering price.
The Advisor (and not the Trust) may pay certain qualifying
underwriters a structuring fee, sales incentive fee or
additional compensation in connection with the offering.
The total amount of the underwriters additional
compensation payments by the Advisor described above will not
exceed 4.5% of the total public offering price of the common
shares offered hereby. The sum total of all compensation to the
underwriters in connection with this public offering of common
shares, including sales load and all forms of additional
compensation or structuring or sales incentive fee payments, if
any, to the underwriters and other expenses, will be limited to
not more than 9.0% of the total public offering price of the
common shares sold in this offering.
The Trust has granted to the underwriters an option, exercisable
for 45 days from the date of this Prospectus, to purchase
up
to
additional common shares at the public offering price less the
sales load. The underwriters may exercise the option solely for
the purpose of covering over-allotments, if any, in connection
with this offering. To the extent such option is exercised, each
underwriter must purchase a number of additional common shares
approximately proportionate to that underwriters initial
purchase commitment.
The Trust, the Advisor and the
Sub-Advisor
have agreed, for a period of 180 days from the date of this
Prospectus, that they will not, without the prior written
consent of Wells Fargo Securities, on behalf of the
underwriters, with certain exceptions, dispose of or hedge any
common shares or any securities convertible into or exchangeable
for common shares, provided that the Trust may issue and sell
common shares pursuant to the Trusts Dividend Reinvestment
Plan.
To meet the NYSE distribution requirements for trading, the
underwriters have undertaken to sell common shares in a manner
such that common shares are held by a minimum of 400 beneficial
owners in lots of 100 or more, the minimum stock price will be
at least $4.00 at the time of listing on the NYSE, at least
1,100,000 common shares will be publicly held in the United
States and the aggregate market value of publicly held shares in
the United States will be at least $60 million. The
Trusts common shares are expected to be listed on the
NYSE, subject to notice of issuance, under the symbol
BBN.
The following table shows the sales load that the Trust will pay
to the underwriters in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of
the underwriters option to purchase additional shares of
common shares.
|
|
|
|
|
|
|
|
|
|
|
Paid by the Trust
|
|
|
No Exercise
|
|
Full Exercise
|
|
Per Common Share
|
|
$
|
0.90
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Trust, the Advisor and the
Sub-Advisor
have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the
Securities Act, or to contribute to payments the
underwriters may be required to make because of any of those
liabilities.
Certain underwriters may make a market in the common shares
after trading in the common shares has commenced on the NYSE. No
underwriter is, however, obligated to conduct market-making
activities and any such activities may be discontinued at any
time without notice, at the sole discretion of the underwriters.
No assurance can be given as to the liquidity of, or the trading
market for, the common shares as a result of any market-making
activities undertaken by any underwriter. This Prospectus is to
be used by any underwriter in connection with the offering and,
during the period in which a prospectus must be delivered, with
offers and sales of the common shares in market-making
transactions in the
over-the-counter
market at negotiated prices related to prevailing market prices
at the time of the sale.
69
In connection with the offering, the underwriters may purchase
and sell the common shares in the open market. These
transactions may include short sales, syndicate covering
transactions and stabilizing transactions. Short sales involve
syndicate sales of common shares in excess of the number of
common shares to be purchased by the underwriters in the
offering, which creates a syndicate short position.
Covered short sales are sales of common shares made
in an amount up to the number of common shares represented by
the underwriters over-allotment option. In determining the
source of common shares to close out the covered syndicate short
position, the underwriters will consider, among other things,
the price of common shares available for purchase in the open
market as compared to the price at which they may purchase
common shares through the over-allotment option.
Transactions to close out the covered syndicate short position
involve either purchases of common shares in the open market
after the distribution has been completed or the exercise of the
over-allotment option. The underwriters may also make
naked short sales of common shares in excess of the
over-allotment option. The underwriters must close out any naked
short position by purchasing common shares in the open market. A
naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure
on the price of common shares in the open market after pricing
that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of bids for or
purchases of common shares in the open market while the offering
is in progress.
The underwriters may impose a penalty bid. Penalty bids allow
the underwriting syndicate to reclaim selling concessions
allowed to an underwriter or a dealer for distributing common
shares in this offering if the syndicate repurchases common
shares to cover syndicate short positions or to stabilize the
purchase price of the common shares.
Any of these activities may have the effect of preventing or
retarding a decline in the market price of common shares. They
may also cause the price of common shares to be higher than the
price that would otherwise exist in the open market in the
absence of these transactions. The underwriters may conduct
these transactions on the NYSE or in the
over-the-counter
market, or otherwise. If the underwriters commence any of these
transactions, they may discontinue them at any time.
A Prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters. Other
than this Prospectus in electronic format, the information on
any such underwriters website is not part of this
Prospectus. The representatives may agree to allocate a number
of common shares to underwriters for sale to their online
brokerage account holders. The representatives will allocate
common shares to underwriters that may make internet
distributions on the same basis as other allocations. In
addition, common shares may be sold by the underwriters to
securities dealers who resell common shares to online brokerage
account holders.
The Trust anticipates that, from time to time, certain
underwriters may act as brokers or dealers in connection with
the execution of the Trusts portfolio transactions after
they have ceased to be underwriters and, subject to certain
restrictions, may act as brokers while they are underwriters.
Certain underwriters may, from time to time, engage in
transactions with or perform investment banking and advisory
services for the Advisor and
Sub-Advisor
and their affiliates in the ordinary course of business, for
which such underwriters have received, and may expect to
receive, customary fees and expenses.
Prior to the public offering of common shares, the Advisor or an
affiliate will purchase common shares from the Trust in an
amount satisfying the net worth requirements of
Section 14(a) of the Investment Company Act.
The principal business address of Wells Fargo Securities, LLC is
375 Park Avenue, New York, New York 10152. The principal
business address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated is One Bryant Park, New York, New York
10036. The principal business address of Citigroup Global
Markets Inc. is 388 Greenwich Street, New York, New York
10013. The principal business address of Morgan
Stanley & Co. Incorporated is 1585 Broadway, New
York, New York 10036. The principal business address of UBS
Securities LLC is 299 Park Avenue, New York, New York
10171. The principal business address of Ameriprise Financial
Services, Inc. is 707 2nd Avenue South, Minneapolis,
Minnesota 55402.
70
CUSTODIAN
AND TRANSFER AGENT
The Custodian of the assets of the Trust is State Street Bank
and Trust Company. The Custodian performs custodial, Trust
accounting and portfolio accounting services. Computershare
Trust Company, N.A., will serve as the Trusts
Transfer Agent with respect to the common shares.
LEGAL
OPINIONS
Certain legal matters in connection with the common shares will
be passed upon for the Trust by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York, and for the
Underwriters by Simpson Thacher & Bartlett LLP, New
York, New York. Simpson Thacher & Bartlett LLP may
rely as to certain matters of Delaware law on the opinion of
Skadden, Arps, Slate, Meagher & Flom LLP.
PRIVACY
PRINCIPLES OF THE TRUST
The Trust is committed to maintaining the privacy of its current
and former shareholders and to safeguarding their non-public
personal information. The following information is provided to
help you understand what personal information the Trust
collects, how the Trust protects that information and why, in
certain cases, the Trust may share such information with select
parties.
The Trust obtains or verifies personal non-public information
from and about you from different sources, including the
following: (i) information the Trust receives from you or,
if applicable, your financial intermediary, on applications,
forms or other documents; (ii) information about your
transactions with the Trust, its affiliates or others;
(iii) information the Trust receives from a consumer
reporting agency; and (iv) from visits to the Trusts
or its affiliates websites.
The Trust does not sell or disclose to non-affiliated third
parties any non-public personal information about its current
and former shareholders, except as permitted by law or as is
necessary to respond to regulatory requests or to service
shareholder accounts. These non-affiliated third parties are
required to protect the confidentiality and security of this
information and to use it only for its intended purpose.
The Trust may share information with its affiliates to service
your account or to provide you with information about other
BlackRock products or services that may be of interest to you.
In addition, the Trust restricts access to non-public personal
information about its current and former shareholders to those
BlackRock employees with a legitimate business need for the
information. The Trust maintains physical, electronic and
procedural safeguards that are designed to protect the
non-public personal information of its current and former
shareholders, including procedures relating to the proper
storage and disposal of such information.
If you are located in a jurisdiction where specific laws, rules
or regulations require the Trust to provide you with additional
or different privacy-related rights beyond what is set forth
above, then the Trust will comply with those specific laws,
rules or regulations.
71
TABLE OF
CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
|
|
|
|
|
|
|
Page
|
|
Use of Proceeds
|
|
|
A-2
|
|
Investment Objectives and Policies
|
|
|
A-2
|
|
Investment Policies and Techniques
|
|
|
A-4
|
|
Other Investment Policies and Techniques
|
|
|
A-10
|
|
Additional Risk Factors
|
|
|
A-13
|
|
Management of the Trust
|
|
|
A-15
|
|
Portfolio Transactions and Brokerage
|
|
|
A-31
|
|
Conflicts of Interest
|
|
|
A-32
|
|
Description of Shares
|
|
|
A-39
|
|
Repurchase of Common Shares
|
|
|
A-40
|
|
Tax Matters
|
|
|
A-41
|
|
Independent Auditors Report
|
|
|
F-1
|
|
Financial Statements
|
|
|
F-2
|
|
Appendix A Ratings of Investments
|
|
|
A-1
|
|
Appendix B Proxy Voting Procedures
|
|
|
B-1
|
|
Appendix C Strategic Transactions
|
|
|
C-1
|
|
72
(This page intentionally left blank)
73
Until ,
2010 (25 days after the date of this Prospectus), all
dealers that buy, sell or trade the common shares, whether or
not participating in this offering, may be required to deliver a
Prospectus. This is in addition to the dealers obligations
to deliver a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
Shares
BlackRock Build America Bond
Trust
Common Shares
$20.00 per
Share
PROSPECTUS
,
2010
Wells Fargo
Securities
BofA Merrill Lynch
Citi
Morgan Stanley
UBS Investment Bank
Ameriprise Financial Services,
Inc.
Raymond James
RBC Capital Markets
Stifel Nicolaus
Weisel
J.J.B. Hilliard, W.L. Lyons,
LLC
Janney Montgomery
Scott
Maxim Group LLC
Morgan Keegan & Company,
Inc.
Wedbush Securities
Inc.
Wunderlich
Securities
BBN-PR-0710
SUBJECT TO COMPLETION, DATED
JULY 27, 2010
BlackRock Build America Bond
Trust
STATEMENT OF ADDITIONAL
INFORMATION
BlackRock Build America Bond Trust (the Trust) is a
non-diversified, closed-end management investment company with
no operating history. This Statement of Additional Information
relating to common shares does not constitute a Prospectus, but
should be read in conjunction with the Prospectus relating
thereto
dated ,
2010. This Statement of Additional Information, which is not a
Prospectus, does not include all information that a prospective
investor should consider before purchasing common shares, and
investors should obtain and read the Prospectus prior to
purchasing such shares. A copy of the Prospectus may be obtained
without charge by calling
(800) 882-0052.
You may also obtain a copy of the Prospectus on the Securities
and Exchange Commissions website
(http://www.sec.gov).
Capitalized terms used but not defined in this Statement of
Additional Information have the meanings ascribed to them in the
Prospectus.
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
Use of Proceeds
|
|
|
A-2
|
|
Investment Objectives and Policies
|
|
|
A-2
|
|
Investment Policies and Techniques
|
|
|
A-4
|
|
Other Investment Policies and Techniques
|
|
|
A-10
|
|
Additional Risk Factors
|
|
|
A-13
|
|
Management of the Trust
|
|
|
A-15
|
|
Portfolio Transactions and Brokerage
|
|
|
A-31
|
|
Conflicts of Interest
|
|
|
A-32
|
|
Description of Shares
|
|
|
A-39
|
|
Repurchase of Common Shares
|
|
|
A-40
|
|
Tax Matters
|
|
|
A-41
|
|
Independent Auditors Report
|
|
|
F-1
|
|
Financial Statements
|
|
|
F-2
|
|
Appendix A Ratings of Investments
|
|
|
A-1
|
|
Appendix B Proxy Voting Procedures
|
|
|
B-1
|
|
Appendix C Strategic Transactions
|
|
|
C-1
|
|
This
Statement of Additional Information is
dated ,
2010.
A-1
USE OF
PROCEEDS
Pending investment in securities that meet the Trusts
investment objectives and policies, the net proceeds of this
offering will be invested in short-term debt securities of the
type described below under Investment Policies and
Techniques Short-Term Taxable Fixed Income
Securities
and/or
Short-Term Tax-Exempt Fixed Income
Securities. If necessary to invest fully the net proceeds
of this offering immediately, the Trust may also purchase, as
temporary investments, securities of other open- or closed-end
investment companies that invest primarily in securities of the
type in which the Trust may invest directly. We currently
anticipate that the Trust will be able to invest all of the net
proceeds in accordance with the Trusts investment
objectives and policies within approximately three months after
the completion of this offering.
INVESTMENT
OBJECTIVES AND POLICIES
Investment
Restrictions
Except as described below, the Trust, as a fundamental policy,
may not, without the approval of the holders of a majority of
the outstanding common shares and preferred shares, if any,
voting together as a single class, and of the holders of a
majority of the outstanding preferred shares, if any, voting as
a separate class:
(1) invest 25% or more of the value of its Managed Assets
in any one industry, provided that this limitation does not
apply to securities of the U.S. Government, any state
government or their respective agencies, or instrumentalities
and securities backed by the credit of any federal or state
governmental entity;
(2) issue senior securities or borrow money other than as
permitted by the Investment Company Act of 1940, as amended (the
Investment Company Act) or pledge its assets other
than to secure such issuances or in connection with hedging
transactions, short sales, when-issued and forward commitment
transactions and similar investment strategies;
(3) make loans of money or property to any person, except
through loans of portfolio securities, the purchase of fixed
income securities consistent with the Trusts investment
objectives and policies or the entry into repurchase agreements;
(4) underwrite the securities of other issuers, except to
the extent that in connection with the disposition of portfolio
securities or the sale of its own securities the Trust may be
deemed to be an underwriter;
(5) purchase or sell real estate or interests therein other
than municipal securities secured by real estate or interests
therein, provided that the Trust may hold and sell any real
estate acquired in connection with its investment in portfolio
securities; or
(6) purchase or sell commodities or commodity contracts for
any purposes except as, and to the extent, permitted by
applicable law without the Trust becoming subject to
registration with the Commodity Futures Trading Commission (the
CFTC) as a commodity pool.
When used above with respect to particular shares of the Trust,
majority of the outstanding means (i) 67% or
more of the shares present at a meeting, if the holders of more
than 50% of the shares are present or represented by proxy, or
(ii) more than 50% of the shares, whichever is less.
For purposes of applying the limitation set forth in
subparagraph (1) above, securities of the
U.S. Government, any state government or their respective
agencies, or instrumentalities and securities backed by the
credit of any federal or state governmental entity are not
considered to represent industries. However, obligations backed
only by the assets and revenues of non-governmental issuers may
for this purpose be deemed to be issued by such non-governmental
issuers. Thus, the 25% limitation would apply to such
obligations. It is nonetheless possible that the Trust may
invest more than 25% of
A-2
its total assets in a broader economic sector of the market for
municipal obligations, such as revenue obligations of hospitals
and other health care facilities or electrical utility revenue
obligations.
For the purpose of applying the limitation set forth in
subparagraph (1) above, a governmental issuer shall be
deemed the sole issuer of a security when its assets and
revenues are separate from other governmental entities and its
securities are backed only by its assets and revenues.
Similarly, in the case of a non-governmental issuer, such as an
industrial corporation or a privately owned or operated
hospital, if the security is backed only by the assets and
revenues of the non-governmental issuer, then such
non-governmental issuer would be deemed to be the sole issuer.
Where a security is backed by the enforceable obligation of a
superior or unrelated governmental entity, it will be included
in the computation of securities owned that are issued by such
governmental entity. When a security is backed by the
enforceable obligation of a superior or unrelated
non-governmental entity (other than a bond insurer), it will
also be included in the computation of securities owned that are
issued by such non-governmental entity. Where a security is
guaranteed by a governmental entity or some other facility, such
as a bank guarantee or letter of credit, such a guarantee or
letter of credit would be considered a separate security and
would be treated as an issue of such government, other entity or
bank. When a municipal security is insured by bond insurance, it
shall not be considered a security that is issued or guaranteed
by the insurer; instead, the issuer of such municipal security
will be determined in accordance with the principles set forth
above. The foregoing restrictions do not limit the percentage of
the Trusts assets that may be invested in municipal
securities insured by any given insurer.
Under the Investment Company Act, the Trust may invest up to 10%
of its total assets in the aggregate in shares of other
investment companies and up to 5% of its total assets in any one
investment company, provided the investment does not represent
more than 3% of the voting stock of the acquired investment
company at the time such shares are purchased. The Trust may
invest a greater percentage of its assets in money market funds
to the extent permitted by the Investment Company Act or the
Securities and Exchange Commission.
In addition to the foregoing fundamental investment policies,
the Trust is also subject to the following non-fundamental
restrictions and policies, which may be changed by the board of
trustees (the Board). The Trust may not:
(1) make any short sale of securities except in conformity
with applicable laws, rules and regulations and unless after
giving effect to such sale, the market value of all securities
sold short does not exceed 25% of the value of the Trusts
total assets and the Trusts aggregate short sales of a
particular class of securities does not exceed 25% of the then
outstanding securities of that class. The Trust may also make
short sales against the box without respect to such
limitations. In this type of short sale, at the time of the
sale, the Trust owns or has the immediate and unconditional
right to acquire at no additional cost the identical security;
(2) purchase securities of open-end or closed-end
investment companies except in compliance with the Investment
Company Act or any regulations promulgated or exemptive relief
obtained thereunder; or
(3) purchase securities of companies for the purpose of
exercising control.
The restrictions and other limitations set forth in the
Trusts Prospectus and in this Statement of Additional
Information will apply only at the time of purchase of
securities and will not be considered violated unless an excess
or deficiency occurs or exists immediately after and as a result
of the acquisition of securities. Any investment policy or
restriction described in the Prospectus or in this Statement of
Additional information is deemed to be a non-fundamental policy
or restriction of the Trust, unless otherwise stated.
In addition, to comply with Federal tax requirements for
qualification as a regulated investment company, the
Trusts investments will be limited in a manner such that
at the close of each quarter of each taxable year, (a) no
more than 25% of the value of the Trusts total assets are
invested in the securities (other than United States government
securities or securities of other regulated investment
companies) of
A-3
a single issuer or two or more issuers controlled by the Trust
and engaged in the same, similar or related trades or businesses
and (b) with regard to at least 50% of the Trusts
total assets, no more than 5% of its total assets are invested
in the securities (other than United States government
securities or securities of other regulated investment
companies) of a single issuer and such securities do not
represent more than 10 percent of the voting securities of
such issuer. These tax-related limitations may be changed by the
trustees to the extent appropriate in light of changes to
applicable tax requirements.
If the Trust offers preferred shares, it may apply for ratings
for such preferred shares from Moodys, S&P
and/or
Fitch. In order to obtain and maintain the required ratings, the
Trust may be required to comply with investment quality,
diversification and other guidelines established by
Moodys, S&P
and/or
Fitch. Such guidelines may be more restrictive than the
restrictions set forth above. The Trust does not anticipate that
such guidelines would have a material adverse effect on the
Trusts holders of common shares or its ability to achieve
its investment objectives. The Trust presently anticipates that
any preferred shares issued would be initially given the highest
ratings by Moodys (Aaa) or by S&P or Fitch (AAA), but
no assurance can be given that such ratings will be obtained. No
minimum rating is required for the issuance of preferred shares
by the Trust. Moodys, S&P and Fitch receive fees in
connection with their ratings issuances.
INVESTMENT
POLICIES AND TECHNIQUES
The following information supplements the discussion of the
Trusts investment objectives, policies and techniques that
are described in the Prospectus.
Portfolio
Investments
Municipal
Securities
Municipal security bonds are either general obligation or
revenue bonds and typically are issued to finance public
projects, such as roads or public buildings, to pay general
operating expenses or to refinance outstanding debt. Municipal
security bonds may also be issued for private activities, such
as housing, medical and educational facility construction or for
privately owned industrial development and pollution control
projects. General obligation bonds are backed by the full faith
and credit, or taxing authority, of the issuer and may be repaid
from any revenue source. Revenue bonds may be repaid only from
the revenues of a specific facility or source.
Issuers of securities rated Ba/BB or below are regarded as
having current capacity to make principal and interest payments
but are subject to business, financial or economic conditions
which could adversely affect such payment capacity. Municipal
securities rated Baa/BBB or better are considered
investment grade securities; municipal securities
rated Baa are considered medium grade obligations which lack
outstanding investment characteristics and have speculative
characteristics, while municipal securities rated BBB are
regarded as having adequate capacity to pay principal and
interest. Municipal securities rated AAA in which the Trust may
invest may have been so rated on the basis of the existence of
insurance guaranteeing the timely payment, when due, of all
principal and interest. Municipal securities rated below
investment grade quality (Ba/BB or lower) are obligations of
issuers that are considered predominantly speculative with
respect to the issuers capacity to pay interest and repay
principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the
possibility of issuer default and bankruptcy and increased
market price volatility. Municipal securities rated below
investment grade tend to be less marketable than higher-quality
securities because the market for them is less broad. The market
for unrated municipal securities is even narrower. During
periods of thin trading in these markets, the spread between bid
and ask prices is likely to increase significantly and the Trust
may have greater difficulty selling its portfolio securities.
The Trust will be more dependent on the research and analysis of
BlackRock Advisors, LLC (the Advisor or
BlackRock Advisors), the Trusts investment
advisor, and BlackRock Investment Management, LLC (the
Sub-Advisor or BlackRock Investment
Management), the Trusts sub-advisor, when investing
in these lower-rated securities. We sometimes refer to the
Advisor and Sub-Advisor collectively as the Advisors.
A-4
A general description of Moodys, S&Ps and
Fitchs ratings of municipal securities is set forth in
Appendix A hereto. The ratings of Moodys, S&P
and Fitch represent their opinions as to the quality of the
municipal securities they rate. It should be emphasized,
however, that ratings are general and are not absolute standards
of quality. Consequently, municipal securities with the same
maturity, coupon and rating may have different yields while
obligations of the same maturity and coupon with different
ratings may have the same yield.
The Trust will opportunistically manage the maturity
and/or
duration of its securities and the average weighted maturity
and/or
duration may be shortened or lengthened from time to time
depending on market conditions. As a result, the Trusts
portfolio at any given time may include both long-term and
intermediate-term municipal securities. Moreover, during
temporary defensive periods (e.g., times when, in the
Advisors opinion, temporary imbalances of supply and
demand or other temporary dislocations in the municipal
securities market adversely affect the price at which long-term
or intermediate-term municipal securities are available), and in
order to keep cash on hand fully invested, including the period
during which the net proceeds of the offering of common shares
or securities in connection with leverage, if any, are being
invested, the Trust may invest any percentage of its assets in
short-term investments including high quality, short-term
securities which may be either tax-exempt or taxable and
securities of other open- or closed-end investment companies
that invest primarily in municipal securities of the type in
which the Trust may invest directly.
Obligations of issuers of municipal securities are subject to
the provisions of bankruptcy, insolvency and other laws
affecting the rights and remedies of creditors, such as the
Bankruptcy Reform Act of 2005. In addition, the obligations of
such issuers may become subject to the laws enacted in the
future by Congress, state legislatures or referenda extending
the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of such obligations
or upon municipalities to levy taxes. There is also the
possibility that, as a result of legislation or other
conditions, the power or ability of any issuer to pay, when due,
the principal of and interest on its municipal securities may be
materially affected.
Short-Term
Taxable Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully
invested, the Trust may invest up to 100% of its Managed Assets
in cash equivalents and short-term taxable fixed income
securities. The Trust may also invest in these instruments to
achieve its investment objectives. Short-term taxable fixed
income investments are defined to include, without limitation,
the following:
(1) U.S. Government securities, including bills, notes
and bonds differing as to maturity and rates of interest that
are either issued or guaranteed by the U.S. Treasury or by
U.S. Government agencies or instrumentalities.
U.S. Government securities include securities issued by
(a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States,
Small Business Administration, and Government National Mortgage
Association, whose securities are supported by the full faith
and credit of the United States; (b) the Federal Home Loan
Banks, Federal Intermediate Credit Banks, and Tennessee Valley
Authority, whose securities are supported by the right of the
agency to borrow from the U.S. Treasury; (c) the
Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the
U.S. Government to purchase certain obligations of the
agency or instrumentality; and (d) the Student Loan
Marketing Association, whose securities are supported only by
its credit. While the U.S. Government provides financial
support to such U.S. Government-sponsored agencies or
instrumentalities, no assurance can be given that it always will
do so since it is not so obligated by law. The
U.S. Government, its agencies and instrumentalities do not
guarantee the market value of their securities. Consequently,
the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited
in a bank or a savings and loan association. Such certificates
are for a definite period of time, earn a specified rate of
return, and are normally negotiable. The issuer of a certificate
of deposit agrees to pay the amount deposited
A-5
plus interest to the bearer of the certificate on the date
specified thereon. Certificates of deposit purchased by the
Trust may not be fully insured by the Federal Deposit Insurance
Corporation.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Trust purchases securities pursuant
to a repurchase agreement, it simultaneously agrees to resell
and redeliver such securities to the seller, who also
simultaneously agrees to buy back the securities at a fixed
price and time. This assures a predetermined yield for the Trust
during its holding period, since the resale price is always
greater than the purchase price and reflects an
agreed-upon
market rate. Such actions afford an opportunity for the Trust to
invest temporarily available cash. The Trust may enter into
repurchase agreements only with respect to obligations of the
U.S. Government, its agencies or instrumentalities;
certificates of deposit; or bankers acceptances in which
the Trust may invest. Repurchase agreements may be considered
loans to the seller, collateralized by the underlying
securities. The risk to the Trust is limited to the ability of
the seller to pay the
agreed-upon
sum on the repurchase date; in the event of default, the
repurchase agreement provides that the Trust is entitled to sell
the underlying collateral. If the value of the collateral
declines after the agreement is entered into, and if the seller
defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, the
Trust could incur a loss of both principal and interest. The
Advisor monitors the value of the collateral at the time the
action is entered into and at all times during the term of the
repurchase agreement. The Advisor does so in an effort to
determine that the value of the collateral always equals or
exceeds the
agreed-upon
repurchase price to be paid to the Trust. If the seller were to
be subject to a Federal bankruptcy proceeding, the ability of
the Trust to liquidate the collateral could be delayed or
impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term
unsecured promissory notes, including variable rate master
demand notes issued by corporations to finance their current
operations. Master demand notes are direct lending arrangements
between the Trust and a corporation. There is no secondary
market for such notes. However, they are redeemable by the Trust
at any time. The Advisor will consider the financial condition
of the corporation (e.g., earning power, cash flow and other
liquidity ratios) and will continuously monitor the
corporations ability to meet all of its financial
obligations, because the Trusts liquidity might be
impaired if the corporation were unable to pay principal and
interest on demand. Investments in commercial paper will be
limited to commercial paper rated in the highest categories by a
major rating agency and which mature within one year of the date
of purchase or carry a variable or floating rate of interest.
Short-Term
Tax-Exempt Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully
invested, the Trust may invest up to 100% of its Managed Assets
in cash equivalents and short-term tax-exempt fixed income
securities. The Trust may also invest in these instruments to
achieve its investment objectives. Short-term tax-exempt fixed
income securities are securities that are exempt from regular
Federal income tax and mature within three years or less from
the date of issuance. Short-term tax-exempt fixed income
securities are defined to include, without limitation, the
following:
Bond Anticipation Notes (BANs) are usually general
obligations of state and local governmental issuers which are
sold to obtain interim financing for projects that will
eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its
obligations on its BANs is primarily dependent on the
issuers access to the long-term municipal bond market and
the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.
Tax Anticipation Notes (TANs) are issued by state
and local governments to finance the current operations of such
governments. Repayment is generally to be derived from specific
future tax revenues. TANs are usually general obligations of the
issuer. A weakness in an issuers capacity to raise taxes
due to, among other things, a decline in its tax base or a rise
in delinquencies could adversely affect the issuers
ability to meet its obligations on outstanding TANs.
A-6
Revenue Anticipation Notes (RANs) are issued by
governments or governmental bodies with the expectation that
future revenues from a designated source will be used to repay
the notes. In general, they also constitute general obligations
of the issuer. A decline in the receipt of projected revenues,
such as anticipated revenues from another level of government,
could adversely affect an issuers ability to meet its
obligations on outstanding RANs. In addition, the possibility
that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the
principal and interest on RANs.
Construction Loan Notes are issued to provide construction
financing for specific projects. Frequently, these notes are
redeemed with funds obtained from the Federal Housing
Administration.
Bank Notes are notes issued by local government bodies and
agencies such as those described above to commercial banks as
evidence of borrowings. The purposes for which the notes are
issued are varied but they are frequently issued to meet
short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and
RANs.
Tax-Exempt Commercial Paper (municipal paper)
represents very short-term unsecured, negotiable promissory
notes, issued by states, municipalities and their agencies.
Payment of principal and interest on issues of municipal paper
may be made from various sources, to the extent the funds are
available therefrom. Maturities on municipal paper generally
will be shorter than the maturities of TANs, BANs or RANs. There
is a limited secondary market for issues of municipal paper.
Certain municipal securities may carry variable or floating
rates of interest whereby the rate of interest is not fixed but
varies with changes in specified market rates or indices, such
as a bank prime rate or tax-exempt money market indices.
While the various types of notes described above as a group
represent the major portion of the tax-exempt note market, other
types of notes are available in the marketplace and the Trust
may invest in such other types of notes to the extent permitted
under its investment objective, policies and limitations. Such
notes may be issued for different purposes and may be secured
differently from those mentioned above.
Strategic
Transactions and Other Management Techniques
Consistent with its investment objectives and policies set forth
herein, the Trust may also enter into certain hedging and risk
management transactions or transactions to enhance total return.
In particular, the Trust may purchase and sell futures
contracts, exchange-listed and
over-the-counter
put and call options on securities, financial indices and
futures contracts, forward foreign currency contracts, and may
enter into various interest rate transactions (collectively,
Strategic Transactions). Strategic Transactions may
be used to attempt to protect against possible changes in the
market value of the Trusts portfolio resulting from
fluctuations in the debt securities markets and changes in
interest rates, to protect the Trusts unrealized gains in
the value of its portfolio securities, to facilitate the sale of
such securities for investment purposes and to establish a
position in the securities markets as a temporary substitute for
purchasing particular securities. Any or all of these Strategic
Transactions may be used at any time whether for hedging and
risk management or to enhance total return. There is no
particular strategy that requires use of one technique rather
than another. Use of any Strategic Transaction is a function of
market conditions. The Strategic Transactions that the Trust may
use are described below. The ability of the Trust to hedge them
successfully will depend on the Advisors ability to
predict pertinent market movements as well as sufficient
correlation among the instruments, which cannot be assured.
Interest Rate Transactions.
The Trust
may enter into interest rate swaps and purchase or sell interest
rate caps and floors primarily to preserve a return or spread on
a particular investment or portion of its portfolio as a
duration management technique or to protect against any increase
in the
A-7
price of securities the Trust anticipates purchasing at a later
date. The Trust intends to use these transactions for duration
and risk management purposes and not as a speculative
investment. The Trust will not sell interest rate caps or floors
that it does not own. Interest rate swaps involve the exchange
by the Trust with another party of their respective commitments
to pay or receive interest, e.g., an exchange of floating rate
payments for fixed rate payments with respect to a notional
amount of principal. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling
such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party
selling such interest rate floor.
The Trust may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, depending on
whether it is offsetting volatility with respect to its assets
or liabilities, and will usually enter into interest rate swaps
on a net basis, i.e., the two payment streams are netted out,
with the Trust receiving or paying, as the case may be, only the
net amount of the two payments on the payment dates. In as much
as these Strategic Transactions are entered into for good faith
risk management purposes, the Advisor, the
Sub-Advisor
and the Trust believe such obligations do not constitute senior
securities and, accordingly, will not treat them as being
subject to its borrowing restrictions. The Trust will accrue the
net amount of the excess, if any, of the Trusts
obligations over its entitlements with respect to each interest
rate swap on a daily basis and will designate on its books and
records with a custodian an amount of cash or liquid high grade
securities having an aggregate net asset value at all times at
least equal to the accrued excess. The Trust will not enter into
any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other
party thereto is rated in the highest rating category of at
least one nationally recognized statistical rating organization
at the time of entering into such transaction. If there is a
default by the other party to such a transaction, the Trust will
have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in
recent years with a large number of banks and investment banking
firms acting both as principals and as agents utilizing
standardized swap documentation. Caps and floors are more recent
innovations for which standardized documentation has not yet
been developed and, accordingly, they are less liquid than swaps.
Futures Contracts and Options on Futures
Contracts.
In connection with its hedging and
other risk management strategies, the Trust may also enter into
contracts for the purchase or sale for future delivery
(futures contracts) of debt securities, aggregates
of debt securities or indices or prices thereof, other financial
indices and U.S. Government debt securities or options on
the above. The Trust primarily intends to engage in such
transactions for bona fide hedging or risk management and other
portfolio management purposes.
Calls on Securities, Indices and Futures
Contracts.
In order to enhance income or
reduce fluctuations on net asset value, the Trust may sell or
purchase call options (calls) on municipal
securities and indices based upon the prices of futures
contracts and debt securities that are traded on U.S. and
foreign securities exchanges and in the
over-the-counter
markets. A call option gives the purchaser of the option the
right to buy, and obligates the seller to sell, the underlying
security, futures contract or index at the exercise price at any
time or at a specified time during the option period. All such
calls sold by the Trust must be covered as long as
the call is outstanding (i.e., the Trust must own the instrument
subject to the call or other securities or assets acceptable for
applicable segregation and coverage requirements). A call sold
by the Trust exposes the Trust during the term of the option to
possible loss of opportunity to realize appreciation in the
market price of the underlying security, index or futures
contract and may require the Trust to hold an instrument which
it might otherwise have sold. The purchase of a call gives the
Trust the right to buy a security, futures contract or index at
a fixed price. Calls on futures on municipal securities must
also be covered by assets or instruments acceptable under
applicable segregation and coverage requirements.
Puts on Securities, Indices and Futures
Contracts.
As with calls, the Trust may
purchase put options (puts) that relate to municipal
securities (whether or not it holds such securities in its
portfolio),
A-8
indices or futures contracts. For the same purposes, the Trust
may also sell puts on municipal securities, indices or futures
contracts on such securities if the Trusts contingent
obligations on such puts are secured by segregated assets
consisting of cash or liquid high grade debt securities having a
value not less than the exercise price. The Trust will not sell
puts if, as a result, more than 50% of the Trusts total
assets would be required to cover its potential obligations
under its hedging and other investment transactions. In selling
puts, there is a risk that the Trust may be required to buy the
underlying security at a price higher than the current market
price.
Credit Derivatives.
The Trust may
engage in credit derivative transactions. There are two broad
categories of credit derivatives: default price risk derivatives
and market spread derivatives. Default price risk derivatives
are linked to the price of reference securities or loans after a
default by the issuer or borrower, respectively. Market spread
derivatives are based on the risk that changes in market
factors, such as credit spreads, can cause a decline in the
value of a security, loan or index. There are three basic
transactional forms for credit derivatives: swaps, options and
structured instruments. The use of credit derivatives is a
highly specialized activity which involves strategies and risks
different from those associated with ordinary portfolio security
transactions. If the Advisor is incorrect in its forecasts of
default risks, market spreads or other applicable factors, the
investment performance of the Trust would diminish compared with
what it would have been if these techniques were not used.
Moreover, even if the Advisor is correct in its forecasts, there
is a risk that a credit derivative position may correlate
imperfectly with the price of the asset or liability being
hedged. There is no limit on the amount of credit derivative
transactions that may be entered into by the Trust. The
Trusts risk of loss in a credit derivative transaction
varies with the form of the transaction. For example, if the
Trust purchases a default option on a security, and if no
default occurs with respect to the security, the Trusts
loss is limited to the premium it paid for the default option.
In contrast, if there is a default by the grantor of a default
option, the Trusts loss will include both the premium that
it paid for the option and the decline in value of the
underlying security that the default option hedged.
Municipal Market Data Rate Locks.
The
Trust may purchase and sell Municipal Market Data Rate Locks
(MMD Rate Locks). An MMD Rate Lock permits the Trust
to lock in a specified municipal interest rate for a portion of
its portfolio to preserve a return on a particular investment or
a portion of its portfolio as a duration management technique or
to protect against any increase in the price of securities to be
purchased at a later date. The Trust will ordinarily use these
transactions as a hedge or for duration or risk management
although it is permitted to enter into them to enhance income or
gain. An MMD Rate Lock is a contract between the Trust and an
MMD Rate Lock provider pursuant to which the parties agree to
make payments to each other on a notional amount, contingent
upon whether the Municipal Market Data AAA General Obligation
Scale is above or below a specified level on the expiration date
of the contract. For example, if the Trust buys an MMD Rate Lock
and the Municipal Market Data AAA General Obligation Scale is
below the specified level on the expiration date, the
counterparty to the contract will make a payment to the Trust
equal to the specified level minus the actual level, multiplied
by the notional amount of the contract. If the Municipal Market
Data AAA General Obligation Scale is above the specified level
on the expiration date, the Trust will make a payment to the
counterparty equal to the actual level minus the specified
level, multiplied by the notional amount of the contract. In
entering into MMD Rate Locks, there is a risk that municipal
yields will move in the direction opposite of the direction
anticipated by the Trust. The Trust will not enter into MMD Rate
Locks if, as a result, more than 50% of its total assets would
be required to cover its potential obligations under its hedging
and other investment transactions.
New Products.
The financial markets
continue to evolve and financial products continue to be
developed. The Trust reserves the right to invest in new
financial products as they are developed or become more widely
accepted. As with any new financial product, these products will
entail risks, including risks to which the Trust currently is
not subject.
Appendix C contains further information about the
characteristics, risks and possible benefits of Strategic
Transactions and the Trusts other policies and limitations
(which are not fundamental policies) relating to investment in
futures contracts and options. The principal risks relating to
the use of futures
A-9
contracts and other Strategic Transactions are: (a) less
than perfect correlation between the prices of the instrument
and the market value of the securities in the Trusts
portfolio; (b) possible lack of a liquid secondary market
for closing out a position in such instruments; (c) losses
resulting from interest rate or other market movements not
anticipated by the Advisor; and (d) the obligation to meet
additional variation margin or other payment requirements, all
of which could result in the Trust being in a worse position
than if such techniques had not been used.
Certain provisions of the Code may restrict or affect the
ability of the Trust to engage in Strategic Transactions. See
Tax Matters.
Short
Sales
The Trust may make short sales of municipal securities and other
securities. A short sale is a transaction in which the Trust
sells a security it does not own in anticipation that the market
price of that security will decline. The Trust may make short
sales to hedge positions, for duration and risk management, in
order to maintain portfolio flexibility or to enhance income or
gain.
When the Trust makes a short sale, it must borrow the security
sold short and deliver it to the broker-dealer through which it
made the short sale as collateral for its obligation to deliver
the security upon conclusion of the sale. The Trust may have to
pay a fee to borrow particular securities and is often obligated
to pay over any payments received on such borrowed securities.
The Trusts obligation to replace the borrowed security
will be secured by collateral deposited with the broker-dealer,
usually cash, U.S. Government securities or other liquid
securities. The Trust will also be required to designate on its
books and records similar collateral with its custodian to the
extent, if any, necessary so that the aggregate collateral value
is at all times at least equal to the current market value of
the security sold short. Depending on arrangements made with the
broker-dealer from which it borrowed the security regarding
payment over of any payments received by the Trust on such
security, the Trust may not receive any payments (including
interest) on its collateral deposited with such broker-dealer.
If the price of the security sold short increases between the
time of the short sale and the time the Trust replaces the
borrowed security, the Trust will incur a loss; conversely, if
the price declines, the Trust will realize a gain. Any gain will
be decreased, and any loss increased, by the transaction costs
described above. Although the Trusts gain is limited to
the price at which it sold the security short, its potential
loss is theoretically unlimited.
The Trust will not make a short sale if, after giving effect to
such sale, the market value of all securities sold short exceeds
25% of the value of its total assets or the Trusts
aggregate short sales of a particular class of securities
exceeds 25% of the outstanding securities of that class. The
Trust may also make short sales against the box
without respect to such limitations. In this type of short sale,
at the time of the sale, the Trust owns or has the immediate and
unconditional right to acquire at no additional cost the
identical security.
OTHER
INVESTMENT POLICIES AND TECHNIQUES
Restricted
and Illiquid Securities
Certain of the Trusts investments may be illiquid.
Illiquid securities are subject to legal or contractual
restrictions on disposition or lack an established secondary
trading market. The sale of restricted and illiquid securities
often requires more time and results in higher brokerage charges
or dealer discounts and other selling expenses than does the
sale of securities eligible for trading on national securities
exchanges or in the over-the- counter markets. Restricted
securities may sell at a price lower than similar securities
that are not subject to restrictions on resale.
A-10
Reverse
Repurchase Agreements
The Trust may enter into reverse repurchase agreements with
respect to its portfolio investments subject to the investment
restrictions set forth herein and in the Prospectus. Reverse
repurchase agreements involve the sale of securities held by the
Trust with an agreement by the Trust to repurchase the
securities at an agreed upon price, date and interest payment.
At the time the Trust enters into a reverse repurchase
agreement, it may designate on its books and records liquid
instruments having a value not less than the repurchase price
(including accrued interest). If the Trust establishes and
maintains such a segregated account, a reverse repurchase
agreement will not be considered a borrowing by the Trust;
however, under certain circumstances in which the Trust does not
establish and maintain such a segregated account, such reverse
repurchase agreement will be considered a borrowing for the
purpose of the Trusts limitation on borrowings. The use by
the Trust of reverse repurchase agreements involves many of the
same risks of leverage since the proceeds derived from such
reverse repurchase agreements may be invested in additional
securities. Reverse repurchase agreements involve the risk that
the market value of the securities acquired in connection with
the reverse repurchase agreement may decline below the price of
the securities the Trust has sold but is obligated to
repurchase. Also, reverse repurchase agreements involve the risk
that the market value of the securities retained in lieu of sale
by the Trust in connection with the reverse repurchase agreement
may decline in price.
If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or its
trustee or receiver may receive an extension of time to
determine whether to enforce the Trusts obligation to
repurchase the securities, and the Trusts use of the
proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision. Also, the Trust would bear the
risk of loss to the extent that the proceeds of the reverse
repurchase agreement are less than the value of the securities
subject to such agreement.
Repurchase
Agreements
As temporary investments, the Trust may invest in repurchase
agreements. A repurchase agreement is a contractual agreement
whereby the seller of securities agrees to repurchase the same
security at a specified price on a future date agreed upon by
the parties. The
agreed-upon
repurchase price determines the yield during the Trusts
holding period. Repurchase agreements are considered to be loans
collateralized by the underlying security that is the subject of
the repurchase contract. The Trust will only enter into
repurchase agreements with registered securities dealers or
domestic banks that, in the opinion of the Advisor, present
minimal credit risk. The risk to the Trust is limited to the
ability of the issuer to pay the
agreed-upon
repurchase price on the delivery date; however, although the
value of the underlying collateral at the time the transaction
is entered into always equals or exceeds the
agreed-upon
repurchase price, if the value of the collateral declines there
is a risk of loss of both principal and interest. In the event
of default, the collateral may be sold but the Trust might incur
a loss if the value of the collateral declines, and might incur
disposition costs or experience delays in connection with
liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the
security, realization upon the collateral by the Trust may be
delayed or limited. The Advisor will monitor the value of the
collateral at the time the transaction is entered into and at
all times subsequent during the term of the repurchase agreement
in an effort to determine that such value always equals or
exceeds the
agreed-upon
repurchase price. In the event the value of the collateral
declines below the repurchase price, the Advisor will demand
additional collateral from the issuer to increase the value of
the collateral to at least that of the repurchase price,
including interest.
Lending
of Securities
The Trust may lend its portfolio securities to banks or dealers
which meet the creditworthiness standards established by the
Board (Qualified Institutions). By lending its
portfolio securities, the Trust attempts to increase its income
through the receipt of interest on the loan. Any gain or loss in
the market price of the securities loaned that may occur during
the term of the loan will be for the account
A-11
of the Trust. The Trust may lend its portfolio securities so
long as the terms and the structure of such loans are not
inconsistent with requirements of the Investment Company Act,
which currently require that (i) the borrower pledge and
maintain with the Trust collateral consisting of cash, a letter
of credit issued by a domestic U.S. Bank, or securities
issued or guaranteed by the U.S. Government having a value
at all times not less than 100% of the value of the securities
loaned, (ii) the borrower add to such collateral whenever
the price of the securities loaned rises (i.e., the value of the
loan is marked to the market on a daily basis),
(iii) the loan be made subject to termination by the Trust
at any time and (iv) the Trust receive reasonable interest
on the loan (which may include the Trusts investing any
cash collateral in interest bearing short term investments), any
distributions on the loaned securities and any increase in their
market value. The Trust will not lend portfolio securities if,
as a result, the aggregate of such loans exceeds
33
1
/
3
%
of the value of the Trusts total assets (including such
loans). Loan arrangements made by the Trust will comply with all
other applicable regulatory requirements, including the rules of
the New York Stock Exchange, which rules presently require the
borrower, after notice, to redeliver the securities within the
normal settlement time of five business days. All relevant facts
and circumstances, including the creditworthiness of the
Qualified Institution, will be monitored by the Advisor, and
will be considered in making decisions with respect to lending
securities, subject to review by the Board.
The Trust may pay reasonable negotiated fees in connection with
loaned securities, so long as such fees are set forth in a
written contract and approved by the Board. In addition, voting
rights may pass with the loaned securities, but if a material
event were to occur affecting such a loan, the loan must be
called and the securities voted.
High
Yield Securities
The Trust may invest up to 20% of its Managed Assets in
securities rated below investment grade, such as those rated Ba
or below by Moodys or BB or below by S&P or Fitch or
securities comparably rated by other rating agencies or in
unrated securities determined by the Advisor or
Sub-Advisor
to be of comparable quality. Securities rated Ba and below by
Moodys and Fitch are judged to have speculative elements,
their future cannot be considered as well assured and often the
protection of interest and principal payments may be very
moderate. Securities rated BB by S&P are regarded as having
predominantly speculative characteristics and, while such
obligations have less near-term vulnerability to default than
other speculative grade debt, they face major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions, which could lead to inadequate capacity to
meet timely interest and principal payments.
Lower grade securities, though high yielding, are characterized
by high risk. They may be subject to certain risks with respect
to the issuing entity and to greater market fluctuations than
certain lower yielding, higher rated securities. The retail
secondary market for lower grade securities may be less liquid
than that of higher rated securities; adverse conditions could
make it difficult at times for the Trust to sell certain
securities or could result in lower prices than those used in
calculating the Trusts net asset value.
The prices of debt securities generally are inversely related to
interest rate changes; however, the price volatility caused by
fluctuating interest rates of securities also is inversely
related to the coupons of such securities. Accordingly, below
investment grade securities may be relatively less sensitive to
interest rate changes than higher quality securities of
comparable maturity because of their higher coupon. This higher
coupon is what the investor receives in return for bearing
greater credit risk. The higher credit risk associated with
below investment grade securities potentially can have a greater
effect on the value of such securities than may be the case with
higher quality issues of comparable maturity.
Lower grade securities may be particularly susceptible to
economic downturns. It is likely that an economic recession
could severely disrupt the market for such securities and may
have an adverse impact on the value of such securities. In
addition, it is likely that any such economic downturn could
A-12
adversely affect the ability of the issuers of such securities
to repay principal and pay interest thereon and increase the
incidence of default for such securities.
The ratings of Moodys, S&P and other rating agencies
represent their opinions as to the quality of the obligations
which they undertake to rate. Ratings are relative and
subjective and, although ratings may be useful in evaluating the
safety of interest and principal payments, they do not evaluate
the market value risk of such obligations. Although these
ratings may be an initial criterion for selection of portfolio
investments, the Advisor also will independently evaluate these
securities and the ability for the issuers of such securities to
pay interest and principal. To the extent that the Trust invests
in lower grade securities that have not been rated by a rating
agency, the Trusts ability to achieve its investment
objectives will be more dependent on the Advisors credit
analysis than would be the case when the Trust invests in rated
securities.
ADDITIONAL
RISK FACTORS
Risk
Factors in Strategic Transactions and Derivatives
In addition to Appendix C, the following contains risk
factors associated with derivatives. Derivatives are volatile
and involve significant risks, including:
The Trusts use of derivatives may reduce its returns
and/or
increase volatility. Volatility is defined as the characteristic
of a security, an index or a market to fluctuate significantly
in price within a short time period. A risk of the Trusts
use of derivatives is that the fluctuations in their values may
not correlate perfectly with the overall securities markets.
Derivatives are also subject to counterparty risk, which is the
risk that the other party in the transaction will not fulfill
its contractual obligation. In addition, some derivatives are
more sensitive to interest rate changes and market price
fluctuations than other securities. The possible lack of a
liquid secondary market for derivatives and the resulting
inability of the Trust to sell or otherwise close a derivatives
position could expose the Trust to losses and could make
derivatives more difficult for the Trust to value accurately.
The Trust could also suffer losses related to its derivative
positions as a result of unanticipated market movements, which
losses are potentially unlimited. Finally, the Advisors may not
be able to predict correctly the direction of securities prices,
interest rates and other economic factors, which could cause the
Trusts derivatives positions to lose value. When a
derivative is used as a hedge against a position that the Trust
holds, any loss generated by the derivative generally should be
substantially offset by gains on the hedged investment, and vice
versa. While hedging can reduce or eliminate losses, it can also
reduce or eliminate gains. Hedges are sometimes subject to
imperfect matching between the derivative and the underlying
security, and there can be no assurance that the Trusts
hedging transactions will be effective. The income from certain
derivatives may be subject to Federal income tax. Swap
agreements involve the risk that the party with whom the Trust
has entered into the swap will default on its obligation to pay
the Trust and the risk that the Trust will not be able to meet
its obligations to pay the other party to the agreement. Credit
default swaps involve special risks in addition to those
mentioned above because they are difficult to value, are highly
susceptible to liquidity and credit risk, and generally pay a
return to the party that has paid the premium only in the event
of an actual default by the issuer of the underlying obligation
(as opposed to a credit downgrade or other indication of
financial difficulty). Forward foreign currency exchange
contracts do not eliminate fluctuations in the value of
non-U.S. Securities
but rather allow the Trust to establish a fixed rate of exchange
for a future point in time. This strategy can have the effect of
reducing returns and minimizing opportunities for gain.
Credit Risk
the risk that the
counterparty in a derivative transaction will be unable to honor
its financial obligation to the Trust, or the risk that the
reference entity in a credit default swap or similar derivative
will not be able to honor its financial obligations.
A-13
Leverage Risk
the risk associated with
certain types of investments or trading strategies (such as, for
example, borrowing money to increase the amount of investments)
that relatively small market movements may result in large
changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses
that greatly exceed the amount originally invested.
Liquidity Risk
the risk that certain
securities may be difficult or impossible to sell at the time
that the seller would like or at the price that the seller
believes the security is currently worth.
Correlation Risk
the risk that changes
in the value of a derivative will not match the changes in the
value of the portfolio holdings that are being hedged or of the
particular market or security to which the Trust seeks exposure.
Index Risk
If the derivative is linked
to the performance of an index, it will be subject to the risks
associated with changes in that index. If the index changes, the
Trust could receive lower interest payments or experience a
reduction in the value of the derivative to below what that
Trust paid. Certain indexed securities, including inverse
securities (which move in an opposite direction to the index),
may create leverage, to the extent that they increase or
decrease in value at a rate that is a multiple of the changes in
the applicable index.
There can be no assurance that, at any specific time, either a
liquid secondary market will exist for a derivative or the Trust
will otherwise be able to sell such instrument at an acceptable
price. It may, therefore, not be possible to close a position in
a derivative without incurring substantial losses, if at all.
Certain transactions in derivatives (such as futures
transactions or sales of put options) involve substantial
leverage risk and may expose the Trust to potential losses that
exceed the amount originally invested by the Trust. When the
Trust engages in such a transaction, the Trust will deposit in a
segregated account liquid assets with a value at least equal to
the Trusts exposure, on a
mark-to-market
basis, to the transaction (as calculated pursuant to
requirements of the Securities and Exchange Commission). Such
segregation will ensure that the Trust has assets available to
satisfy its obligations with respect to the transaction, but
will not limit the Trusts exposure to loss.
Risks Associated with Options.
There
are several risks associated with transactions in options on
securities and indexes. For example, there are significant
differences between the securities and options markets that
could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. In
addition, a liquid secondary market for particular options,
whether traded
over-the-counter
or on a national securities exchange (Exchange) may
be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions
may be imposed by an Exchange on opening transactions or closing
transactions or both; trading halts, suspensions or other
restrictions may be imposed with respect to particular classes
or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an
Exchange; the facilities of an Exchange or the Options Clearing
Corporation (OCC) may not at all times be adequate
to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a
particular class or series of options), in which event the
secondary market on that Exchange (or in that class or series of
options) would cease to exist, although outstanding options that
had been issued by the OCC as a result of trades on that
Exchange would continue to be exercisable in accordance with
their terms.
Risks Associated with Futures.
The
primary risks associated with the use of futures contracts and
options are (a) the imperfect correlation between the
change in market value of the instruments held by the Trust and
the price of the futures contract or option; (b) possible
lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures contract when desired;
(c) losses caused by unanticipated market movements, which
are potentially unlimited; (d) the Advisors inability
to predict correctly the direction of securities prices,
interest rates,
A-14
currency exchange rates and other economic factors; and
(e) the possibility that the counterparty will default in
the performance of its obligations.
Additional Risk Factors of OTC Transactions; Limitations
on the Use of OTC Derivatives.
Certain
derivatives traded in OTC markets, including indexed securities,
swaps and OTC options, involve substantial liquidity risk. The
absence of liquidity may make it difficult or impossible for the
Trust to sell such instruments promptly at an acceptable price.
The absence of liquidity may also make it more difficult for the
Trust to ascertain a market value for such instruments. The
Trust will, therefore, acquire illiquid OTC instruments
(i) if the agreement pursuant to which the instrument is
purchased contains a formula price at which the instrument may
be terminated or sold, or (ii) for which the Advisor
anticipates the Trust can receive on each business day at least
two independent bids or offers, unless a quotation from only one
dealer is available, in which case that dealers quotation
may be used. Because derivatives traded in OTC markets are not
guaranteed by an exchange or clearing corporation and generally
do not require payment of margin, to the extent that the Trust
has unrealized gains in such instruments or has deposited
collateral with its counterparties the Trust is at risk that its
counterparties will become bankrupt or otherwise fail to honor
its obligations. The Trust will attempt to minimize these risks
by engaging in transactions in derivatives traded in OTC markets
only with financial institutions that have substantial capital
or that have provided the Trust with a third-party guaranty or
other credit enhancement.
MANAGEMENT
OF THE TRUST
Investment
Advisor and
Sub-Advisor
BlackRock Advisors acts as the Trusts investment advisor
and BlackRock Investment Management acts as the Trusts
investment
sub-advisor.
BlackRock Advisors, located at 100 Bellevue Parkway, Wilmington,
Delaware 19809, and BlackRock Investment Management, located at
55 East 52nd Street, New York, New York 10055, are wholly owned
subsidiaries of BlackRock Inc. (BlackRock), which is
a leader in investment management, risk management and advisory
services for institutional and retail clients worldwide. At
June 30, 2010, BlackRocks assets under management was
$3.151 trillion.
BlackRock participated in the first BAB issuance and currently
manages approximately $4.5 billion in BABs across its
entire fixed income platform, as of June 30, 2010.
BlackRock has over 20 years of experience managing
closed-end funds and, as of June 30, 2010, advised a
registered closed-end fund family of 95 exchange-listed active
funds with approximately $36.6 billion in assets. In
addition, BlackRock advised 3 non-exchange-listed closed end
funds with approximately $815 million in assets.
BlackRock offers products that span the risk spectrum to meet
clients needs, including active, enhanced and index
strategies across markets and asset classes. Products are
offered in a variety of structures including separate accounts,
mutual funds,
iShares
®
(exchange traded funds), and other pooled investment vehicles.
BlackRock also offers risk management, advisory and enterprise
investment system services to a broad base of institutional
investors through
BlackRock
Solutions
®
.
Headquartered in New York City, as of June 30, 2010,
the firm has approximately 8,500 employees in 24 countries
and a major presence in key global markets, including North and
South America, Europe, Asia, Australia and the Middle East and
Africa.
Investment
Management Agreement
Although BlackRock Advisors intends to devote such time and
effort to the business of the Trust as is reasonably necessary
to perform its duties to the Trust, the services of BlackRock
Advisors are not exclusive and BlackRock Advisors provides
similar services to other investment companies and other clients
and may engage in other activities.
The Investment Management Agreement also provides that in the
absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations thereunder, BlackRock
Advisors is not liable to the Trust or any of the Trusts
shareholders for any act or omission by BlackRock Advisors in
A-15
the supervision or management of its respective investment
activities or for any loss sustained by the Trust or the
Trusts shareholders and provides for indemnification by
the Trust of BlackRock Advisors, its directors, officers,
employees, agents and control persons for liabilities incurred
by them in connection with their services to the Trust, subject
to certain limitations and conditions.
The Investment Management Agreement was approved by the
Trusts Board at an in-person meeting of the Board held on
July 16, 2010, including a majority of the trustees who are
not parties to the agreement or interested persons of any such
party (as such term is defined in the Investment Company Act).
This agreement provides for the Trust to pay a Management Fee at
an annual rate equal to 0.55% of the average daily value of the
Trusts Managed Assets. Managed Assets means
the total assets of the Trust (including any assets attributable
to money borrowed for investment purposes) minus the sum of the
Trusts accrued liabilities (other than money borrowed for
investment purposes).
The Investment Management Agreement was approved by the sole
common shareholder of the Trust as of July 20, 2010. The
Investment Management Agreement will continue in effect for a
period of two years from its effective date, and if not sooner
terminated, will continue in effect for successive periods of
12 months thereafter, provided that each continuance is
specifically approved at least annually by both (1) the
vote of a majority of the Board or the vote of a majority of the
outstanding voting securities of the Trust (as such term is
defined in the Investment Company Act) and (2) by the vote
of a majority of the trustees who are not parties to the
investment management agreement or interested persons (as such
term is defined in the Investment Company Act) of any such
party, cast in person at a meeting called for the purpose of
voting on such approval. The Investment Management Agreement may
be terminated as a whole at any time by the Trust, without the
payment of any penalty, upon the vote of a majority of the Board
or a majority of the outstanding voting securities of the Trust
or by BlackRock Advisors, on 60 days written notice
by either party to the other which can be waived by the
non-terminating party. The Investment Management Agreement will
terminate automatically in the event of its assignment (as such
term is defined in the Investment Company Act and the rules
thereunder).
Sub-Investment
Advisory Agreement
BlackRock Investment Management is a wholly owned subsidiary of
BlackRock. Pursuant to the
sub-investment
advisory agreement, BlackRock Advisors has appointed BlackRock
Investment Management, one of its affiliates, to perform certain
of the
day-to-day
investment management of the Trust. BlackRock Investment
Management will receive a portion of the management fee paid by
the Trust to BlackRock Advisors. From the management fees,
BlackRock Advisors will pay BlackRock Investment Management for
serving as
Sub-Advisor,
a fee equal to 50% of the monthly management fees received by
BlackRock Advisors; provided thereafter that the
Sub-Advisor
may be compensated at cost for any services rendered to the
Trust at the request of BlackRock Advisors and approved of by
the Board.
The
sub-investment
advisory agreement also provides that, in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard
of its obligations thereunder, the Trust will indemnify
BlackRock Investment Management, its directors, officers,
employees, agents, associates and control persons for
liabilities incurred by them in connection with their services
to the Trust, subject to certain limitations.
Although BlackRock Investment Management intends to devote such
time and effort to the business of the Trust as is reasonably
necessary to perform its duties to the Trust, the services of
BlackRock Investment Management are not exclusive and BlackRock
Investment Management provides similar services to other
investment companies and other clients and may engage in other
activities.
The
sub-investment
advisory agreement was approved by the Board at an in-person
meeting of the Board held on July 16, 2010, including a
majority of the trustees who are not parties to the agreement or
interested persons of any such party (as such term is defined in
the Investment Company Act).
The
sub-investment
advisory agreement was approved by the sole common shareholder
of the Trust as of July 20, 2010. The
sub-investment
advisory agreement will continue in effect for a period of two
years from its effective date, and if not sooner terminated,
will continue in effect for successive
A-16
periods of 12 months thereafter, provided that each
continuance is specifically approved at least annually by both
(1) the vote of a majority of the Board or the vote of a
majority of the outstanding voting securities of the Trust (as
defined in the Investment Company Act) and (2) by the vote
of a majority of the trustees who are not parties to such
agreement or interested persons (as such term is defined in the
Investment Company Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The
sub-investment
advisory agreement may be terminated as a whole at any time by
the Trust without the payment of any penalty, upon the vote of a
majority of the Board or a majority of the outstanding voting
securities of the Trust, or by BlackRock Advisors or BlackRock
Investment Management, on 60 days written notice by
either party to the other. The
sub-investment
advisory agreement will also terminate automatically in the
event of its assignment (as such term is defined in the
Investment Company Act and the rules thereunder).
Matters
Considered by the Board
A discussion regarding the basis for the approval of the
respective initial and successor investment management and
sub-investment
advisory agreements by the Board will be available in the
Trusts first report sent to shareholders.
Trustees
and Officers
The Board consists of ten individuals (the
Trustees), eight of whom are not interested
persons of the Trust as defined in the Investment Company
Act (the Independent Trustees). The registered
investment companies advised by the Advisors or their affiliates
(the BlackRock-Advised Funds) are organized into one
complex of closed-end funds (the Closed-End
Complex), two complexes of open-end funds (the
Equity-Liquidity Complex, and the Equity-Bond
Complex) and one complex of exchange-traded funds (the
Exchange-Traded Complex; each such complex, a
BlackRock Fund Complex). The Trust is part of
the Closed-End Complex. The Trustees also oversee as Board
members the operations of the other closed-end registered
investment companies included in the Closed-End Complex.
The Board has overall responsibility for the oversight of the
Trust. The Chair of the Board is an Independent Trustee, and the
Chair of each Board committee (each, a Committee) is
an Independent Trustee. The Board has five standing Committees:
an Audit Committee, a Governance and Nominating Committee, a
Compliance Committee, a Performance Oversight Committee and an
Executive Committee. The Board also has one ad hoc committee,
the Joint Product Pricing Committee. The Chair of the
Boards role is to preside at all meetings of the Board,
and to act as a liaison with service providers, officers,
attorneys, and other Trustees generally between meetings. The
Chair of each Committee performs a similar role with respect to
such Committee. The Chair of the Board or a Committee may also
perform such other functions as may be delegated by the Board or
the Committee from time to time. The Independent Trustees meet
regularly outside the presence of the Trusts management,
in executive session or with other service providers to the
Trust. The Board has regular meetings five times a year,
including a meeting to consider the approval of the Trusts
investment advisory agreements, and may hold special meetings if
required before its next regular meeting. Each Committee meets
regularly to conduct the oversight functions delegated to that
Committee by the Board and reports its findings to the Board.
The Board and each standing Committee conduct annual assessments
of their oversight function and structure. The Board has
determined that the Boards leadership structure is
appropriate because it allows the Board to exercise independent
judgment over management and to allocate areas of responsibility
among Committees and the full Board to enhance effective
oversight.
The Board has engaged the Advisors to manage the Trust on a
day-to-day
basis. The Board is responsible for overseeing the Advisors,
other service providers, the operations of the Trust and
associated risk in accordance with the provisions of the
Investment Company Act, state law, other applicable laws, the
Trusts Agreement and Declaration of Trust, and the
Trusts investment objectives and strategies. The Board
reviews, on an ongoing basis, the Trusts performance,
operations, and investment strategies and techniques. The Board
also conducts reviews of the Advisors and their role in running
the operations of the Trust.
A-17
Day-to-day
risk management with respect to the Trust is the responsibility
of the Advisors or other service providers (depending on the
nature of the risk), subject to the supervision of the Advisors.
The Trust is subject to a number of risks, including investment,
compliance, operational and valuation risks, among others. While
there are a number of risk management functions performed by the
Advisors or other service providers, as applicable, it is not
possible to eliminate all of the risks applicable to the Trust.
Risk oversight is part of the Boards general oversight of
the Trust and is addressed as part of various Board and
Committee activities. The Board, directly or through a
Committee, also reviews reports from, among others, management,
the independent registered public accounting firm for the Trust,
subadvisers, and internal auditors for the investment adviser or
its affiliates, as appropriate, regarding risks faced by the
Trust and managements or the service providers risk
functions. The Committee system facilitates the timely and
efficient consideration of matters by the Trustees, and
facilitates effective oversight of compliance with legal and
regulatory requirements and of the Trusts activities and
associated risks. The Board has appointed a Chief Compliance
Officer, who oversees the implementation and testing of the
Trusts compliance program and reports to the Board
regarding compliance matters for the Trust and its service
providers. The Independent Trustees have engaged independent
legal counsel to assist them in performing their oversight
responsibilities.
The members of the Audit Committee are Karen P. Robards (Chair),
Frank J. Fabozzi, James T. Flynn and W. Carl Kester, all of whom
are Independent Trustees. The principal responsibilities of the
Audit Committee are to assist the Board in fulfilling its
oversight responsibilities relating to the accounting and
financial reporting polices and practices of the Trust. The
Audit Committees responsibilities include, without
limitation, (i) approving the selection, retention,
termination and compensation of the Trusts independent
registered public accounting firm (the independent
auditors) and evaluating the independence and objectivity
of the independent auditors; (ii) approving all audit
engagement terms and fees for the Trust; (iii) reviewing
the conduct and results of each audit and discussing the
Trusts audited and unaudited financial statements;
(iv) reviewing any issues raised by the independent auditor
or management regarding the accounting or financial reporting
policies and practices of the Trust, its internal controls, and,
as appropriate, the internal controls of certain service
providers and managements response to any such issues;
(v) reviewing and discussing the Trusts audited
financial statements and disclosure in the Trusts
shareholder reports relating to the Trusts performance;
(vi) assisting the Board in considering the performance of
the Trusts internal audit function provided by its
investment adviser, administrator, pricing agent or other
service provider; and (vii) resolving any disagreements
between Trust management and the independent auditors regarding
financial reporting. The Board has adopted a written charter for
the Audit Committee.
The members of the Governance and Nominating Committee (the
Governance Committee) are R. Glenn Hubbard
(Chair), Richard E. Cavanagh, Kathleen F. Feldstein and Jerrold
B. Harris, all of whom are Independent Trustees. The principal
responsibilities of the Governance Committee are to
(i) identifying individuals qualified to serve as
Independent Trustees of the Trust and recommending Independent
Trustee nominees for election by shareholders or appointment by
the Board; (ii) advising the Board with respect to Board
composition, procedures and committees (other than the Audit
Committee); (iii) overseeing periodic self-assessments of
the Board and committees of the Board (other than the Audit
Committee); (iv) reviewing and making recommendations in
respect of Independent Trustee compensation; (v) monitoring
corporate governance matters and making recommendations in
respect thereof to the Board; and (vi) acting as the
administrative committee with respect to Board policies and
procedures, committee policies and procedures (other than the
Audit Committee) and codes of ethics as they relate to the
Independent Trustees. The Governance Committee of the Board
seeks to identify individuals to serve on the Board who have a
diverse range of viewpoints, qualifications, experiences,
backgrounds and skill sets so that the Board will be better
suited to fulfill its responsibility of overseeing the
Trusts activities. In so doing, the Governance Committee
reviews the size of the Board, the ages of the current Board
members and their tenure on the Board, and the skills,
background and experiences of the Board members in light of the
issues facing the Trust in determining whether one or more new
directors should be added to the Board. The Governance Committee
believes that the Board members as a group possess the array of
skills, experiences and backgrounds necessary to guide the
Trust. The Governance Committee may consider
A-18
nominations for the office of Trustee made by Trust shareholders
as it deems appropriate. Shareholders who wish to recommend a
nominee should send a recommendation to the Secretary of the
Trust that includes all information relating to such person that
is required to be disclosed in solicitations of proxies for the
election of Board members or is required by the advance notice
provision of the Trusts By-Laws. For a candidate to be
considered by the Governance Committee, a shareholder must
submit the recommendation in writing and must include:
|
|
|
|
|
the name and record address of the shareholder, the class or
series and number of shares of the Trust which are owned
beneficially or of record by the shareholder, a description of
all arrangements or understandings between the shareholder and
each proposed candidate and any other person or persons
(including their names) in connection with the nomination(s)
made by the shareholder, a representation that the shareholder
intends to appear in person or by proxy at the meeting to
nominate the persons named in its recommendation and any other
information relating to the shareholder that would be required
to be disclosed in a proxy statement or other filings required
to be made in connection with solicitations of proxies for
election of directors/trustees pursuant to Section 14 of
the United States Securities Exchange Act of 1934 (the
Exchange Act) and the rules and regulations
promulgated thereunder; and
|
|
|
|
|
|
the name, age, business address and residential address of the
candidate(s), the principal occupation or employment of the
candidate(s), the class or series and number of shares of the
Trust which are owned beneficially or of record by the
candidate(s), if any, and any other information relating to the
candidate(s) that would be required to be disclosed in a proxy
statement or other filings required to be made in connection
with solicitations of proxies for election of directors/trustees
pursuant to Section 14 of the Exchange Act.
|
Such recommendation must be accompanied by a written consent of
each proposed candidate to being named as a nominee and to serve
as a Trustee if elected. The Governance Committee may take into
consideration the number of shares held by the recommending
shareholder and the length of time that such shares have been
held.
The members of the Compliance Committee are Kathleen F.
Feldstein (Chair), Richard E. Cavanagh, Jerrold B. Harris and R.
Glenn Hubbard, all of whom are Independent Trustees. The
Compliance Committees purpose is to assist the Board in
fulfilling its responsibility with respect to the oversight of
regulatory and fiduciary compliance matters involving the Trust,
the fund-related activities of BlackRock, and any subadvisor and
the Trusts other third party service providers. The
Compliance Committees responsibilities include, without
limitation, to (i) overseeing the compliance policies and
procedures of the Trust and its service providers;
(ii) reviewing information on and, where appropriate,
recommending policies concerning the Trusts compliance
with applicable law; (iii) reviewing information on any
significant correspondence with or other actions by regulators
or governmental agencies with respect to the Trust and any
employee complaints or published reports that raise concerns
regarding compliance matters; and (iv) reviewing reports
from and making certain recommendations in respect of the
Trusts Chief Compliance Officer, including, without
limitation, determining the amount and structure of the Chief
Compliance Officers compensation. The Board has adopted a
written charter for the Compliance Committee.
The members of the Performance Oversight Committee (the
Performance Oversight Committee) are Frank J.
Fabozzi (Chair), Richard E. Cavanagh, Kathleen F. Feldstein,
James T. Flynn, Jerrold B. Harris, R. Glenn Hubbard, W. Carl
Kester and Karen P. Robards, all of whom are Independent
Trustees. The Performance Oversight Committees purpose is
to assist the Board in fulfilling its responsibility to oversee
the Trusts investment performance relative to the
Trusts investment objectives, policies and practices. The
Performance Oversight Committees responsibilities include,
without limitation, to (i) reviewing the Trusts
investment objectives, policies and practices;
(ii) recommending to the Board any required action in
respect of changes in fundamental and non-fundamental investment
restrictions; (iii) reviewing information on appropriate
benchmarks and competitive universes; (iv) reviewing the
Trusts investment performance relative to such benchmarks;
(v) reviewing information on unusual or exceptional
investment matters;
A-19
(vi) reviewing whether the Trust has complied with its
investment polices and restrictions; and (vii) overseeing
policies, procedures and controls regarding valuation of the
Funds investments. The Board has adopted a written charter
for the Performance Oversight Committee.
The members of the Executive Committee are Richard E. Cavanagh
(Chair) and Karen P. Robards, both of whom are Independent
Trustees, and Richard S. Davis, who serves as an interested
Trustee. The principal responsibilities of the Executive
Committee include, without limitation, (i) acting on
routine matters between meetings of the Board; (ii) acting
on such matters as may require urgent action between meetings of
the Board; and (iii) exercising such other authority as may
from time to time be delegated to the Executive Committee by the
Board. The Board has adopted a written charter for the Executive
Committee.
The Boards of the Equity-Liquidity Complex, the Equity-Bond
Complex and the Closed-End Complex, established the
ad hoc
Joint Product Pricing Committee (the Product Pricing
Committee) comprised of nine members drawn from the
members serving on the Boards of these BlackRock
Fund Complexes. Karen P. Robards and Jerrold B. Harris
are members of the Product Pricing Committee representing the
Closed-End Complex. Five independent board members representing
the Equity-Bond Complex and two independent board members
representing the Equity-Liquidity Complex, serve on the Product
Pricing Committee. The Product Pricing Committee is chaired by
John F. OBrien. The purpose of the Product Pricing
Committee is to review the components and pricing structure of
the non-money market funds in the BlackRock Fund Complexes.
The Product Pricing Committee was formed on June 4, 2009.
As the Trust is a closed-end investment company with no prior
investment operations, no meetings of the above committees have
been held in the fiscal year, except that the Audit Committee
met in connection with the organization of the Trust to select
the Trusts independent registered public accounting firm.
Prior to this offering, all of the outstanding common shares of
the Trust were owned by an affiliate of the Advisors.
The Independent Trustees have adopted a statement of policy that
describes the experience, qualifications, skills and attributes
that are necessary and desirable for potential Independent
Trustee candidates (the Statement of Policy). The
Board believes that each Independent Trustee satisfied, at the
time he or she was initially elected or appointed a Trustee, and
continues to satisfy, the standards contemplated by the
Statement of Policy. Furthermore, in determining that a
particular Trustee was and continues to be qualified to serve as
a Trustee, the Board has considered a variety of criteria, none
of which, in isolation, was controlling. The Board believes
that, collectively, the Trustees have balanced and diverse
experience, skills, attributes and qualifications, which allow
the Board to operate effectively in governing the Trust and
protecting the interests of shareholders. Among the attributes
common to all Trustees are their ability to review critically,
evaluate, question and discuss information provided to them, to
interact effectively with the Advisors, other service providers,
counsel and independent auditors, and to exercise effective
business judgment in the performance of their duties as
Trustees. Each Trustees ability to perform his or her
duties effectively is evidenced by his or her educational
background or professional training; business, consulting,
public service or academic positions; experience from service as
a board member of the Trust or the other funds in the BlackRock
Fund Complexes (and any predecessor funds), other
investment funds, public companies, or non-profit entities or
other organizations; ongoing commitment and participation in
Board and committee meetings, as well as their leadership of
standing and
ad hoc
committees throughout the years; or
other relevant life experiences. Information about the specific
experience, skills, attributes and qualifications of each
Trustee, which in each case led to the Boards conclusion
that the Trustee should serve (or continue to serve) as a
trustee of the Trust, is provided in below, in
Biographical Information.
A-20
Biographical
Information
Certain biographical and other information relating to the
Trustees is set forth below, including their address and year of
birth, their principal occupations for at least the last five
years, the length of time served, the total number of investment
companies and portfolios overseen in the BlackRock-Advised funds
and any public directorships held during the past five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of BlackRock-
|
|
Other Public
|
|
|
|
|
|
|
|
|
Advised Registered
|
|
Company or
|
|
|
|
|
|
|
|
|
Investment Companies
|
|
Investment
|
|
|
|
|
|
|
|
|
(RICs) Consisting of
|
|
Company
|
|
|
Position(s)
|
|
Length of
|
|
|
|
Investment Portfolios
|
|
Directorships Held
|
Name, Address
|
|
Held with
|
|
Time
|
|
Principal Occupation(s)
|
|
(Portfolios)
|
|
During Past
|
and Year of Birth
|
|
Registrant
|
|
Served*
|
|
During Past Five Years
|
|
Overseen**
|
|
Five Years***
|
|
Non-Interested Trustees
|
|
|
|
|
|
|
|
|
Richard E. Cavanagh
55 East 52nd Street
New York,
NY 10055
1946
|
|
Trustee and Chair of the Board
|
|
Since inception
|
|
Trustee, Aircraft Finance Trust from 1999 to 2009; Director, The
Guardian Life Insurance Company of America since 1998; Trustee,
Educational Testing Service from 1997 to 2009 and Chairman
thereof from 2005 to 2009; Senior Advisor, the Freemont Group
since 2008 and Director thereof since 1996; Adjunct Lecturer,
Harvard University since 2007; President and Chief Executive
Officer, The Conference Board, Inc. (global business research
organization) from 1995 to 2007.
|
|
99 RICs
consisting of
97 Portfolios
|
|
Arch Chemical (chemical and allied products)
|
Karen P. Robards
55 East 52nd Street
New York,
NY 10055
1950
|
|
Trustee, Vice Chair of the Board and Chair of the Audit Committee
|
|
Since inception
|
|
Partner of Robards & Company, LLC (financial advisory firm)
since 1987; Co-founder and Director of the Cooke Center for
Learning and Development (a not-for-profit organization) since
1987; Director of Enable Medical Corp. from 1996 to 2005;
Investment Banker at Morgan Stanley from 1976 to 1987.
|
|
99 RICs
consisting of
97 Portfolios
|
|
AtriCure, Inc. (medical devices); Care Investment Trust, Inc.
(health care REIT)
|
Frank J. Fabozzi
55 East 52nd Street
New York,
NY 10055
1948
|
|
Trustee and Member of the Audit Committee
|
|
Since inception
|
|
Consultant/Editor of The Journal of Portfolio Management since
2006; Professor in the Practice of Finance and Becton Fellow,
Yale University, School of Management since 2006; Adjunct
Professor of Finance and Becton Fellow, Yale University from
1994 to 2006.
|
|
99 RICs
consisting of
97 Portfolios
|
|
None
|
A-21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of BlackRock-
|
|
Other Public
|
|
|
|
|
|
|
|
|
Advised Registered
|
|
Company or
|
|
|
|
|
|
|
|
|
Investment Companies
|
|
Investment
|
|
|
|
|
|
|
|
|
(RICs) Consisting of
|
|
Company
|
|
|
Position(s)
|
|
Length of
|
|
|
|
Investment Portfolios
|
|
Directorships Held
|
Name, Address
|
|
Held with
|
|
Time
|
|
Principal Occupation(s)
|
|
(Portfolios)
|
|
During Past
|
and Year of Birth
|
|
Registrant
|
|
Served*
|
|
During Past Five Years
|
|
Overseen**
|
|
Five Years***
|
|
Kathleen F. Feldstein
55 East 52nd Street
New York,
NY 10055
1941
|
|
Trustee
|
|
Since inception
|
|
President of Economics Studies, Inc. (private economic
consulting firm) since 1987; Chair, Board of Trustees, McLean
Hospital from 2000 to 2008 and Trustee Emeritus since 2008;
Member of the Board of Partners Community Healthcare, Inc. from
2005 to 2009; Member of the Corporation of Partners HealthCare
since 1995; Trustee, Museum of Fine Arts, Boston since 1992;
Member of the Visiting Committee to the Harvard University Art
Museum since 2003; Director, Catholic Charities of Boston since
2009.
|
|
99 RICs
consisting of
97 Portfolios
|
|
The McClatchy Company (publishing); BellSouth
(telecommunications); Knight Ridder (publishing)
|
James T. Flynn
55 East 52nd Street
New York,
NY 10055
1939
|
|
Trustee and Member of the Audit Committee
|
|
Since inception
|
|
Chief Financial Officer of JPMorgan & Co., Inc. from 1990
to 1995.
|
|
99 RICs
consisting of
97 Portfolios
|
|
None
|
Jerrold B. Harris
55 East 52nd Street
New York,
NY 10055
1942
|
|
Trustee
|
|
Since inception
|
|
Trustee, Ursinus College since 2000; Director, Troemner LLC
(scientific equipment) since 2000; Director of Delta Waterfowl
Foundation since 2001; President and Chief Executive Officer,
VWR Scientific Products Corporation from 1990 to 1999.
|
|
99 RICs
consisting of
97 Portfolios
|
|
BlackRock - Kelso Capital Corp. (business development company)
|
R. Glenn Hubbard
55 East 52nd Street
New York,
NY 10055
1958
|
|
Trustee
|
|
Since inception
|
|
Dean, Columbia Business School since 2004; Columbia faculty
member since 1988; Co-Director, Columbia Business Schools
Entrepreneurship Program from 1997 to 2004; Chairman, U.S.
Council of Economic Advisers under the President of the United
States from 2001 to 2003; Chairman Economic Policy Committee of
the OECD from 2001 to 2003.
|
|
99 RICs
consisting of
97 Portfolios
|
|
ADP (data and information services); KKR Financial Corporation
(finance); Metropolitan Life Insurance Company (insurance)
|
A-22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of BlackRock-
|
|
Other Public
|
|
|
|
|
|
|
|
|
Advised Registered
|
|
Company or
|
|
|
|
|
|
|
|
|
Investment Companies
|
|
Investment
|
|
|
|
|
|
|
|
|
(RICs) Consisting of
|
|
Company
|
|
|
Position(s)
|
|
Length of
|
|
|
|
Investment Portfolios
|
|
Directorships Held
|
Name, Address
|
|
Held with
|
|
Time
|
|
Principal Occupation(s)
|
|
(Portfolios)
|
|
During Past
|
and Year of Birth
|
|
Registrant
|
|
Served*
|
|
During Past Five Years
|
|
Overseen**
|
|
Five Years***
|
|
W. Carl Kester
55 East 52nd Street
New York,
NY 10055
1951
|
|
Trustee and Member of the Audit Committee
|
|
Since inception
|
|
George Fisher Baker Jr. Professor of Business Administration,
Harvard Business School; Deputy Dean for Academic Affairs since
2006; Unit Head, Finance, Harvard Business School from 2005 to
2006; Senior Associate Dean and Chairman of the MBA Program of
Harvard Business School from 1999 to 2005; Member of the Faculty
of Harvard Business School since 1981; Independent Consultant
since 1978.
|
|
99 RICs
consisting of
97 Portfolios
|
|
None
|
Interested Trustees
|
|
|
|
|
|
|
|
|
Richard S. Davis
55 East 52nd Street
New York,
NY 10055
1945
|
|
Trustee
|
|
Since inception
|
|
Managing Director, BlackRock, Inc. since 2005; Chief Executive
Officer, State Street Research & Management Company from
2000 to 2005; Chairman of the Board of Trustees, State Street
Research Mutual Funds from 2000 to 2005; Chairman, SSR Realty
from 2000 to 2004.
|
|
169 RICs
consisting of
292 Portfolios
|
|
None
|
Henry Gabbay
55 East 52nd Street
New York,
NY 10055
1947
|
|
Trustee
|
|
Since inception
|
|
Consultant, BlackRock, Inc. from 2007 to 2008; Managing
Director, BlackRock, Inc. from 1989 to 2007; Chief
Administrative Officer, BlackRock Advisors, LLC from 1998 to
2007; President of BlackRock Funds and BlackRock Bond Allocation
Target Shares from 2005 to 2007; Treasurer of certain closed-end
funds in the Closed-End Complex from 1989 to 2006.
|
|
169 RICs
consisting of
292 Portfolios
|
|
None
|
|
|
|
*
|
|
Trustees serve until their
resignation, removal or death, or until December 31 of the year
in which they turn 72.
|
|
|
|
**
|
|
For purposes of this chart,
RICs refers to the legal investment companies into
which investors invest and Portfolios refers to the
investment programs of the funds. The Closed-End Complex is
comprised of 99 RICs. Some of the RICs have the same investment
program because they invest through a master-feeder structure,
which results in the smaller number of Portfolios than RICs. The
Trust is not included in these numbers.
|
|
|
|
***
|
|
Directorships disclosed under this
column do not include directorships disclosed under the column
Principal Occupation(s) During Past Five Years.
|
|
|
|
|
|
Messrs. Davis and Gabbay are
interested persons (as defined in the Investment
Company Act) of the Trust by virtue of their current or former
positions with BlackRock Advisors, LLC, BlackRock Capital
Management, Inc. or BlackRock Financial Management, Inc., each a
wholly owned subsidiary of BlackRock, Inc., and their ownership
of BlackRock, Inc. and The PNC Financial Service Group, Inc.
securities.
|
A-23
Officers
Certain biographical and other information relating to the
officers is set forth below.
|
|
|
|
|
|
|
Name, Address and
|
|
Position(s) Held with
|
|
Length of Time
|
|
|
Year of Birth
|
|
Fund*
|
|
Served
|
|
Principal Occupations(s) During Past 5 Years
|
|
Anne F. Ackerley
55 East 52nd Street
New York,
NY 10055
1962
|
|
President and Chief Executive Officer
|
|
Since inception
|
|
Managing Director of BlackRock, Inc. since 2000; Vice President
of the BlackRock-advised funds from 2007 to 2009; Chief
Operating Officer of BlackRocks Global Client Group since
2009; Chief Operating Officer of BlackRocks U.S. Retail
Group from 2006 to 2009; Head of BlackRocks Mutual Fund
Group from 2000 to 2006.
|
Brendan Kyne
55 East 52nd Street
New York,
NY 10055
1977
|
|
Vice President
|
|
Since inception
|
|
Managing Director of BlackRock, Inc. since 2010; Director of
BlackRock, Inc. from 2008 to 2009; Head of Product Development
and Management for BlackRocks U.S. Retail Group since
2009; Co-head of Product Development and Management for
BlackRocks U.S. Retail Group from 2007 to 2009; Vice
President of BlackRock, Inc. from 2005 to 2008.
|
Neal J. Andrews
55 East 52nd Street
New York,
NY 10055
1966
|
|
Chief Financial Officer
|
|
Since inception
|
|
Managing Director of BlackRock, Inc. since 2006; Senior Vice
President and Line of Business Head of Fund Accounting and
Administration at PNC Global Investment Servicing (US) Inc. from
1992 to 2006.
|
Jay M. Fife
55 East 52nd Street
New York,
NY 10055
1970
|
|
Treasurer
|
|
Since inception
|
|
Managing Director of BlackRock, Inc. since 2007 and Director in
2006; Assistant Treasurer of the Merrill Lynch Investment
Managers, L.P. (MLIM) and Fund Asset Management L.P.
advised Funds from 2005 to 2006; Director of MLIM Fund Services
Group from 2001 to 2006.
|
Brian P. Kindelan
55 East 52nd Street
New York,
NY 10055
1959
|
|
Chief Compliance Officer
|
|
Since inception
|
|
Chief Compliance Officer of the BlackRock-advised Funds since
2007; Managing Director and Senior Counsel of BlackRock, Inc.
since 2005.
|
Howard B. Surloff
55 East 52nd Street
New York,
NY 10055
1965
|
|
Secretary
|
|
Since inception
|
|
Managing Director and General Counsel of U.S. Funds of
BlackRock, Inc. since 2006; General Counsel (U.S.) of Goldman
Sachs Asset Management, L.P. from 1993 to 2006.
|
|
|
|
*
|
|
Officers of the Trust serve at the pleasure of the Board.
|
A-24
Share
Ownership
|
|
|
|
|
|
|
|
|
Aggregate Dollar Range of Equity
|
|
|
Dollar Range of Equity
|
|
Securities Overseen by Trustees in
|
|
|
Securities in the
|
|
the Family of Registered
|
Name of Trustee
|
|
Trust(*)
|
|
Investment Companies
|
|
Independent Trustees
|
|
|
|
|
Richard E. Cavanagh
|
|
$0
|
|
over $100,000
|
Frank J. Fabozzi
|
|
$0
|
|
$50,001-100,000
|
Kathleen F. Feldstein
|
|
$0
|
|
$10,001-50,000
|
James T. Flynn
|
|
$0
|
|
over $100,000
|
Jerrold B. Harris
|
|
$0
|
|
$50,001-100,000
|
R. Glenn Hubbard
|
|
$0
|
|
$50,001-100,000
|
W. Carl Kester
|
|
$0
|
|
over $100,000
|
Karen P. Robards
|
|
$0
|
|
$50,001-100,000
|
Interested Trustees
|
|
|
|
|
Richard S. Davis
|
|
$0
|
|
over $100,000
|
Henry Gabbay
|
|
$0
|
|
over $100,000
|
|
|
|
*
|
|
As of December 31, 2009. The Trustees could not own shares
in the Trust as of this date because the Trust had not yet begun
investment operations. The term Family of Registered
Investment Companies refers to all registered investment
companies advised by the Advisors or an affiliate thereof.
|
Compensation
of Trustees
Each Trustee who is an Independent Trustee is paid an annual
retainer of $250,000 per year for his or her services as a Board
member of the Closed-End Complex, including the Trust, and each
Independent Trustee may also receive a $10,000 board meeting fee
for special unscheduled meetings or meetings in excess of six
Board meetings held in a calendar year, together with
out-of-pocket
expenses in accordance with a Board policy on travel and other
business expenses relating to attendance at meetings. In
addition, the Chair and Vice-Chair of the Board are paid an
additional annual retainer of $120,000 and $40,000,
respectively. The Chair of the Audit Committee, Compliance
Committee, Governance Committee, and Performance Oversight
Committee are paid an additional annual retainer of $35,000,
$20,000, $10,000, and $20,000, respectively. Each Audit
Committee member is paid an additional annual retainer of
$25,000.
Dr. Gabbay is an interested Trustee of the Trust and serves
as an interested Board member of the other BlackRock-Advised
Funds which compose the Closed-End Complex, Equity-Liquidity
Complex, and the Equity-Bond Complex. Dr. Gabbay receives
for his services as a Board member of each of the three
BlackRock Fund Complexes, (i) an annual retainer of
$487,500 allocated to the funds in the these three BlackRock
Fund Complexes, including the Trust, based on their net
assets and (ii) with respect to each of the two open-end
BlackRock Fund Complexes, a Board meeting fee of $3,750
(with respect to meetings of the Equity-Liquidity Complex) and
$18,750 (with respect to meetings of the Equity-Bond Complex) to
be paid for attendance at each Board meeting up to five Board
meetings held in a calendar year by each such Complex
(compensation for meetings in excess of this number to be
determined on a
case-by-case
basis). Dr. Gabbay will also be reimbursed for
out-of-pocket
expenses in accordance with a Board policy on travel and other
business expenses relating to attendance at meetings.
Dr. Gabbays compensation for serving on the boards of
the funds in these BlackRock Fund Complexes (including the
Trust) is equal to 75% of each retainer and, as applicable, of
each meeting fee (without regard to additional fees paid to
Board and Committee chairs) received by the Independent Trustees
serving on such boards. The Board of the Trust or of any other
fund in a BlackRock Fund Complex may modify the
trustees compensation from time to time depending on
market conditions and Dr. Gabbays compensation would
be impacted by those modifications.
A-25
The following table sets forth the estimated compensation that
each of the Trustees would have earned from the Trust for the
fiscal year ended July 31, 2010 and the aggregate
compensation paid to them by all funds in the Closed-End Complex
for the calendar year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
Compensation from
|
|
|
Aggregate
|
|
the Trust and other
|
|
|
Compensation from
|
|
BlackRock-Advised
|
Name
|
|
the Trust
|
|
Funds(1)(2)
|
|
Richard E. Cavanagh
|
|
$
|
3,338
|
|
|
$
|
370,448
|
(3)
|
Frank J. Fabozzi
|
|
$
|
2,661
|
|
|
$
|
295,538
|
(4)(5)
|
Kathleen F. Feldstein
|
|
$
|
2,436
|
|
|
$
|
270,046
|
(6)
|
James T. Flynn
|
|
$
|
2,481
|
|
|
$
|
275,000
|
(4)
|
Jerrold B. Harris
|
|
$
|
2,255
|
|
|
$
|
250,000
|
|
R. Glenn Hubbard
|
|
$
|
2,346
|
|
|
$
|
263,824
|
(7)
|
W. Carl Kester
|
|
$
|
2,481
|
|
|
$
|
275,000
|
(4)
|
Karen P. Robards
|
|
$
|
3,158
|
|
|
$
|
350,000
|
(4)(8)
|
|
|
|
(1)
|
|
Of these amounts, Trustees Cavanagh, Fabozzi, Feldstein, Flynn,
Harris, Kester, and Robards deferred a portion of compensation
paid in calendar year 2009, pursuant to the
Fund Complexs deferred compensation plan.
|
|
|
|
(2)
|
|
The Trust shall pay a pro rata portion quarterly (based on the
relative net assets) of the above director/trustee fees paid by
all of the funds in the Fund Complex for which they serve.
|
|
|
|
(3)
|
|
Mr. Cavanagh serves as Chair of each board of
directors/trustees in the Fund Complex. For his services as
Chair, Mr. Cavanagh receives $120,000 per annum by the
Fund Complex.
|
|
|
|
(4)
|
|
Includes compensation for service on the Audit Committee.
Ms. Robards receives $35,000 per annum for her service as
Chair of the Audit Committee and all directors/trustees on the
Audit Committee, including Ms. Robards, receive $25,000 per
annum for their service on the Audit Committee.
|
|
|
|
(5)
|
|
Dr. Fabozzi receives $20,000 per annum for his service as
Chair of the Performance Oversight Committee.
|
|
|
|
(6)
|
|
Dr. Feldstein receives $20,000 per annum for her service as
Chair of the Compliance Committee.
|
|
|
|
(7)
|
|
Dr. Hubbard receives $10,000 per annum for his service as
Chair of the Governance and Nominating Committee.
|
|
|
|
(8)
|
|
Ms. Robards serves as Vice-Chair of each board of
directors/trustees in the Fund Complex. For her services as
Vice-Chair of the Board, Ms. Robards receives $40,000 per
annum by the Fund Complex.
|
The Independent Trustees have agreed that a maximum of 50% of
each Independent Trustees total compensation paid by the
Supervised Funds may be deferred pursuant to the Supervised
Funds deferred compensation plan. Under the deferred
compensation plan, deferred amounts earn a return for the
Independent Trustees as though equivalent dollar amounts had
been invested in common shares of certain Supervised Funds
selected by the Independent Trustee. This has approximately the
same economic effect for the Independent Trustee as if they had
invested the deferred amounts in such funds. The deferred
compensation plan is not funded and obligations thereunder
represent general unsecured claims against the general assets of
a fund. A fund may, however, elect to invest in common shares of
those funds in the Closed-End Complex selected by the
Independent Trustee in order to match its deferred compensation
obligation.
Independent
Trustee Ownership of Securities
As of July 23, 2010, the Independent Trustees (and their
respective immediate family members) did not beneficially own
securities of the Advisors, or an entity controlling, controlled
by or under common control with the Advisors (not including
registered investment companies). As of July 23, 2010, as a
A-26
group, Trustees and officers owned less than 1% of the
outstanding common shares in the Trust because the Trust is
commencing its offering coincident with the date of the
Prospectus.
Proxy
Voting Policies
The Board has delegated the voting of proxies for Trust
securities to the Advisors pursuant to the Advisors proxy
voting guidelines. Under these guidelines, the Advisors will
vote proxies related to Trust securities in the best interests
of the Trust and its shareholders. A copy of the Advisors
proxy voting policy is attached as Appendix B to this
Statement of Additional Information. Information regarding how
the Trust voted proxies relating to portfolio securities during
the most recent
12-month
period ended June 30 will be available (i) without charge,
upon request, by calling
(800) 441-7762;
and (ii) on the Securities and Exchange Commissions
website at
http://www.sec.gov
.
Codes of
Ethics
The Trust and the Advisors have adopted codes of ethics pursuant
to
Rule 17j-1
under the Investment Company Act. These codes permit personnel
subject to the codes to invest in securities, including
securities that may be purchased or held by the Trust. These
codes can be reviewed and copied at the Securities and Exchange
Commissions Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be
obtained by calling the Securities and Exchange Commission at
(202) 551-8090.
These codes of ethics are available on the EDGAR Database on the
Securities and Exchange Commissions website
(http://www.sec.gov),
and copies of these codes may be obtained, after paying a
duplicating fee, by electronic request at the following
e-mail
address: publicinfo@sec.gov, or by writing the Securities and
Exchange Commissions Public Reference Section,
Washington, D.C.
20549-0102.
Other
Information
BlackRock is independent in ownership and governance, with no
single majority stockholder and a majority of independent
directors. As of March 31, 2010, Bank of America
Corporation (Bank of America), through its
subsidiary Merrill Lynch & Co., Inc., Barclays Bank
Plc (Barclays), and The PNC Financial Services
Group, Inc. (PNC) owned 3.7%, 4.7% and 34.4%,
respectively, of the voting shares of BlackRock. In addition,
Bank of America, Barclays, and PNC held economic interests in
BlackRock of 33.8%, 19.6% and 24.2%, respectively. Bank of
America and PNC are the ultimate parent companies of one or more
underwriters who may participate in the Trusts offering of
common shares.
A-27
Portfolio
Manager Assets Under Management
The following table sets forth information about funds and
accounts other than the BlackRock Build America Bond Trust for
which the portfolio managers are primarily responsible for the
day-to-day
portfolio management as of June 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Other Accounts and
|
|
|
Number of Other Accounts Managed
|
|
Assets for Which Advisory Fee is
|
|
|
and Assets by Account Type
|
|
Performance-Based
|
|
|
Other
|
|
Other
|
|
|
|
Other
|
|
|
|
|
|
|
Registered
|
|
Pooled
|
|
|
|
Registered
|
|
Other Pooled
|
|
|
Name of
|
|
Investment
|
|
Investment
|
|
Other
|
|
Investment
|
|
Investment
|
|
Other
|
Portfolio Manager
|
|
Companies
|
|
Vehicles
|
|
Accounts
|
|
Companies
|
|
Vehicles
|
|
Accounts
|
|
Peter Hayes
|
|
|
1
|
|
|
|
1
|
|
|
|
37
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1.14 Billion
|
|
|
$
|
29.9 Million
|
|
|
$
|
12.5 Billion
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Theodore R. Jaeckel, Jr.
|
|
|
73
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
19.99 Billion
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
James Pruskowski
|
|
|
0
|
|
|
|
4
|
|
|
|
211
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
0
|
|
|
$
|
222 Million
|
|
|
$
|
53.4 Billion
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Michael Kalinoski
|
|
|
7
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
3.19 Billion
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Portfolio
Manager Compensation Overview
BlackRocks financial arrangements with its portfolio
managers, its competitive compensation and its career path
emphasis at all levels reflect the value senior management
places on key resources. Compensation may include a variety of
components and may vary from year to year based on a number of
factors. The principal components of compensation include a base
salary, a performance-based discretionary bonus, participation
in various benefits programs and one or more of the incentive
compensation programs established by BlackRock such as its
Long-Term Retention and Incentive Plan and Restricted Stock
Program.
Base Compensation.
Generally, portfolio
managers receive base compensation based on their seniority
and/or
their
position with the firm. Senior portfolio managers who perform
additional management functions within the portfolio management
group or within BlackRock may receive additional compensation
for serving in these other capacities.
Discretionary Incentive
Compensation.
Discretionary incentive
compensation is a function of several components: the
performance of BlackRock, Inc., the performance of the portfolio
managers group within BlackRock, the investment
performance, including risk-adjusted returns, of the firms
assets under management or supervision by that portfolio manager
relative to predetermined benchmarks, and the individuals
seniority, role within the portfolio management team, teamwork
and contribution to the overall performance of these portfolios
and BlackRock. In most cases, including for the portfolio
managers of the Trust, these benchmarks are the same as the
benchmark or benchmarks against which the performance of the
Trust or other accounts managed by the portfolio managers are
measured. BlackRocks Chief Investment Officers determine
the benchmarks against which the performance of funds and other
accounts managed by each portfolio manager is compared and the
period of time over which performance is evaluated. With respect
to the portfolio managers, such benchmarks for the Trust include
a combination of market-based indices (e.g. Barclays Capital
Municipal Bond Index), certain customized indices and certain
fund industry peer groups.
BlackRocks Chief Investment Officers make a subjective
determination with respect to the portfolio managers
compensation based on the performance of the funds and other
accounts managed by each portfolio manager relative to the
various benchmarks noted above. Performance is measured on both
a pre-tax and after-tax basis over various time periods
including 1, 3, 5 and
10-year
periods, as applicable.
A-28
Distribution of Discretionary Incentive
Compensation.
Discretionary incentive
compensation is distributed to portfolio managers in a
combination of cash and BlackRock, Inc. restricted stock units
which vest ratably over a number of years. The BlackRock, Inc.
restricted stock units, if properly vested, will be settled in
BlackRock, Inc. common stock. Typically, the cash bonus, when
combined with base salary, represents more than 60% of total
compensation for the portfolio managers. Paying a portion of
annual bonuses in stock puts compensation earned by a portfolio
manager for a given year at risk based on
BlackRocks ability to sustain and improve its performance
over future periods.
Long-Term Retention and Incentive Plan
(LTIP)
From time to time
long-term incentive equity awards are granted to certain key
employees to aid in retention, align their interests with
long-term shareholder interests and motivate performance. Equity
awards are generally granted in the form of BlackRock, Inc.
restricted stock units that, once vested, settle in BlackRock,
Inc. common stock. Messrs. Hayes, Jaeckel and Pruskowski
have each received awards under the LTIP.
Deferred Compensation Program
A
portion of the compensation paid to eligible BlackRock employees
may be voluntarily deferred into an account that tracks the
performance of certain of the firms investment products.
Each participant in the deferred compensation program is
permitted to allocate his deferred amounts among the various
investment options. Messrs. Hayes, Jaeckel, Pruskowski and
Kalinoski have each participated in the deferred compensation
program.
Other Compensation Benefits.
In
addition to base compensation and discretionary incentive
compensation, portfolio managers may be eligible to receive or
participate in one or more of the following:
Incentive Savings Plans
BlackRock,
Inc. has created a variety of incentive savings plans in which
BlackRock employees are eligible to participate, including a
401(k) plan, the BlackRock Retirement Savings Plan
(RSP), and the BlackRock Employee Stock Purchase
Plan (ESPP). The employer contribution components of
the RSP include a company match equal to 50% of the first 6% of
eligible pay contributed to the plan capped at $4,000 per year,
and a company retirement contribution equal to 3-5% of eligible
compensation. The RSP offers a range of investment options,
including registered investment companies managed by the firm.
BlackRock contributions follow the investment direction set by
participants for their own contributions or, absent employee
investment direction, are invested into a balanced portfolio.
The ESPP allows for investment in BlackRock common stock at a 5%
discount on the fair market value of the stock on the purchase
date. Annual participation in the ESPP is limited to the
purchase of 1,000 shares or a dollar value of $25,000. Each
portfolio manager is eligible to participate in these plans.
Potential
Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when
a portfolio manager has
day-to-day
portfolio management responsibilities with respect to more than
one fund or account.
BlackRock has built a professional working environment,
firm-wide compliance culture and compliance procedures and
systems designed to protect against potential incentives that
may favor one account over another. BlackRock has adopted
policies and procedures that address the allocation of
investment opportunities, execution of portfolio transactions,
personal trading by employees and other potential conflicts of
interest that are designed to ensure that all client accounts
are treated equitably over time. Nevertheless, BlackRock
furnishes investment management and advisory services to
numerous clients in addition to the Trust, and BlackRock may,
consistent with applicable law, make investment recommendations
to other clients or accounts (including accounts which are hedge
funds or have performance or higher fees paid to BlackRock, or
in which portfolio managers have a personal interest in the
receipt of such fees), which may be the same as or different
from those made to the Trust. In addition, BlackRock, its
affiliates and significant shareholders and any officer,
director, stockholder or employee may or may not have an
interest in the securities whose purchase and sale BlackRock
recommends to the Trust. BlackRock, or any of its affiliates or
significant shareholders, or any officer, director, stockholder,
employee or any member of their families may take different
actions than those
A-29
recommended to the Trust by BlackRock with respect to the same
securities. Moreover, BlackRock may refrain from rendering any
advice or services concerning securities of companies of which
any of BlackRocks (or its affiliates or significant
shareholders) officers, directors or employees are
directors or officers, or companies as to which BlackRock or any
of its affiliates or significant shareholders or the officers,
directors and employees of any of them has any substantial
economic interest or possesses material non-public information.
Each portfolio manager also may manage accounts whose investment
strategies may at times be opposed to the strategy utilized for
a fund. In this connection, it should be noted that a portfolio
manager may currently manage certain accounts that are subject
to performance fees. In addition, a portfolio manager may assist
in managing certain hedge funds and may be entitled to receive a
portion of any incentive fees earned on such funds and a portion
of such incentive fees may be voluntarily or involuntarily
deferred. Additional portfolio managers may in the future manage
other such accounts or funds and may be entitled to receive
incentive fees.
As a fiduciary, BlackRock owes a duty of loyalty to its clients
and must treat each client fairly. When BlackRock purchases or
sells securities for more than one account, the trades must be
allocated in a manner consistent with its fiduciary duties.
BlackRock attempts to allocate investments in a fair and
equitable manner among client accounts, with no account
receiving preferential treatment. To this end, BlackRock has
adopted policies that are intended to ensure that investment
opportunities are allocated fairly and equitably among client
accounts over time. These policies also seek to achieve
reasonable efficiency in client transactions and provide
BlackRock with sufficient flexibility to allocate investments in
a manner that is consistent with the particular investment
discipline and client base, as appropriate.
A-30
PORTFOLIO
TRANSACTIONS AND BROKERAGE
The Advisor and the
Sub-Advisor
are responsible for decisions to buy and sell securities for the
Trust, the selection of brokers and dealers to effect the
transactions and the negotiation of prices and any brokerage
commissions. The securities in which the Trust invests are
traded principally in the
over-the-counter
market. In the
over-the-counter
market, securities are generally traded on a net
basis with dealers acting as principal for their own accounts
without a stated commission, although the price of such
securities usually includes a
mark-up
to
the dealer. Securities purchased in underwritten offerings
generally include, in the price, a fixed amount of compensation
for the manager(s), underwriter(s) and dealer(s). The Trust may
also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid.
Purchases and sales of bonds on a stock exchange are effected
through brokers who charge a commission for their services.
The Advisor and the
Sub-Advisor
are responsible for effecting securities transactions of the
Trust and will do so in a manner deemed fair and reasonable to
shareholders of the Trust and not according to any formula. The
Advisors and the
Sub-Advisors
primary considerations in selecting the manner of executing
securities transactions for the Trust will be prompt execution
of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution
capability of the firm, the difficulty in executing the order,
and the best net price. There are many instances when, in the
judgment of the Advisor or the
Sub-Advisor,
more than one firm can offer comparable execution services. In
selecting among such firms, consideration is given to those
firms which supply research and other services in addition to
execution services. Consideration may also be given to the sale
of shares of the Trust. However, it is not the policy of
BlackRock, absent special circumstances, to pay higher
commissions to a firm because it has supplied such research or
other services.
The Advisor and the
Sub-Advisor
are able to fulfill their obligation to furnish a continuous
investment program to the Trust without receiving research or
other information from brokers; however, each considers access
to such information to be an important element of financial
management. Although such information is considered useful, its
value is not determinable, as it must be reviewed and
assimilated by the Advisor
and/or
the
Sub-Advisor,
and does not reduce the Advisors
and/or
the
Sub-Advisors
normal research activities in rendering investment advice under
the investment management agreement or the
sub-investment
advisory agreement. It is possible that the Advisors
and/or
the
Sub-Advisors
expenses could be materially increased if it attempted to
purchase this type of information or generate it through its own
staff.
One or more of the other investment companies or accounts which
the Advisor
and/or
the
Sub-Advisor
manages may own from time to time some of the same investments
as the Trust. Investment decisions for the Trust are made
independently from those of such other investment companies or
accounts; however, from time to time, the same investment
decision may be made for more than one company or account. When
two or more companies or accounts seek to purchase or sell the
same securities, the securities actually purchased or sold will
be allocated among the companies and accounts on a good faith
equitable basis by the Advisor
and/or
the
Sub-Advisor
in their discretion in accordance with the accounts
various investment objectives. In some cases, this system may
adversely affect the price or size of the position obtainable
for the Trust. In other cases, however, the ability of the Trust
to participate in volume transactions may produce better
execution for the Trust. It is the opinion of the Trusts
Board that this advantage, when combined with the other benefits
available due to the Advisors or the
Sub-Advisors
organization, outweighs any disadvantages that may be said to
exist from exposure to simultaneous transactions.
It is not the Trusts policy to engage in transactions with
the objective of seeking profits from short-term trading.
However, the annual portfolio turnover rate of the trust may be
greater than 100%. Because it is difficult to predict accurately
portfolio turnover rates, actual turnover may be higher or
lower. Higher portfolio turnover results in increased Trust
costs, including brokerage commissions, dealer
mark-ups
and
other transaction costs on the sale of securities and on the
reinvestment in other securities.
A-31
CONFLICTS
OF INTEREST
The Bank of America Corporation (BAC), through its
subsidiary Merrill Lynch & Co, Inc. (Merrill
Lynch), Barclays PLC (Barclays) and The PNC
Financial Services Group, Inc. (PNC) each have a
significant economic interest in BlackRock, Inc., the parent of
the Advisors. PNC is considered to be an affiliate of BlackRock,
Inc. under the Investment Company Act. Certain activities of the
Advisors, BlackRock, Inc. and their affiliates (collectively,
BlackRock) and PNC and its affiliates (collectively,
PNC and together with BlackRock,
Affiliates), and those of BAC, Merrill Lynch and
their affiliates (collectively, the BAC Entities)
and Barclays and its affiliates (collectively, the
Barclays Entities) (BAC Entities and Barclays
Entities, collectively, the BAC/Barclays Entities),
with respect to the Trust
and/or
other
accounts managed by BlackRock, PNC or BAC/Barclays Entities, may
give rise to actual or perceived conflicts of interest such as
those described below.
BlackRock is one of the worlds largest asset management
firms. BAC is a national banking corporation which through its
affiliates and subsidiaries, including Merrill Lynch, provides a
full range of financial services. Merrill Lynch is a full
service investment banking, broker-dealer, asset management and
financial services organization. PNC is a diversified financial
services organization spanning the retail, business and
corporate markets. Barclays is a major global financial services
provider engaged in a range of activities including retail and
commercial banking, credit cards, investment banking, and wealth
management. BlackRock and PNC are affiliates of one another
under the Investment Company Act. BlackRock, BAC, Merrill Lynch,
PNC, Barclays and their respective affiliates (including, for
these purposes, their directors, partners, trustees, managing
members, officers and employees), including the entities and
personnel who may be involved in the investment activities and
business operations of the Trust, are engaged worldwide in
businesses, including equity, fixed income, cash management and
alternative investments, and have interests other than that of
managing the Trust. These are considerations of which investors
in the Trust should be aware, and which may cause conflicts of
interest that could disadvantage the Trust and its shareholders.
These activities and interests include potential multiple
advisory, transactional, financial and other interests in
securities and other instruments, and companies that may be
purchased or sold by the Trust.
BlackRock and its Affiliates, as well as the BAC/Barclays
Entities, have proprietary interests in, and may manage or
advise with respect to, accounts or funds (including separate
accounts and other funds and collective investment vehicles)
that have investment objectives similar to those of the Trust
and/or
that
engage in transactions in the same types of securities,
currencies and instruments as the Trust. One or more Affiliates
and BAC/Barclays Entities are also major participants in the
global currency, equities, swap and fixed income markets, in
each case both on a proprietary basis and for the accounts of
customers. As such, one or more Affiliates or BAC/Barclays
Entities are or may be actively engaged in transactions in the
same securities, currencies, and instruments in which a the
Trust may invest. Such activities could affect the prices and
availability of the securities, currencies, and instruments in
which the Trust invests, which could have an adverse impact on
the Trusts performance. Such transactions,
particularly in respect of most proprietary accounts or customer
accounts, will be executed independently of the Trusts
transactions and thus at prices or rates that may be more or
less favorable than those obtained by the Trust.
When BlackRock and its Affiliates or the BAC/Barclays Entities
seek to purchase or sell the same assets for their managed
accounts, the assets actually purchased or sold may be allocated
among the accounts on a basis determined in their good faith
discretion to be equitable. In some cases, this system may
adversely affect the size or price of the assets purchased or
sold for the Trust. In addition, transactions in investments by
one or more other accounts managed by BlackRock or its
Affiliates or a BAC/Barclays Entity may have the effect of
diluting or otherwise disadvantaging the values, prices or
investment strategies of the Trust, particularly, but not
limited to, with respect to small capitalization, emerging
market or less liquid strategies. This may occur when investment
decisions regarding the Trust are based on research or other
information that is also used to support decisions for other
accounts. When BlackRock or its Affiliates or a BAC/Barclays
Entity implements a portfolio decision or strategy on behalf of
another account ahead of, or contemporaneously with, similar
decisions or strategies for the
A-32
Trust, market impact, liquidity constraints, or other factors
could result in the Trust receiving less favorable trading
results and the costs of implementing such decisions or
strategies could be increased or the Trust could otherwise be
disadvantaged. BlackRock or it Affiliates or a BAC/Barclays
Entity may, in certain cases, elect to implement internal
policies and procedures designed to limit such consequences,
which may cause the Trust to be unable to engage in certain
activities, including purchasing or disposing of securities,
when it might otherwise be desirable for it to do so.
Conflicts may also arise because portfolio decisions regarding
the Trust may benefit other accounts managed by BlackRock or its
Affiliates or a BAC/Barclays Entity. For example, the sale of a
long position or establishment of a short position by the Trust
may impair the price of the same security sold short by (and
therefore benefit) one or more Affiliates or BAC/Barclays
Entities or their other accounts, and the purchase of a security
or covering of a short position in a security by the Trust may
increase the price of the same security held by (and therefore
benefit) one or more Affiliates or BAC/Barclays Entities or
their other accounts.
BlackRock and its Affiliates or a BAC/Barclays Entity and their
clients may pursue or enforce rights with respect to an issuer
in which the Trust has invested, and those activities may have
an adverse effect on the Trust. As a result, prices,
availability, liquidity and terms of the Trusts
investments may be negatively impacted by the activities of
BlackRock or its Affiliates or a BAC/Barclays Entity or their
clients, and transactions for the Trust may be impaired or
effected at prices or terms that may be less favorable than
would otherwise have been the case.
The results of the Trusts investment activities may differ
significantly from the results achieved by BlackRock and its
Affiliates or the BAC/Barclays Entities for their proprietary
accounts or other accounts (including investment companies or
collective investment vehicles) managed or advised by them. It
is possible that one or more Affiliate- or BAC/Barclays
Entity-managed accounts and such other accounts will achieve
investment results that are substantially more or less favorable
than the results achieved by the Trust. Moreover, it is possible
that the Trust will sustain losses during periods in which one
or more Affiliates or BAC/Barclays Entity-managed accounts
achieve significant profits on their trading for proprietary or
other accounts. The opposite result is also possible. The
investment activities of one or more Affiliates or BAC/Barclays
Entities for their proprietary accounts and accounts under their
management may also limit the investment opportunities for the
Trust in certain emerging and other markets in which limitations
are imposed upon the amount of investment, in the aggregate or
in individual issuers, by affiliated foreign investors.
From time to time, the Trusts activities may also be
restricted because of regulatory restrictions applicable to one
or more Affiliates or BAC/Barclays Entities,
and/or
their
internal policies designed to comply with such restrictions. As
a result, there may be periods, for example, when BlackRock,
and/or
one
or more Affiliates or BAC/Barclays Entities, will not initiate
or recommend certain types of transactions in certain securities
or instruments with respect to which BlackRock
and/or
one
or more Affiliates or BAC/Barclays Entities are performing
services or when position limits have been reached.
In connection with its management of the Trust, BlackRock may
have access to certain fundamental analysis and proprietary
technical models developed by one or more Affiliates or
BAC/Barclays Entities. BlackRock will not be under any
obligation, however, to effect transactions on behalf of the
Trust in accordance with such analysis and models. In addition,
neither BlackRock nor any of its Affiliates, nor any
BAC/Barclays Entity, will have any obligation to make available
any information regarding their proprietary activities or
strategies, or the activities or strategies used for other
accounts managed by them, for the benefit of the management of
the Trust and it is not anticipated that BlackRock will have
access to such information for the purpose of managing the
Trust. The proprietary activities or portfolio strategies of
BlackRock and its Affiliates and the BAC/Barclays Entities, or
the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions
and strategies employed by BlackRock in managing the Trust.
In addition, certain principals and certain employees of
BlackRock are also principals or employees of BlackRock or
another Affiliate. As a result, the performance by these
principals and employees of their
A-33
obligations to such other entities may be a consideration of
which investors in the Trust should be aware.
BlackRock may enter into transactions and invest in securities,
instruments and currencies on behalf of the Trust in which
customers of BlackRock or its Affiliates or a BAC/Barclays
Entity, or, to the extent permitted by the SEC, BlackRock or
another Affiliate or a BAC/Barclays Entity, serves as the
counterparty, principal or issuer. In such cases, such
partys interests in the transaction will be adverse to the
interests of the Trust, and such party may have no incentive to
assure that the Trust obtains the best possible prices or terms
in connection with the transactions. In addition, the purchase,
holding and sale of such investments by the Trust may enhance
the profitability of BlackRock or its Affiliates or a
BAC/Barclays Entity. One or more Affiliates or BAC/Barclays
Entities may also create, write or issue derivatives for their
customers, the underlying securities, currencies or instruments
of which may be those in which the Trust invests or which may be
based on the performance of the Trust. The Trust may, subject to
applicable law, purchase investments that are the subject of an
underwriting or other distribution by one or more Affiliates or
BAC/Barclays Entities and may also enter into transactions with
other clients of an Affiliate or BAC/Barclays Entity where such
other clients have interests adverse to those of the Trust.
At times, these activities may cause departments of BlackRock or
its Affiliates or a BAC/Barclays Entity to give advice to
clients that may cause these clients to take actions adverse to
the interests of the Trust. To the extent affiliated
transactions are permitted, the Trust will deal with BlackRock
and its Affiliates or BAC/Barclays Entities on an arms-length
basis. BlackRock or its Affiliates or a BAC/Barclays Entity may
also have an ownership interest in certain trading or
information systems used by the Trust. The Trusts use of
such trading or information systems may enhance the
profitability of BlackRock and its Affiliates or BAC/Barclays
Entities.
One or more Affiliates or one of the BAC/Barclays Entities may
act as broker, dealer, agent, lender or adviser or in other
commercial capacities for the Trust. It is anticipated that the
commissions,
mark-ups,
mark-downs, financial advisory fees, underwriting and placement
fees, sales fees, financing and commitment fees, brokerage fees,
other fees, compensation or profits, rates, terms and conditions
charged by an Affiliate or BAC/Barclays Entity will be in its
view commercially reasonable, although each Affiliate or
BAC/Barclays Entity, including its sales personnel, will have an
interest in obtaining fees and other amounts that are favorable
to the Affiliate or BAC/Barclays Entity and such sales personnel.
Subject to applicable law, the Affiliates and BAC/Barclays
Entities (and their personnel and other distributors) will be
entitled to retain fees and other amounts that they receive in
connection with their service to the Trust as broker, dealer,
agent, lender, adviser or in other commercial capacities and no
accounting to the Trust or its shareholders will be required,
and no fees or other compensation payable by the Trust or its
shareholders will be reduced by reason of receipt by an
Affiliate or BAC/Barclays Entity of any such fees or other
amounts.
When an Affiliate or BAC/Barclays Entity acts as broker, dealer,
agent, adviser or in other commercial capacities in relation to
the Trust, the Affiliate or BAC/Barclays Entity may take
commercial steps in its own interests, which may have an adverse
effect on the Trust. The Trust will be required to establish
business relationships with its counterparties based on the
Trusts own credit standing. Neither BlackRock nor any of
the Affiliates, nor any BAC/Barclays Entity, will have any
obligation to allow their credit to be used in connection with
the Trusts establishment of its business relationships,
nor is it expected that the Trusts counterparties will
rely on the credit of BlackRock or any of the Affiliates or
BAC/Barclays Entities in evaluating the Trusts
creditworthiness.
Purchases and sales of securities for the Trust may be bunched
or aggregated with orders for other BlackRock client accounts.
BlackRock and its Affiliates and the BAC/Barclays Entities,
however, are not required to bunch or aggregate orders if
portfolio management decisions for different accounts are made
separately, or if they determine that bunching or aggregating is
not practicable, required or with cases involving client
direction.
A-34
Prevailing trading activity frequently may make impossible the
receipt of the same price or execution on the entire volume of
securities purchased or sold. When this occurs, the various
prices may be averaged, and the Trust will be charged or
credited with the average price. Thus, the effect of the
aggregation may operate on some occasions to the disadvantage of
the Trust. In addition, under certain circumstances, the Trust
will not be charged the same commission or commission equivalent
rates in connection with a bunched or aggregated order.
BlackRock may select brokers (including, without limitation,
Affiliates or BAC/Barclays Entities) that furnish BlackRock, the
Trust, other BlackRock client accounts or other Affiliates or
BAC/Barclays Entities or personnel, directly or through
correspondent relationships, with research or other appropriate
services which provide, in BlackRocks view, appropriate
assistance to BlackRock in the investment decision-making
process (including with respect to futures, fixed price
offerings and
over-the-counter
transactions). Such research or other services may include, to
the extent permitted by law, research reports on companies,
industries and securities; economic and financial data;
financial publications; proxy analysis; trade industry seminars;
computer data bases; research-oriented software and other
services and products.
Research or other services obtained in this manner may be used
in servicing the Trust and other BlackRock client accounts,
including in connection with BlackRock client accounts other
than those that pay commissions to the broker relating to the
research or other service arrangements. Such products and
services may disproportionately benefit other BlackRock client
accounts relative to the Trust based on the amount of brokerage
commissions paid by the Trust and such other BlackRock client
accounts. For example, research or other services that are paid
for through one clients commissions may not be used in
managing that clients account. In addition, other
BlackRock client accounts may receive the benefit, including
disproportionate benefits, of economies of scale or price
discounts in connection with products and services that may be
provided to the Trust and to such other BlackRock client
accounts. To the extent that BlackRock uses soft dollars, it
will not have to pay for those products and services itself.
BlackRock may receive research that is bundled with the trade
execution, clearing,
and/or
settlement services provided by a particular broker-dealer. To
the extent that BlackRock receives research on this basis, many
of the same conflicts related to traditional soft dollars may
exist. For example, the research effectively will be paid by
client commissions that also will be used to pay for the
execution, clearing, and settlement services provided by the
broker-dealer and will not be paid by BlackRock.
BlackRock may endeavor to execute trades through brokers who,
pursuant to such arrangements, provide research or other
services in order to ensure the continued receipt of research or
other services BlackRock believes are useful in its investment
decision-making process. BlackRock may from time to time choose
not to engage in the above described arrangements to varying
degrees. BlackRock may also enter into commission sharing
arrangements under which BlackRock may execute transactions
through a broker-dealer, including, where permitted, an
Affiliate or BAC/Barclays Entity, and request that the
broker-dealer allocate a portion of the commissions or
commission credits to another firm that provides research to
BlackRock. To the extent that BlackRock engages in commission
sharing arrangements, many of the same conflicts related to
traditional soft dollars may exist.
BlackRock may utilize certain electronic crossing networks
(ECNs) in executing client securities transactions
for certain types of securities. These ECNs may charge fees for
their services, including access fees and transaction fees. The
transaction fees, which are similar to commissions or
markups/markdowns, will generally be charged to clients and,
like commissions and markups/markdowns, would generally be
included in the cost of the securities purchased. Access fees
may be paid by BlackRock even though incurred in connection with
executing transactions on behalf of clients, including the
Trust. In certain circumstances, ECNs may offer volume discounts
that will reduce the access fees typically paid by BlackRock.
This would have the effect of reducing the access fees paid by
BlackRock. BlackRock will only utilize ECNs consistent with its
obligation to seek to obtain best execution in client
transactions.
A-35
BlackRock has adopted policies and procedures designed to
prevent conflicts of interest from influencing proxy voting
decisions that it makes on behalf of advisory clients, including
the Trust, and to help ensure that such decisions are made in
accordance with BlackRocks fiduciary obligations to its
clients. Nevertheless, notwithstanding such proxy voting
policies and procedures, actual proxy voting decisions of
BlackRock may have the effect of favoring the interests of other
clients or businesses of other divisions or units of BlackRock
and/or
its
Affiliates or a BAC/Barclays Entity, provided that BlackRock
believes such voting decisions to be in accordance with its
fiduciary obligations. For a more detailed discussion of these
policies and procedures, see Management of the
Trust Proxy Voting Policies.
It is also possible that, from time to time, BlackRock or its
Affiliates or a BAC/Barclays Entity may, although they are not
required to, purchase and hold shares of the Trust. Increasing
the Trusts assets may enhance investment flexibility and
diversification and may contribute to economies of scale that
tend to reduce the Trusts expense ratio.
It is possible that the Trust may invest in securities of
companies with which an Affiliate or a BAC/Barclays Entity has
or is trying to develop investment banking relationships as well
as securities of entities in which BlackRock or its Affiliates
or a BAC/Barclays Entity has significant debt or equity
investments or in which an Affiliate or BAC/Barclays Entity
makes a market. The Trust also may invest in securities of
companies to which an Affiliate or a BAC/Barclays Entity
provides or may some day provide research coverage. Such
investments could cause conflicts between the interests of the
Trust and the interests of other clients of BlackRock or its
Affiliates or a BAC/Barclays Entity. In making investment
decisions for the Trust, BlackRock is not permitted to obtain or
use material non-public information acquired by any division,
department or Affiliate of BlackRock or of a BAC/Barclays Entity
in the course of these activities. In addition, from time to
time, the activities of an Affiliate or a BAC/Barclays Entity
may limit the Trusts flexibility in purchases and sales of
securities. When an Affiliate is engaged in an underwriting or
other distribution of securities of an entity, BlackRock may be
prohibited from purchasing or recommending the purchase of
certain securities of that entity for the Trust.
BlackRock and its Affiliates and the BAC/Barclays Entities,
their personnel and other financial service providers have
interests in promoting sales of the Trust. With respect to
BlackRock and its Affiliates and BAC/Barclays Entities and their
personnel, the remuneration and profitability relating to
services to and sales of the Trust or other products may be
greater than remuneration and profitability relating to services
to and sales of certain funds or other products that might be
provided or offered. BlackRock and its Affiliates or
BAC/Barclays Entities and their sales personnel may directly or
indirectly receive a portion of the fees and commissions charged
to the Trust or their shareholders. BlackRock and its advisory
or other personnel may also benefit from increased amounts of
assets under management. Fees and commissions may also be higher
than for other products or services, and the remuneration and
profitability to BlackRock or its Affiliates or a BAC/Barclays
Entity and such personnel resulting from transactions on behalf
of or management of the Trust may be greater than the
remuneration and profitability resulting from other funds or
products.
BlackRock and its Affiliates or a BAC/Barclays Entity and their
personnel may receive greater compensation or greater profit in
connection with an account for which BlackRock serves as an
adviser than with an account advised by an unaffiliated
investment adviser. Differentials in compensation may be related
to the fact that BlackRock may pay a portion of its advisory fee
to its Affiliate or to a BAC/Barclays Entity, or relate to
compensation arrangements, including for portfolio management,
brokerage transactions or account servicing. Any differential in
compensation may create a financial incentive on the part of
BlackRock or its Affiliates or BAC/Barclays Entities and their
personnel to recommend BlackRock over unaffiliated investment
advisers or to effect transactions differently in one account
over another.
BlackRock and its Affiliates or a BAC/Barclays Entity may
provide valuation assistance to certain clients with respect to
certain securities or other investments and the valuation
recommendations made for their clients accounts may differ
from the valuations for the same securities or investments
assigned
A-36
by the Trusts pricing vendors, especially if such
valuations are based on broker-dealer quotes or other data
sources unavailable to the Trusts pricing vendors. While
BlackRock will generally communicate its valuation information
or determinations to the Trusts pricing vendors
and/or
fund
accountants, there may be instances where the Trusts
pricing vendors or fund accountants assign a different valuation
to a security or other investment than the valuation for such
security or investment determined or recommended by BlackRock.
As disclosed in more detail in Net Asset Value, when
market quotations of direct investments are not readily
available or are believed by BlackRock to be unreliable, the
Trusts investments may be valued at fair value by
BlackRock, pursuant to procedures adopted by the Board. When
determining an assets fair value, BlackRock
seeks to determine the price that the Trust might reasonably
expect to receive from the current sale of that asset in an
arms-length transaction. The price generally may not be
determined based on what the Trust might reasonably expect to
receive for selling an asset at a later time or if it holds the
asset to maturity. While fair value determinations will be based
upon all available factors that BlackRock deems relevant at the
time of the determination, and may be based on analytical values
determined by BlackRock using proprietary or third party
valuation models, fair value represents only a good faith
approximation of the value of a security. The fair value of one
or more securities may not, in retrospect, be the price at which
those assets could have been sold during the period in which the
particular fair values were used in determining the Trusts
NAV. As a result, the Trusts sale or repurchase of its
shares at NAV, at a time when a holding or holdings are valued
by BlackRock (pursuant to Board-adopted procedures) at fair
value, may have the effect of diluting or increasing the
economic interest of existing shareholders.
To the extent permitted by applicable law, the Trust may invest
all or some of its short term cash investments in any money
market fund or similarly-managed private fund or exchange-traded
fund advised or managed by BlackRock. In connection with any
such investments, the Trust, to the extent permitted by the
Investment Company Act, may pay its share of expenses of a money
market fund in which it invests, which may result in the Trust
bearing some additional expenses.
BlackRock and its Affiliates or a BAC/Barclays Entity and their
directors, officers and employees, may buy and sell securities
or other investments for their own accounts, and may have
conflicts of interest with respect to investments made on behalf
of the Trust. As a result of differing trading and investment
strategies or constraints, positions may be taken by directors,
officers, employees and Affiliates of BlackRock or by
BAC/Barclays Entities that are the same, different from or made
at different times than positions taken for the Trust. To lessen
the possibility that the Trust will be adversely affected by
this personal trading, the Trust and BlackRock each have adopted
a Code of Ethics in compliance with Section 17(j) of the
Investment Company Act that restricts securities trading in the
personal accounts of investment professionals and others who
normally come into possession of information regarding the
Trusts portfolio transactions.
BlackRock and its Affiliates will not purchase securities or
other property from, or sell securities or other property to,
the Trust, except that the Trust may in accordance with rules
adopted under the Investment Company Act engage in transactions
with accounts that are affiliated with the Trust as a result of
common officers, directors, or investment advisers or pursuant
to exemptive orders granted to the Trust
and/or
BlackRock by the Securities and Exchange Commission. These
transactions would be affected in circumstances in which
BlackRock determined that it would be appropriate for the Trust
to purchase and another client of BlackRock to sell, or the
Trust, to sell and another client of BlackRock to purchase, the
same security or instrument on the same day. From time to time,
the activities of the Trust may be restricted because of
regulatory requirements applicable to BlackRock or its
Affiliates or a BAC/Barclays Entity
and/or
BlackRocks internal policies designed to comply with,
limit the applicability of, or otherwise relate to such
requirements. A client not advised by BlackRock would not be
subject to some of those considerations. There may be periods
when BlackRock may not initiate or recommend certain types of
transactions, or may otherwise restrict or limit their advice in
certain securities or instruments issued by or related to
companies for which an Affiliate or a BAC/Barclays Entity is
performing investment banking, market making or other services
or has proprietary positions. For example, when an
A-37
Affiliate is engaged in an underwriting or other distribution
of securities of, or advisory services for, a company, the Trust
may be prohibited from or limited in purchasing or selling
securities of that company. Similar situations could arise if
personnel of BlackRock or its Affiliates or a BAC/Barclays
Entity serve as directors of companies the securities of which
the Trust wishes to purchase or sell. However, if permitted by
applicable law, the Trust may purchase securities or instruments
that are issued by such companies or are the subject of an
underwriting, distribution, or advisory assignment by an
Affiliate or a BAC/Barclays Entity, or in cases in which
personnel of BlackRock or its Affiliates or of BAC/Barclays
Entities are directors or officers of the issuer. The investment
activities of one or more Affiliates or BAC/Barclays Entities
for their proprietary accounts and for client accounts may also
limit the investment strategies and rights of the Trust. For
example, in regulated industries, in certain emerging or
international markets, in corporate and regulatory ownership
definitions, in certain futures and derivative transactions, and
to comply with certain provisions of the Investment Company Act
that prohibit affiliated transactions, there may be limits on
the aggregate amount of investment by affiliated investors that
may not be exceeded without the grant of a license or other
regulatory or corporate consent or, if exceeded, may cause
BlackRock, the Trust or other client accounts to suffer
disadvantages or business restrictions. These limitations may
cause the Trust to invest in different portfolios than other
BlackRock funds which may result in the Trust investing on less
advantageous terms that such other funds or in different types
of securities, such as non-voting securities, in order to comply
with regulatory requirements.
If certain aggregate ownership thresholds are reached or certain
transactions undertaken, the ability of BlackRock on behalf of
clients (including the Trust) to purchase or dispose of
investments, or exercise rights or undertake business
transactions, may be restricted by regulation or otherwise
impaired. As a result, BlackRock, on behalf of clients
(including the Trust), may limit purchases, sell existing
investments, or otherwise restrict or limit the exercise of
rights (including voting rights) when BlackRock, in its sole
discretion, deems it appropriate.
BlackRock and its Affiliates and BAC/Barclays Entities may
maintain securities indices as part of their product offerings.
Index based funds seek to track the performance of securities
indices and may use the name of the index in the fund name.
Index providers, including BlackRock and its Affiliates and
BAC/Barclays Entities may be paid licensing fees for use of
their index or index name. BlackRock and its Affiliates and
BAC/Barclays Entities will not be obligated to license their
indices to BlackRock, and BlackRock cannot be assured that the
terms of any index licensing agreement with BlackRock and its
Affiliates and BAC/Barclays Entities will be as favorable as
those terms offered to other index licensees.
BlackRock and its Affiliates and BAC/Barclays Entities may serve
as Authorized Participants in the creation and redemption of
exchange traded funds, including funds advised by affiliates of
BlackRock. BlackRock and its Affiliates and BAC/Barclays
Entities may therefore be deemed to be participants in a
distribution of such exchange traded funds, which could render
them statutory underwriters.
Custody arrangements may lead to potential conflicts of interest
with BlackRock where BlackRock has agreed to waive fees
and/or
reimburse ordinary operating expenses in order to cap expenses
of the Trust. This is because the custody arrangements with the
Trusts custodian may have the effect of reducing custody
fees when the Trust leave cash balances uninvested. When a
funds actual operating expense ratio exceeds a stated cap,
a reduction in custody fees reduces the amount of waivers
and/or
reimbursements BlackRock would be required to make to the fund.
This could be viewed as having the potential to provide
BlackRock an incentive to keep high positive cash balances for
funds with expense caps in order to offset fund custody fees
that BlackRock might otherwise reimburse. However,
BlackRocks portfolio managers do not intentionally keep
uninvested balances high, but rather make investment decisions
that they anticipate will be beneficial to fund performance.
Present and future activities of BlackRock and its Affiliates
and BAC/Barclays Entities, including BlackRock Advisors, in
addition to those described in this section, may give rise to
additional conflicts of interest.
A-38
DESCRIPTION
OF SHARES
Common
Shares
The Trust intends to hold annual meetings of shareholders so
long as the common shares are listed on a national securities
exchange and such meetings are required as a condition to such
listing.
Preferred
Shares
The terms of preferred shares, if any, issued by the Trust,
including their dividend rate, voting rights, liquidation
preference and redemption provisions, would be determined by the
Board (subject to applicable law and the Trusts Agreement
and Declaration of Trust) if and when it authorizes a preferred
shares offering.
If the Board determines to proceed with an offering of preferred
shares, the terms of the preferred shares may be the same as, or
different from, the terms described below, subject to applicable
law and the Trusts Agreement and Declaration of Trust. The
Board, without the approval of the holders of common shares, may
authorize an offering of preferred shares or may determine not
to authorize such an offering, and may fix the terms of the
preferred shares to be offered.
Liquidation
Preference
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Trust, the holders of any
preferred shares then outstanding would be entitled to receive a
preferential liquidating distribution, which is expected to
equal the original purchase price per preferred share plus
accrued and unpaid dividends, whether or not declared, before
any distribution of assets is made to holders of common shares.
After payment of the full amount of the liquidating distribution
to which they are entitled, the holders of preferred shares
would not be entitled to any further participation in any
distribution of assets by the Trust.
Voting
Rights
The Investment Company Act requires that the holders of any
preferred shares, voting separately as a single class, have the
right to elect at least two trustees at all times. The remaining
trustees will be elected by holders of common shares and
preferred shares, voting together as a single class. In
addition, subject to the prior rights, if any, of the holders of
any other class of senior securities outstanding, the holders of
any preferred shares have the right to elect a majority of the
trustees of the Trust at any time two years dividends on
any preferred shares are unpaid. The Investment Company Act also
requires that, in addition to any 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 (1) adopt any plan of
reorganization that would adversely affect the preferred shares,
and (2) take any action requiring a vote of security
holders under Section 13(a) of the Investment Company Act,
including, among other things, changes in the Trusts
subclassification as a closed-end investment company or changes
in its fundamental investment restrictions. See Certain
Provisions in the Agreement and Declaration of Trust in
the Trusts Prospectus. As a result of these voting rights,
the Trusts ability to take any such actions may be impeded
to the extent that there are any preferred shares outstanding.
The Board anticipates that, except as otherwise indicated in the
Prospectus and except as otherwise required by applicable law,
holders of preferred shares will have equal voting rights with
holders of common shares (one vote per share, unless otherwise
required by the Investment Company Act) and will vote together
with holders of common shares as a single class.
The affirmative vote of the holders of a majority of the
outstanding preferred shares, voting as a separate class, will
be required to amend, alter or repeal any of the preferences,
rights or powers of holders of preferred shares so as to affect
materially and adversely such preferences, rights or powers, or
to increase or decrease the authorized number of preferred
shares. The class vote of holders of preferred
A-39
shares described above will in each case be in addition to any
other vote required to authorize the action in question.
Redemption,
Purchase and Sale of Preferred Shares by the Trust
The terms of any preferred shares that may be offered are
expected to provide that (1) they are redeemable by the
Trust in whole or in part at the original purchase price per
share plus accrued dividends per share, (2) the Trust may
tender for or purchase preferred shares and (3) the Trust
may subsequently resell any shares so tendered for or purchased.
Any redemption or purchase of preferred shares by the Trust will
reduce the leverage applicable to the common shares, while any
resale of shares by the Trust will increase that leverage.
Other
Shares
The Board (subject to applicable law and the Trusts
Agreement and Declaration of Trust) may authorize an offering,
without the approval of the holders of common shares and,
depending on their terms, any preferred shares outstanding at
that time, of other classes of shares, or other classes or
series of shares, as they determine to be necessary, desirable
or appropriate, having such terms, rights, preferences,
privileges, limitations and restrictions as the Board sees fit.
The Trust currently does not expect to issue any other classes
of shares, or series of shares, except for the common shares.
REPURCHASE
OF COMMON SHARES
The Trust is a closed-end management investment company and as
such its shareholders will not have the right to cause the Trust
to redeem their shares. Instead, the Trusts common shares
will trade in the open market at a price that will be a function
of several factors, including dividend levels (which are in turn
affected by expenses), net asset value, call protection,
dividend stability, relative demand for and supply of such
shares in the market, general market and economic conditions and
other factors. Because shares of a closed-end investment company
may frequently trade at prices lower than net asset value, the
Board may consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect
of common shares, which may include the repurchase of such
shares in the open market or in private transactions, the making
of a tender offer for such shares, or the conversion of the
Trust to an open-end investment company. The Board may decide
not to take any of these actions. In addition, there can be no
assurance that share repurchases or tender offers, if
undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Trust has
preferred shares outstanding, the Trust may not purchase, redeem
or otherwise acquire any of its common shares unless
(1) all accrued preferred shares dividends have been paid
and (2) at the time of such purchase, redemption or
acquisition, the net asset value of the Trusts portfolio
(determined after deducting the acquisition price of the common
shares) is at least 200% of the liquidation value of any
outstanding preferred shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends
thereon). Any service fees incurred in connection with any
tender offer made by the Trust will be borne by the Trust and
will not reduce the stated consideration to be paid to tendering
shareholders.
Subject to its investment restrictions, the Trust may borrow to
finance the repurchase of shares or to make a tender offer.
Interest on any borrowings to finance share repurchase
transactions or the accumulation of cash by the Trust in
anticipation of share repurchases or tenders will reduce the
Trusts net income. Any share repurchase, tender offer or
borrowing that might be approved by the Board would have to
comply with the Exchange Act, the Investment Company Act and the
rules and regulations thereunder.
Although the decision to take action in response to a discount
from net asset value will be made by the Board at the time it
considers such issue, it is the boards present policy,
which may be changed by the Board, not to authorize repurchases
of common shares or a tender offer for such shares if:
(1) such
A-40
transactions, if consummated, would (a) result in the
delisting of the common shares from the New York Stock Exchange,
or (b) impair the Trusts status as a regulated
investment company under the Code, (which would make the Trust a
taxable entity, causing the Trusts income to be taxed at
the corporate level in addition to the taxation of shareholders
who receive dividends from the Trust) or as a registered
closed-end investment company under the Investment Company Act;
(2) the Trust would not be able to liquidate portfolio
securities in an orderly manner and consistent with the
Trusts investment objectives and policies in order to
repurchase shares; or (3) there is, in the Boards
judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or
otherwise materially adversely affecting the Trust,
(b) general suspension of or limitation on prices for
trading securities on the New York Stock Exchange,
(c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by United States or New
York banks, (d) material limitation affecting the Trust or
the issuers of its portfolio securities by Federal or state
authorities on the extension of credit by lending institutions
or on the exchange of foreign currency, (e) commencement of
war, armed hostilities or other international or national
calamity directly or indirectly involving the United States, or
(f) other event or condition which would have a material
adverse effect (including any adverse tax effect) on the Trust
or its shareholders if shares were repurchased. The Board may in
the future modify these conditions in light of experience.
The repurchase by the Trust of its shares at prices below net
asset value will result in an increase in the net asset value of
those shares that remain outstanding. However, there can be no
assurance that share repurchases or tender offers at or below
net asset value will result in the Trusts shares trading
at a price equal to their net asset value. Nevertheless, the
fact that the Trusts shares may be the subject of
repurchase or tender offers from time to time, or that the Trust
may be converted to an open-end investment company, may reduce
any spread between market price and net asset value that might
otherwise exist.
In addition, a purchase by the Trust of its common shares will
decrease the Trusts Managed Assets which would likely have
the effect of increasing the Trusts expense ratio. Any
purchase by the Trust of its common shares at a time when
preferred shares are outstanding will increase the leverage
applicable to the outstanding common shares then remaining.
Before deciding whether to take any action if the common shares
trade below net asset value, the Board would likely consider all
relevant factors, including the extent and duration of the
discount, the liquidity of the Trusts portfolio, the
impact of any action that might be taken on the Trust or its
shareholders and market considerations. Based on these
considerations, even if the Trusts shares should trade at
a discount, the Board may determine that, in the interest of the
Trust and its shareholders, no action should be taken.
TAX
MATTERS
The following discussion is a brief summary of certain
U.S. Federal income tax considerations affecting the Trust
and its shareholders. The discussion reflects applicable tax
laws of the United States as of the date of this Statement of
Additional Information, which tax laws may be changed or subject
to new interpretations by the courts or the Internal Revenue
Service (the IRS) retroactively or prospectively. No
ruling has been or will be sought from the IRS regarding any
matter discussed herein. No assurance can be given that the IRS
would not assert, or that a court would not sustain, a position
different from any of the tax aspects set forth below. This
discussion assumes that the Trusts shareholders hold their
common shares as capital assets for U.S. Federal income tax
purposes (generally, assets held for investment). No attempt is
made to present a detailed explanation of all U.S. Federal
income tax concerns affecting the Trust and its shareholders
(including shareholders owning a large position in the Trust),
and the discussions set forth here and in the prospectus do not
constitute tax advice. Investors are urged to consult their own
tax advisors with any specific questions relating to federal,
state, local and foreign taxes.
A-41
Taxation
of the Trust
The Trust intends to elect to be, and to qualify for special tax
treatment afforded to, a regulated investment company under
Subchapter M of the Code. As long as it so qualifies, in any
taxable year in which it meets the distribution requirements
described below, the Trust (but not its shareholders) will not
be subject to U.S. Federal income tax to the extent that it
distributes its investment company taxable income and net
recognized capital gains.
In order to qualify to be taxed as a regulated investment
company, the Trust must, among other things: (i) derive in
each taxable year at least 90% of its gross income from
(a) dividends, interest (including tax-exempt interest),
payments with respect to certain securities loans, and gains
from the sale or other disposition of stock, securities, or
foreign currencies, or other income (including but not limited
to gain from options, futures and forward contracts) derived
with respect to its business of investing in such stock,
securities or currencies and (b) net income derived from
interests in certain publicly traded partnerships that derive
less than 90% of their gross income from the items described in
clause (a) above (each a Qualified Publicly Traded
Partnership); and (ii) diversify its holdings so
that, at the end of each quarter of each taxable year
(a) at least 50% of the value of the Trusts total
assets is represented by cash and cash items,
U.S. Government securities, the securities of other
regulated investment companies and other securities, with such
other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the value of the Trusts
total assets and not more than 10% of the outstanding voting
securities of such issuer and (b) not more than 25% of the
value of the Trusts total assets is invested in the
securities of (I) any one issuer (other than
U.S. Government securities and the securities of other
regulated investment companies), (II) any two or more
issuers (other than regulated investment companies) that the
Trust controls and that are determined to be engaged in the same
business or similar or related trades or businesses or
(III) any one or more Qualified Publicly Traded
Partnerships.
As a regulated investment company, the Trust generally is not
subject to U.S. Federal income tax on income and gains that
it distributes each taxable year to its shareholders, provided
that in such taxable year it distributes at least 90% of the sum
of (i) its investment company taxable income (which
includes, among other items, dividends, interest, the excess of
any net short-term capital gain over net long-term capital loss
and other taxable income, other than net capital gain (as
defined below), reduced by deductible expenses) determined
without regard to the deduction for dividends and distributions
paid and (ii) its net tax-exempt interest income (the
excess of its gross tax-exempt interest income over certain
disallowed deductions). The Trust intends to distribute annually
all or substantially all of such income.
The Trust may retain for investment its net capital gain (which
consists of the excess of its net long-term capital gain over
its net short-term capital loss). However, if the Trust retains
any net capital gain or any investment company taxable income,
it will be subject to a tax on such amount at regular corporate
tax rates. If the Trust retains any net capital gain, it expects
to designate the retained amount as undistributed capital gains
in a notice to its shareholders, each of whom, if subject to
U.S. Federal income tax on long-term capital gains,
(i) will be required to include in income for
U.S. Federal income tax purposes its share of such
undistributed net capital gain, (ii) will be entitled to
credit its proportionate share of the tax paid by the Trust
against its U.S. Federal income tax liability, if any, and
to claim refunds to the extent that the credit exceeds such
liability and (iii) will increase its tax basis in its
common shares by the excess of the amount described in
clause (i) over the amount described in clause (ii).
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a
nondeductible 4% U.S. Federal excise tax at the Trust
level. To avoid the excise tax, the Trust must distribute during
each calendar year an amount at least equal to the sum of
(i) 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) 98% of
its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending
on October 31 of the calendar year, and (iii) certain
undistributed amounts from previous years on which the Trust
paid no U.S. Federal income tax. While the Trust intends to
distribute any income and capital gain in the manner necessary
to minimize imposition of the 4% federal
A-42
excise tax, there can be no assurance that sufficient amounts of
the Trusts taxable income and capital gains will be
distributed to avoid entirely the imposition of the tax. In that
event, the Trust will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirement.
Dividends and distributions will be treated as paid during the
calendar year if they are paid during the calendar year or
declared by the Trust in October, November or December of the
year, payable to shareholders of record on a date during such a
month and paid by the Trust during January of the following
year. Any such dividend or distribution paid during January of
the following year will be deemed to be received by the
Trusts shareholders on December 31 of the year the
dividend or distribution was declared, rather than when the
dividend or distribution is actually received.
If the Trust were unable to satisfy the 90% distribution
requirement or otherwise were to fail to qualify as a regulated
investment company in any year, it would be taxed in the same
manner as an ordinary corporation and distributions to the
Trusts shareholders would not be deductible by the Trust
in computing its taxable income. In such case, distributions
generally would be eligible (i) for treatment as qualified
dividend income in the case of individual shareholders and
(ii) for the dividends received deduction in the case of
corporate shareholders. To qualify again to be taxed as a
regulated investment company in a subsequent year, the Trust
would be required to distribute to its shareholders its
accumulated earnings and profits attributable to non-regulated
investment company years reduced by an interest charge on 50% of
such earnings and profits payable by the Trust as an additional
tax. In addition, if the Trust failed to qualify as a regulated
investment company for a period greater than two taxable years,
then, in order to qualify as a regulated investment company in a
subsequent year, the Trust would be required to elect to
recognize and pay tax on any net built-in gain (the excess of
aggregate gain, including items of income, over aggregate loss
that would have been realized if the Trust had been liquidated)
or, alternatively, be subject to taxation on such built-in gain
recognized for a period of ten years.
The Trust intends to utilize leverage through borrowings, and
thus may be restricted by loan covenants with respect to the
declaration and payment of dividends in certain circumstances.
Limits on the Trusts payment of dividends may prevent the
Trust from satisfying the 90% distribution requirement and may
therefore jeopardize the Trusts qualification for taxation
as a regulated investment company
and/or
may
subject the Trust to the nondeductible 4% U.S. Federal
excise tax. The Trust will endeavor to avoid restrictions on its
ability to make dividend payments.
Gain or loss on the sale of securities by the Trust will
generally be long-term capital gain or loss if the securities
have been held by the Trust for more than one year. Gain or loss
on the sale of securities held for one year or less will be
short-term capital gain or loss.
Certain of the Trusts investment practices are subject to
special and complex U.S. Federal income tax provisions that
may, among other things, (i) disallow, suspend or otherwise
limit the allowance of certain losses or deductions,
(ii) convert lower taxed long-term capital gains and
qualified dividend income into higher taxed short-term capital
gains or ordinary income, (iii) convert ordinary loss or a
deduction into capital loss (the deductibility of which is more
limited), (iv) cause the Trust to recognize income or gain
without a corresponding receipt of cash (e.g., under the
original issue discount rules), (v) adversely affect the
time as to when a purchase or sale of stock or securities is
deemed to occur, (vi) adversely alter the characterization
of certain complex financial transactions and (vii) produce
income that will not qualify as good income for purposes of the
90% annual gross income requirement described above. For
example, gain derived by the Trust from the disposition of any
securities with market discount (i.e., an amount generally equal
to the excess of the stated redemption price or revised issue
price of the security over the basis of such security
immediately after it was acquired) will be taxed as ordinary
income to the extent of the accrued market discount, unless the
Trust makes an election to accrue market discount on a current
basis. If this election is not made, all or a portion of any
deduction for interest expense incurred to purchase or carry a
market discount security may be deferred until such security is
sold or otherwise disposed of. The Trust will monitor its
transactions and may make certain
A-43
tax elections and may be required to borrow money or dispose of
securities to mitigate the effect of these rules and prevent
disqualification of the Trust as a regulated investment company.
If the Trust invests in foreign securities, its income from such
securities may be subject to
non-U.S. Taxes.
The Trust will not be eligible to elect to pass
through to shareholders of the Trust the ability to use
the foreign tax deduction or foreign tax credit for foreign
taxes paid with respect to qualifying taxes.
Taxation
of Shareholders
Distributions paid by the Trust from its investment company
taxable income, which includes the excess of net short-term
capital gains over net long-term capital losses (together
referred to hereinafter as ordinary income
dividends), whether paid in cash or reinvested in Trust
shares, are generally taxable to you as ordinary income to the
extent of the Trusts earnings and profits. Ordinary income
dividends paid by the Trust generally will not be eligible for
the reduced rates applicable to qualified dividend
income and will not be eligible for the corporate
dividends received deduction.
Distributions made from net capital gain, which is the excess of
net long-term capital gains over net short-term capital losses
(capital gain dividends), including capital gain
dividends credited to a shareholder but retained by the Trust,
are taxable to shareholders as long-term capital gains if they
have been properly designated by the Trust, regardless of the
length of time the shareholder has owned common shares of the
Trust. Net long-term capital gain of individuals is generally
taxed at a reduced maximum rate. For corporate taxpayers, net
long-term capital gain is taxed at ordinary income rates.
The IRS currently requires that a regulated investment company
that has two or more classes of stock allocate to each such
class proportionate amounts of each type of its income (such as
ordinary income and net capital gain) based upon the percentage
of total dividends paid to each class for the tax year.
Accordingly, if the Trust issues preferred shares, then the
Trust intends each year to allocate its ordinary income, net
capital gain and other relevant items (if any) between its
common shares and preferred shares in proportion to the total
dividends paid to each class with respect to such tax year.
If, for any calendar year, the Trusts total distributions
exceed both current earnings and profits and accumulated
earnings and profits, the excess will generally be treated as a
tax-free return of capital up to the amount of a
shareholders tax basis in the common shares, reducing that
basis accordingly. Such distributions exceeding the
shareholders basis will be treated as gain from the sale
or exchange of the shares. When you sell your shares in the
Trust, the amount, if any, by which your sales price exceeds
your basis in the Trusts common shares is gain subject to
tax. Because a return of capital reduces your basis in the
shares, it will increase the amount of your gain or decrease the
amount of your loss when you sell the shares, all other things
being equal.
Generally, not later than 60 days after the close of its
taxable year, the Trust will provide its shareholders with a
written notice designating the amount of any ordinary income
dividends or capital gain dividends and other distributions.
The Trust does not intend to invest in tax credit BABs. If,
contrary to its expectation, the Trust invests in tax credit
BABs or certain other bonds generating tax credits, it may make
an election to pass through the credits to its shareholders. If
such an election is made, the Trust will be required to
(i) include in gross income for the tax year, as interest
income, an amount equal to the amount that the Trust would have
included in gross income relating to the credits if the election
had not been made and (ii) increase the amount of its
dividends paid deduction for the tax year by the amount of the
income. In addition, each shareholder of the Trust (a) will
be required to include in gross income as taxable ordinary
income an amount equal to the shareholders proportionate
share of the interest income attributable to the credits and
(b) will be permitted to take its proportionate share of
the credits against its taxes. If the Trust makes this election,
it will inform shareholders concerning their allocable share of
tax credits as part of its annual reporting to shareholders.
Shareholders should consult their tax advisors concerning their
ability to use such allocated tax credits.
A-44
The sale or other disposition of common shares of the Trust will
generally result in capital gain or loss to shareholders
measured by the difference between the sale price and the
shareholders tax basis in its shares. Generally, a
shareholders gain or loss will be long-term gain or loss
if the shares have been held for more than one year. Any loss
upon the sale or exchange of Trust common shares held for six
months or less will be treated as long-term capital loss to the
extent of any capital gain dividends received (including amounts
credited as an undistributed capital gain) by the shareholder.
Any loss a shareholder realizes on a sale or exchange of common
shares of the Trust will be disallowed if the shareholder
acquires other common shares of the Trust (whether through the
automatic reinvestment of dividends or otherwise) within a
61-day
period beginning 30 days before and ending 30 days
after the shareholders sale or exchange of the common
shares. In such case, the basis of the common shares acquired
will be adjusted to reflect the disallowed loss. Present law
taxes both long-term and short-term capital gains of
corporations at the rates applicable to ordinary income.
Shareholders may be entitled to offset their capital gain
distributions with capital losses. There are a number of
statutory provisions affecting when capital losses may be offset
against capital gain, and limiting the use of losses from
certain investments and activities. Accordingly, shareholders
with capital losses are urged to consult their tax advisers.
An investor should be aware that if Trust common shares are
purchased shortly before the record date for any taxable
distribution (including a capital gain dividend), the purchase
price likely will reflect the value of the distribution and the
investor then would receive a taxable distribution likely to
reduce the trading value of such Trust common shares, in effect
resulting in a taxable return of some of the purchase price.
Dividends are taxable to shareholders. Ordinary income
distributions and capital gain distributions also may be subject
to state, local and foreign taxes. Shareholders are urged to
consult their own tax advisers regarding specific questions
about U.S. Federal, state, local and foreign tax
consequences to them of investing in the Trust.
A shareholder that is a nonresident alien individual or a
foreign corporation (a foreign investor) generally
will be subject to U.S. Federal withholding tax at a rate
of 30% (or possibly a lower rate provided by an applicable tax
treaty) on ordinary income dividends (except as discussed
below). Different tax consequences may result if the foreign
investor is engaged in a trade or business in the United States
or, in the case of an individual, is present in the United
States for 183 days or more during a taxable year and
certain other conditions are met. Foreign investors should
consult their tax advisors regarding the tax consequences of
investing in the Trusts common shares.
In addition, after December 31, 2012, the Trust will be
required to withhold at a rate of 30 percent on dividends
in respect of, and gross proceeds from the sale of, our common
stock held by or through certain foreign financial institutions
(including investment funds), unless such institution enters
into an agreement with the Secretary of the Treasury to report,
on an annual basis, information with respect to shares in, and
accounts maintained by, the institution to the extent such
shares or accounts are held by certain United States persons or
by certain
non-U.S. Entities
that are wholly or partially owned by United States
persons. Accordingly, the entity through which our common stock
is held will affect the determination of whether such
withholding is required. Similarly, dividends in respect of, and
gross proceeds from the sale of, our common stock held by an
investor that is a non-financial
non-U.S. Entity
will be subject to withholding at a rate of 30 percent,
unless such entity either (i) certifies to us that such
entity does not have any substantial United States
owners or (ii) provides certain information regarding
the entitys substantial United States owners,
which we will in turn provide to the Secretary of the Treasury.
Foreign investors are encouraged to consult with their tax
advisers regarding the possible implications of the legislation
on their investment in our common stock.
Assuming applicable disclosure and certification requirements
are met, U.S. Federal withholding tax will generally not
apply to any gain or income realized by a foreign investor in
respect of any distributions of net capital gain or upon the
sale or other disposition of common shares of the Trust.
A-45
Under a legislative bill pending in Congress, but not yet
enacted into law, properly designated dividends paid in 2010
would generally be exempt from U.S. Federal withholding tax
where they (i) are paid in respect of the Trusts
qualified net interest income (generally, the
Trusts
U.S.-source
interest income, other than certain contingent interest and
interest from obligations of a corporation or partnership in
which the Trust is at least a 10% shareholder, reduced by
expenses that are allocable to such income) or (ii) are
paid in respect of the Trusts qualified short-term
capital gains (generally, the excess of the Trusts
net short-term capital gain over the Trusts long-term
capital loss for such taxable year). However, even if such
pending bill were enacted, the Trust may designate all, some or
none of its potentially eligible dividends as such qualified net
interest income or as qualified short-term capital gains,
and/or
treat
such dividends, in whole or in part, as ineligible for this
exemption from withholding. In order to qualify for this
exemption from withholding (if enacted), a foreign investor
would need to comply with applicable certification requirements
relating to its
non-U.S. Status
(including, in general, furnishing an IRS
Form W-8BEN
or substitute Form). In the case of common shares held through
an intermediary, the intermediary may withhold even if the Trust
designates the payment as qualified net interest income or
qualified short-term capital gain. Foreign investors should
contact their intermediaries with respect to the application of
these rules (if enacted) to their accounts. There can be no
assurance as to what portion of the Trusts distributions
would qualify for favorable treatment as qualified net interest
income or qualified short-term capital gains if such pending
bill were enacted. No assurance can be given that the above
rules will be enacted into law.
Backup
Withholding
The Trust is required in certain circumstances to withhold, for
U.S. Federal backup withholding purposes, on taxable
dividends or distributions and certain other payments paid to
non-exempt holders of the Trusts common shares who do not
furnish the Trust with their correct taxpayer identification
number (in the case of individuals, their social security
number) and certain certifications, or who are otherwise subject
to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld from payments made to a shareholder
may be refunded or credited against such shareholders
U.S. Federal income tax liability, if any, provided that
the required information is furnished to the IRS.
The foregoing is a general summary of the provisions of the
Code and the Treasury regulations in effect as they directly
govern the taxation of the Trust and its shareholders. These
provisions are subject to change by legislative, judicial or
administrative action, and any such change may be retroactive.
Ordinary income and capital gain dividends may also be subject
to state, local and foreign taxes. Shareholders are urged to
consult their tax advisors regarding specific questions as to
U.S. Federal, state, local and foreign income or other
taxes.
A-46
INDEPENDENT
AUDITORS REPORT
To the Shareholder and Board of Trustees of
BlackRock Build America Bond Trust
We have audited the accompanying statement of assets and
liabilities of BlackRock Build America Bond Trust (the
Trust) as of July 16, 2010, including the
statements of operations and changes in net assets for the
period June 7, 2010 (date of inception) to July 16,
2010. These financial statements are the responsibility of the
Trusts management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Trust is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit 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. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred
to above presents fairly, in all material respects, the
financial position of BlackRock Build America Bond Trust as of
July 16, 2010, and the results of its operations and
changes in its net assets for the period June 7, 2010 to
July 16, 2010, in conformity with accounting principles
generally accepted in the United States of America.
/s/
DELOITTE &
TOUCHE LLP
Princeton, New Jersey
July 23, 2010
See Notes to Financial Statements
F-1
BlackRock
Build America Bond Trust (BBN)
Statement
of Assets and Liabilities
July 16,
2010
|
|
|
|
|
ASSETS:
|
|
|
|
|
Cash
|
|
$
|
133,012
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
Payable for organization costs
|
|
|
33,000
|
|
|
|
|
|
|
NET ASSETS:
|
|
$
|
100,012
|
|
|
|
|
|
|
NET ASSETS CONSIST OF:
|
|
|
|
|
Paid-in capital (Note 1)
|
|
$
|
133,012
|
|
Accumulated net investment loss
|
|
|
(33,000
|
)
|
|
|
|
|
|
Net Assets, July 16, 2010
|
|
$
|
100,012
|
|
|
|
|
|
|
Net asset value per common share:
|
|
|
|
|
Equivalent to 6,964 shares of common stock issued and
outstanding, par $0.001, unlimited shares authorized
|
|
$
|
14.36
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-2
BlackRock
Build America Bond Trust (BBN)
Statement
of Operations
For the
period June 7, 2010 (date of inception) to July 16,
2010
|
|
|
|
|
Investment income
|
|
$
|
|
|
Expenses
|
|
|
|
|
Organization expenses
|
|
|
33,000
|
|
|
|
|
|
|
Net investment loss
|
|
$
|
(33,000
|
)
|
|
|
|
|
|
See Notes to Financial Statements.
F-3
BlackRock
Build America Bond Trust (BBN)
Statement
of Changes in Net Assets
For the
period June 7, 2010 (date of inception) to July 16,
2010
|
|
|
|
|
INCREASE (DECREASE) IN NET ASSETS
|
|
|
|
|
Operations
|
|
|
|
|
Net investment loss
|
|
$
|
(33,000
|
)
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
|
(33,000
|
)
|
|
|
|
|
|
Capital Share Transactions
|
|
|
|
|
Net proceeds from the issuance of common shares
|
|
|
133,012
|
|
|
|
|
|
|
Total increase
|
|
|
100,012
|
|
Net Assets
|
|
|
|
|
Beginning of period
|
|
|
|
|
|
|
|
|
|
End of period (including accumulated net investment loss of
$33,000)
|
|
$
|
100,012
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-4
NOTES TO
FINANCIAL STATEMENTS
Note 1. Organization
and Significant Accounting Policies:
BlackRock Build America Bond Trust (BBN) (the Trust)
was organized as a Delaware statutory trust on June 7,
2010, and is registered as a non-diversified, closed-end
management investment company under the Investment Company Act
of 1940, as amended. The Trust had no operations other than a
sale to BlackRock Holdco. 2, Inc. of 6,964 shares of common
stock for $133,012 ($19.10 per share). The Trusts
financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America,
which may require management to make estimates and assumptions
that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those
estimates.
Valuation:
The Trusts policy is
to fair value its financial instruments at market value using
independent dealers or pricing services selected under the
supervision of the Trusts Board of Trustees (the
Board). 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. Short-term securities with remaining maturities of
60 days or less may be valued at amortized cost, which
approximates fair value.
In the event that application of these methods of valuation
results in a price for an investment which is deemed not to be
representative of the market value of such investment or is not
available, the investment will be valued by a method approved by
the Board as reflecting fair value (Fair Value
Assets). When determining the price for Fair Value Assets,
the investment advisor
and/or
the
sub-advisor
seeks to determine the price that the 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 investment advisor
and/or
sub-advisor
deems relevant. The pricing of all Fair Value Assets is
subsequently reported to the Board or a committee thereof.
Income Taxes:
It is the 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.
Note 2. Investment
Advisory Arrangements:
The PNC Financial Services Group, Inc. (PNC), Bank
of America Corporation (BAC) and Barclays Bank PLC
(Barclays) are the largest stockholders of
BlackRock, Inc. (BlackRock). Due to the ownership
structure, PNC is an affiliate of the Trust for 1940 Act
purposes, but BAC and Barclays are not.
The 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 the Trusts portfolio and provides the
necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Trust. For such
services, the Trust pays the Manager a monthly fee at the annual
rate of 0.55% of the average daily value of the Trusts
Managed Assets. Managed Assets means the total
assets of the Trust, minus the sum of its accrued liabilities
(other than Trust liabilities incurred for the express purpose
of creating leverage).
The Manager entered into a separate
sub-advisory
agreement with BlackRock Investment Management, LLC
(BIM), an affiliate of the Manager. The Manager pays
BIM for services it provides, a monthly fee that is a percentage
of the investment advisory fees paid by the Trust to the Manager.
F-5
Note 3. Organization
Expenses and Offering Costs:
Organization expenses of $33,000 incurred by the Trust have been
expensed. Offering costs, estimated to be approximately
$1,232,034, limited to $0.04 per share, will be charged to
paid-in capital at the time common shares are sold.
Note 4. Subsequent
Event:
Management has evaluated the impact of all subsequent events on
the Trust through the date the financial statements were issued
and has determined that there were no subsequent events
requiring adjustment or additional disclosure in the financial
statements.
F-6
APPENDIX A
Ratings
of Investments
Standard & Poors Corporation
A brief description of the applicable
Standard & Poors Corporation
(S&P) rating symbols and their meanings (as
published by S&P) follows:
A Standard & Poors issue credit rating is a
forward-looking opinion about the creditworthiness of an obligor
with respect to a specific financial obligation, a specific
class of financial obligations, or a specific financial program
(including ratings on medium-term note programs and commercial
paper programs). It takes into consideration the
creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated. The opinion
reflects S&Ps view of the obligors capacity and
willingness to meet its financial commitments as they come due,
and may assess terms, such as collateral security and
subordination, which could affect ultimate payment in the event
of default.
Issue credit ratings can be either long term or short term.
Short-term ratings are generally assigned to those obligations
considered short-term in the relevant market. In the U.S., for
example, that means obligations with an original maturity of no
more than 365 days including commercial paper.
Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features on
long-term obligations. The result is a dual rating, in which the
short-term rating addresses the put feature, in addition to the
usual long-term rating. Medium-term notes are assigned long-term
ratings.
Long-Term
Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on
S&Ps analysis of the following considerations:
|
|
|
|
|
Likelihood of payment capacity and willingness of
the obligor to meet its financial commitment on an obligation in
accordance with the terms of the obligation;
|
|
|
|
Nature of and provisions of the obligation;
|
|
|
|
Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting
creditors rights.
|
Issue ratings are an assessment of default risk, but may
incorporate an assessment of relative seniority or ultimate
recovery in the event of default. Junior obligations are
typically rated lower than senior obligations, to reflect the
lower priority in bankruptcy, as noted above. (Such
differentiation may apply when an entity has both senior and
subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.)
AAA An obligation rated AAA has the highest
rating assigned by S&P. The obligors capacity to meet
its financial commitment on the obligation is extremely strong.
AA An obligation rated AA differs from the
highest-rated obligations only to a small degree. The
obligors capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher-rated
categories. However, the obligors capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate
protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B,
CCC, CC, and C are regarded
as having significant speculative characteristics.
BB indicates the least degree of speculation and
C the highest. While such obligations
A-1
will likely have some quality and protective characteristics,
these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to
nonpayment than other speculative issues. However, it faces
major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the
obligors inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to
nonpayment than obligations rated BB, but the
obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligors
capacity or willingness to meet its financial commitment on the
obligation.
CCC An obligation rated CCC is currently
vulnerable to nonpayment, and is dependent upon favorable
business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial
commitment on the obligation.
CC An obligation rated CC is currently highly
vulnerable to nonpayment.
C A C rating is assigned to obligations that
are currently highly vulnerable to nonpayment, obligations that
have payment arrearages allowed by the terms of the documents,
or obligations of an issuer that is the subject of a bankruptcy
petition or similar action which have not experienced a payment
default. Among others, the C rating may be assigned
to subordinated debt, preferred stock or other obligations on
which cash payments have been suspended in accordance with the
instruments terms or when preferred stock is the subject
of a distressed exchange offer, whereby some or all of the issue
is either repurchased for an amount of cash or replaced by other
instruments having a total value that is less than par.
D An obligation rated D is in payment default.
The D rating category is used when payments on an
obligation, including a regulatory capital instrument, are not
made on the date due even if the applicable grace period has not
expired, unless Standard & Poors believes that
such payments will be made during such grace period. The
D rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action if payments
on an obligation are jeopardized. An obligations rating is
lowered to D upon completion of a distressed
exchange offer, whereby some or all of the issue is either
repurchased for an amount of cash or replaced by other
instruments having a total value that is less than par.
NR This indicates that no rating has been requested, that
there is insufficient information on which to base a rating, or
that S&P does not rate a particular obligation as a matter
of policy.
The ratings from AA to CCC may be
modified by the addition of a plus (+) or minus (-) sign to show
relative standing within the major rating categories.
Short-Term
Issue Credit Ratings
A-1 A
short-term obligation rated A-1 is rated in the
highest category by S&P. The obligors capacity to
meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligors capacity
to meet its financial commitment on these obligations is
extremely strong.
A-2 A
short-term obligation rated A-2 is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rating
categories. However, the obligors capacity to meet its
financial commitment on the obligation is satisfactory.
A-3 A
short-term obligation rated A-3 exhibits adequate
protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the
obligation.
A-2
B A short-term obligation rated B is regarded
as having significant speculative characteristics. Ratings of
B-1, B-2, and B-3 may be
assigned to indicate finer distinctions within the B
category. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligors
inadequate capacity to meet its financial commitment on the
obligation.
B-1 A short-term obligation rated B-1 is
regarded as having significant speculative characteristics, but
the obligor has a relatively stronger capacity to meet its
financial commitments over the short-term compared to other
speculative-grade obligors.
B-2 A short-term obligation rated B-2 is regarded as
having significant speculative characteristics, and the obligor
has an average speculative-grade capacity to meet its financial
commitments over the short-term compared to other
speculative-grade obligors.
B-3 A short-term obligation rated B-3 is regarded as
having significant speculative characteristics, and the obligor
has a relatively weaker capacity to meet its financial
commitments over the short-term compared to other
speculative-grade obligors.
C A short-term obligation rated C is currently
vulnerable to nonpayment and is dependent upon favorable
business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation.
D A short-term obligation rated D is in payment
default. The D rating category is used when payments
on an obligation, including a regulatory capital instrument, are
not made on the date due even if the applicable grace period has
not expired, unless S&P believes that such payments will be
made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are
jeopardized.
Active
Qualifiers (Currently Applied and/or Outstanding)
i This subscript is used for issues in which the credit
factors, terms, or both, that determine the likelihood of
receipt of payment of interest are different from the credit
factors, terms or both that determine the likelihood of receipt
of principal on the obligation. The i subscript
indicates that the rating addresses the interest portion of the
obligation only. The i subscript will always be used
in conjunction with the p subscript, which addresses
likelihood of receipt of principal. For example, a rated
obligation could be assigned ratings of AAAp NRi
indicating that the principal portion is rated AAA
and the interest portion of the obligation is not rated.
L Ratings qualified with L apply only to
amounts invested up to federal deposit insurance limits.
p This subscript is used for issues in which the credit
factors, the terms, or both, that determine the likelihood of
receipt of payment of principal are different from the credit
factors, terms or both that determine the likelihood of receipt
of interest on the obligation. The p subscript
indicates that the rating addresses the principal portion of the
obligation only. The p subscript will always be used
in conjunction with the i subscript, which addresses
likelihood of receipt of interest. For example, a rated
obligation could be assigned ratings of AAAp NRi
indicating that the principal portion is rated AAA
and the interest portion of the obligation is not rated.
pi Ratings with a pi subscript are based on an
analysis of an issuers published financial information, as
well as additional information in the public domain. They do
not, however, reflect in-depth meetings with an issuers
management and therefore may be based on less comprehensive
information than ratings without a pi subscript.
Ratings with a pi subscript are reviewed annually
based on a new years financial statements, but may be
reviewed on an interim basis if a major event occurs that may
affect the issuers credit quality.
prelim Preliminary ratings, with the prelim
qualifier, may be assigned to obligors or obligations, including
financial programs, in the circumstances described below.
Assignment of a
A-3
final rating is conditional on the receipt by S&P of
appropriate documentation. S&P reserves the right not to
issue a final rating. Moreover, if a final rating is issued, it
may differ from the preliminary rating.
|
|
|
|
|
Preliminary ratings may be assigned to obligations, most
commonly structured and project finance issues, pending receipt
of final documentation and legal opinions.
|
|
|
|
Preliminary ratings are assigned to Rule 415 Shelf
Registrations. As specific issues, with defined terms, are
offered from the master registration, a final rating may be
assigned to them in accordance with Standard &
Poors policies.
|
|
|
|
Preliminary ratings may be assigned to obligations that will
likely be issued upon the obligors emergence from
bankruptcy or similar reorganization, based on late-stage
reorganization plans, documentation and discussions with the
obligor. Preliminary ratings may also be assigned to the
obligors. These ratings consider the anticipated general credit
quality of the reorganized or postbankruptcy issuer as well as
attributes of the anticipated obligation(s).
|
|
|
|
Preliminary ratings may be assigned to entities that are being
formed or that are in the process of being independently
established when, in S&Ps opinion, documentation is
close to final. Preliminary ratings may also be assigned to
these entities obligations.
|
|
|
|
Preliminary ratings may be assigned when a previously unrated
entity is undergoing a well-formulated restructuring,
recapitalization, significant financing or other transformative
event, generally at the point that investor or lender
commitments are invited. The preliminary rating may be assigned
to the entity and to its proposed obligation(s). These
preliminary ratings consider the anticipated general credit
quality of the obligor, as well as attributes of the anticipated
obligation(s), assuming successful completion of the
transformative event. Should the transformative event not occur,
S&P would likely withdraw these preliminary ratings.
|
|
|
|
A preliminary recovery rating may be assigned to an obligation
that has a preliminary issue credit rating.
|
t This symbol indicates termination structures that are
designed to honor their contracts to full maturity or, should
certain events occur, to terminate and cash settle all their
contracts before their final maturity date.
uns(...) Unsolicited ratings are those credit ratings assigned
at the initiative of S&P and not at the request of the
issuer or its agents.
Municipal
Short-Term Note Ratings Definitions
A Standard & Poors U.S. Municipal note
rating reflects S&Ps opinion about the liquidity
factors and market access risks unique to the notes. Notes due
in three years or less will likely receive a note rating. Notes
with an original maturity of more than three years will most
likely receive a long-term debt rating. In determining which
type of rating, if any, to assign, S&Ps analysis will
review the following considerations:
|
|
|
|
|
Amortization schedule the larger the final maturity
relative to other maturities, the more likely it will be treated
as a note; and
|
|
|
|
Source of payment the more dependent the issue is on
the market for its refinancing, the more likely it will be
treated as a note.
|
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service
is given a plus (+) designation.
A-4
SP-2 Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes
over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Moodys Investors Service, Inc.
A
brief description of the applicable Moodys Investors
Service, Inc. (Moodys) rating symbols and
their meanings (as published by Moodys) follows:
Long-Term
Obligation Ratings
Moodys long-term ratings are opinions of the relative
credit risk of financial obligations with an original maturity
of one year or more. They address the possibility that a
financial obligation will not be honored as promised. Such
ratings use Moodys Global Scale and reflect both the
likelihood of default and any financial loss suffered in the
event of default.
Aaa Obligations rated Aaa are judged to be of the highest
quality, with minimal credit risk.
Aa Obligations rated Aa are judged to be of high quality and are
subject to very low credit risk.
A Obligations rated A are considered upper-medium grade and
are subject to low credit risk.
Baa Obligations rated Baa are subject to moderate credit risk.
They are considered medium grade and as such may possess certain
speculative characteristics.
Ba Obligations rated Ba are judged to have speculative elements
and are subject to substantial credit risk.
B Obligations rated B are considered speculative and are
subject to high credit risk.
Caa Obligations rated Caa are judged to be of poor standing and
are subject to very high credit risk.
Ca Obligations rated Ca are highly speculative and are likely
in, or very near, default, with some prospect of recovery of
principal and interest.
C Obligations rated C are the lowest rated class of bonds
and are typically in default, with little prospect for recovery
of principal or interest.
Note: Moodys appends numerical modifiers 1, 2, and 3 to
each generic rating classification from Aa through Caa. The
modifier 1 indicates that the obligation ranks in the higher end
of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
Short-Term
Obligation Ratings
Moodys short-term ratings are opinions of the ability of
issuers to honor short-term financial obligations. Ratings may
be assigned to issuers, short-term programs or to individual
short-term debt instruments. Such obligations generally have an
original maturity not exceeding thirteen months, unless
explicitly noted. Moodys employs the following
designations to indicate the relative repayment ability of rated
issuers:
P-1
Issuers
(or supporting institutions) rated Prime-1 have a superior
ability to repay short-term debt obligations.
P-2
Issuers
(or supporting institutions) rated Prime-2 have a strong ability
to repay short-term debt obligations.
P-3
Issuers
(or supporting institutions) rated Prime-3 have an acceptable
ability to repay short-term obligations.
NP Issuers (or supporting institutions) rated Not Prime do not
fall within any of the Prime rating categories.
A-5
US
Municipal Short-Term Obligation Ratings
There are three rating categories for short-term municipal
obligations that are considered investment grade. These ratings
are designated as Municipal Investment Grade (MIG) and are
divided into three levels MIG 1 through MIG 3. In
addition, those short-term obligations that are of speculative
quality are designated SG, or speculative grade. MIG ratings
expire at the maturity of the obligation.
MIG1 This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly
reliable liquidity support, or demonstrated broad-based access
to the market for refinancing.
MIG2 This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding
group.
MIG3 This designation denotes acceptable credit quality.
Liquidity and cash-flow protection may be narrow, and market
access for refinancing is likely to be less well-established.
SG This designation denotes speculative-grade credit quality.
Debt instruments in this category may lack sufficient margins of
protection.
Other
Ratings Symbols
e
Expected Ratings.
To address
market demand for timely information on particular types of
credit ratings, Moodys has licensed to certain third
parties the right to generate Expected Ratings.
Expected Ratings are designated by an e after the
rating code, and are intended to anticipate Moodys
forthcoming rating assignments based on reliable information
from third party sources (such as the issuer or underwriter
associated with the particular securities) or established
Moodys rating practices (i.e., medium term notes are
typically, but not always, assigned the same rating as the
notes program rating). Expected Ratings will exist only
until Moodys confirms the Expected Rating, or issues a
different rating for the relevant instrument. Moodys
encourages market participants to contact Moodys Ratings
Desk or visit www.moodys.com if they have questions regarding
Expected Ratings, or wish Moodys to confirm an Expected
Rating.
(P)
Provisional Ratings.
As a
service to the market and at the request of an issuer,
Moodys will often assign a provisional rating when the
assignment of a final rating is subject to the fulfillment of
contingencies, but it is highly likely that the rating will
become definitive after all documents are received or an
obligation is issued into the market. A provisional rating is
denoted by placing a (P) in front of the rating. Such
ratings are typically assigned to shelf registrations under SEC
rule 415 or transaction-based structures that require
investor education. When a transaction uses a well-established
structure and the transactions structure and terms are not
expected to change prior to sale in a manner that would affect
the rating, a definitive rating may be assigned directly.
#
Refundeds.
Issues that are
secured by escrowed funds held in trust, reinvested in direct,
non-callable US government obligations or non-callable
obligations unconditionally guaranteed by the US Government or
Resolution Funding Corporation are identified with a # (hatch
mark) symbol, e.g., #Aaa.
WR
Withdrawn.
When Moodys no
longer rates an obligation on which it previously maintained a
rating, the symbol WR is employed. Please see Moodys
Guidelines for the Withdrawal of Ratings, available on
www.moodys.com.
NR
Not Rated.
NR is assigned to an
unrated issuer, obligation
and/or
program.
NAV
Not Available.
An issue that
Moodys has not yet rated is denoted by the NAV symbol.
TWR
Terminated Without Rating.
The
symbol TWR applies primarily to issues that mature or are
redeemed without having been rated.
A-6
Fitch IBCA, Inc.
A brief description
of the applicable Fitch IBCA, Inc. (Fitch) ratings
symbols and meanings (as published by Fitch) follows:
Rated entities in a number of sectors, including financial and
non-financial corporations, sovereigns and insurance companies,
are generally assigned Issuer Default Ratings (IDRs). IDRs opine
on an entitys relative vulnerability to default on
financial obligations. The threshold default risk
addressed by the IDR is generally that of the financial
obligations whose non-payment would best reflect the uncured
failure of that entity. As such, IDRs also address relative
vulnerability to bankruptcy, administrative receivership or
similar concepts, although the agency recognizes that issuers
may also make pre-emptive and therefore voluntary use of such
mechanisms.
In aggregate, IDRs provide an ordinal ranking of issuers based
on the agencys view of their relative vulnerability to
default, rather than a prediction of a specific percentage
likelihood of default. For historical information on the default
experience of Fitch-rated issuers, please consult the transition
and default performance studies available from the Fitch Ratings
website.
Long-Term
Credit Ratings Scales
AAA
Highest Credit
Quality.
AAA ratings denote the
lowest expectation of default risk. They are assigned only in
cases of exceptionally strong capacity for payment of financial
commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA
Very High Credit
Quality.
AA ratings denote
expectations of very low default risk. They indicate very strong
capacity for payment of financial commitments. This capacity is
not significantly vulnerable to foreseeable events.
A
High Credit Quality.
A ratings denote expectations of low
default risk. The capacity for payment of financial commitments
is considered strong. This capacity may, nevertheless, be more
vulnerable to adverse business or economic conditions than is
the case for higher ratings.
BBB
Good Credit
Quality.
BBB ratings indicate
that expectations of default risk are currently low. The
capacity for payment of financial commitments is considered
adequate but adverse business or economic conditions are more
likely to impair this capacity.
BB
Speculative.
BB
ratings indicate an elevated vulnerability to default risk,
particularly in the event of adverse changes in business or
economic conditions over time; however, business or financial
flexibility exists which supports the servicing of financial
commitments.
B
Highly
Speculative.
B ratings indicate
that material default risk is present, but a limited margin of
safety remains. Financial commitments are currently being met;
however, capacity for continued payment is vulnerable to
deterioration in the business and economic environment.
CCC
Substantial Credit
Risk.
Default is a real possibility.
CC
Very High Levels of Credit
Risk.
Default of some kind appears probable.
C
Exceptionally High Levels of Credit
Risk.
Default is imminent or inevitable, or
the issuer is in standstill. Conditions that are indicative of a
C category rating for an issuer include:
a. The issuer has entered into a grace or cure period
following non-payment of a material financial obligation;
b. The issuer has entered into a temporary negotiated
waiver or standstill agreement following a payment default on a
material financial obligation; or
c. Fitch Ratings otherwise believes a condition of
RD or D to be imminent or inevitable,
including through the formal announcement of a coercive debt
exchange.
RD
Restricted Default.
RD
ratings indicate an issuer that in Fitch Ratings opinion
has experienced an uncured payment default on a bond, loan or
other material financial obligation but
A-7
which has not entered into bankruptcy filings, administration,
receivership, liquidation or other formal
winding-up
procedure, and which has not otherwise ceased business. This
would include:
a. The selective payment default on a specific class or
currency of debt;
b. The uncured expiry of any applicable grace period, cure
period or default forbearance period following a payment default
on a bank loan, capital markets security or other material
financial obligation;
c. The extension of multiple waivers or forbearance periods
upon a payment default on one or more material financial
obligations, either in series or in parallel; or
d. Execution of a coercive debt exchange on one or more
material financial obligations.
D
Default.
D ratings
indicate an issuer that in Fitch Ratings opinion has
entered into bankruptcy filings, administration, receivership,
liquidation or other formal
winding-up
procedure, or which has otherwise ceased business.
Default ratings are not assigned prospectively to entities or
their obligations; within this context, non-payment on an
instrument that contains a deferral feature or grace period will
generally not be considered a default until after the expiration
of the deferral or grace period, unless a default is otherwise
driven by bankruptcy or other similar circumstance, or by a
coercive debt exchange.
Imminent default typically refers to the occasion
where a payment default has been intimated by the issuer, and is
all but inevitable. This may, for example, be where an issuer
has missed a scheduled payment, but (as is typical) has a grace
period during which it may cure the payment default. Another
alternative would be where an issuer has formally announced a
coercive debt exchange, but the date of the exchange still lies
several days or weeks in the immediate future.
In all cases, the assignment of a default rating reflects the
agencys opinion as to the most appropriate rating category
consistent with the rest of its universe of ratings, and may
differ from the definition of default under the terms of an
issuers financial obligations or local commercial practice.
Note: The modifiers + or - may be
appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the
AAA Long-Term IDR category, or to Long-Term IDR
categories below B.
Specific limitations relevant to the structured, project and
public finance obligation rating scale include:
|
|
|
|
|
The ratings do not predict a specific percentage of default
likelihood over any given time period.
|
|
|
|
The ratings do not opine on the market value of any
issuers securities or stock, or the likelihood that this
value may change.
|
|
|
|
The ratings do not opine on the liquidity of the issuers
securities or stock.
|
|
|
|
The ratings do not opine on the possible loss severity on an
obligation should an obligation default.
|
|
|
|
The ratings do not opine on any quality related to a
transactions profile other than the agencys opinion
on the relative vulnerability to default of each rated tranche
or security.
|
Ratings assigned by Fitch Ratings articulate an opinion on
discrete and specific areas of risk. The above list is not
exhaustive, and is provided for the readers convenience.
A-8
Short-Term
Ratings Assigned to Obligations in Corporate, Public and
Structured Finance
A short-term issuer or obligation rating is based in all cases
on the short-term vulnerability to default of the rated entity
or security stream and relates to the capacity to meet financial
obligations in accordance with the documentation governing the
relevant obligation. Short-Term Ratings are assigned to
obligations whose initial maturity is viewed as short
term based on market convention. Typically, this means up
to 13 months for corporate, sovereign, and structured
obligations, and up to 36 months for obligations in
U.S. Public finance markets.
F1
Highest Short-Term Credit
Quality.
Indicates the strongest intrinsic
capacity for timely payment of financial commitments; may have
an added + to denote any exceptionally strong credit
feature.
F2
Good Short-Term Credit
Quality.
Good intrinsic capacity for timely
payment of financial commitments.
F3
Fair Short-Term Credit
Quality.
The intrinsic capacity for timely
payment of financial commitments is adequate.
B
Speculative Short-Term Credit
Quality.
Minimal capacity for timely payment
of financial commitments, plus heightened vulnerability to near
term adverse changes in financial and economic conditions.
C
High Short-Term Default
Risk.
Default is a real possibility.
RD
Restricted Default.
Indicates
an entity that has defaulted on one or more of its financial
commitments, although it continues to meet other financial
obligations. Applicable to entity ratings only.
D
Default.
Indicates a broad-based
default event for an entity, or the default of a specific
short-term obligation.
Specific limitations relevant to the Short-Term Ratings scale
include:
|
|
|
|
|
The ratings do not predict a specific percentage of default
likelihood over any given time period.
|
|
|
|
The ratings do not opine on the market value of any
issuers securities or stock, or the likelihood that this
value may change.
|
|
|
|
The ratings do not opine on the liquidity of the issuers
securities or stock.
|
|
|
|
The ratings do not opine on the possible loss severity on an
obligation should an obligation default.
|
|
|
|
The ratings do not opine on any quality related to an issuer or
transactions profile other than the agencys opinion
on the relative vulnerability to default of the rated issuer or
obligation.
|
|
|
|
Ratings assigned by Fitch Ratings articulate an opinion on
discrete and specific areas of risk. The above list is not
exhaustive, and is provided for the readers convenience.
|
Ratings assigned by Fitch Ratings articulate an opinion on
discrete and specific areas of risk. The above list is not
exhaustive, and is provided for the readers convenience.
A-9
I.
Introduction
The Trustees/Directors (Directors) of the
BlackRock-Advised Funds (the Funds) have the
responsibility for voting proxies relating to portfolio
securities of the Funds, and have determined that it is in the
best interests of the Funds and their shareholders to delegate
that responsibility to BlackRock Advisors, LLC and its
affiliated U.S. Registered investment advisers
(BlackRock), the investment adviser to the Funds, as
part of BlackRocks authority to manage, acquire and
dispose of account assets. The Directors hereby direct BlackRock
to vote such proxies in accordance with this Policy, and any
proxy voting guidelines that the Adviser determines are
appropriate and in the best interests of the Funds
shareholders and which are consistent with the principles
outlined in this Policy. The Directors have authorized BlackRock
to utilize an unaffiliated third-party as its agent to vote
portfolio proxies in accordance with this Policy and to maintain
records of such portfolio proxy voting.
Rule 206(4)-6
under the Investment Advisers Act of 1940 requires, among other
things, that an investment adviser that exercises voting
authority over clients proxy voting adopt policies and
procedures reasonably designed to ensure that the adviser votes
proxies in the best interests of clients, discloses to its
clients information about those policies and procedures and also
discloses to clients how they may obtain information on how the
adviser has voted their proxies.
BlackRock has adopted separate but substantially similar
guidelines and procedures that are consistent with the
principles of this Policy. BlackRocks Corporate Governance
Committee (the Committee), addresses proxy voting
issues on behalf of BlackRock and its clients, including the
Funds. The Committee is comprised of senior members of
BlackRocks Portfolio Management and Administration Groups
and is advised by BlackRocks Legal and Compliance
Department.
BlackRock votes (or refrains from voting) proxies for each Fund
in a manner that BlackRock, in the exercise of its independent
business judgment, concludes are in the best economic interests
of such Fund. In some cases, BlackRock may determine that it is
in the best economic interests of a Fund to refrain from
exercising the Funds proxy voting rights (such as, for
example, proxies on certain
non-U.S. Securities
that might impose costly or time-consuming in-person voting
requirements). With regard to the relationship between
securities lending and proxy voting, BlackRocks approach
is also driven by our clients economic interests. The
evaluation of the economic desirability of recalling loans
involves balancing the revenue producing value of loans against
the likely economic value of casting votes. Based on our
evaluation of this relationship, BlackRock believes that the
likely economic value of casting a vote generally is less than
the securities lending income, either because the votes will not
have significant economic consequences or because the outcome of
the vote would not be affected by BlackRock recalling loaned
securities in order to ensure they are voted. Periodically,
BlackRock analyzes the process and benefits of voting proxies
for securities on loan, and will consider whether any
modification of its proxy voting policies or procedures are
necessary in light of any regulatory changes.
BlackRock will normally vote on specific proxy issues in
accordance with BlackRocks proxy voting guidelines.
BlackRocks proxy voting guidelines provide detailed
guidance as to how to vote proxies on certain important or
commonly raised issues. BlackRock may, in the exercise of its
business judgment, conclude that the proxy voting guidelines do
not cover the specific matter upon which a proxy vote is
requested, or that an exception to the proxy voting guidelines
would be in the best economic interests of a Fund. BlackRock
votes (or refrains from voting) proxies without regard to the
relationship of the issuer of the proxy (or any shareholder of
such issuer) to the Fund, the Funds affiliates (if any),
BlackRock or BlackRocks affiliates. When voting proxies,
BlackRock attempts to encourage companies to follow practices
that enhance shareholder value and increase transparency and
allow the market to place a proper value on their assets.
B-2
II. Proxy
Voting Policies
The Funds generally support the boards nominees in the
election of directors and generally supports proposals that
strengthen the independence of boards of directors. As a general
matter, the Funds believe that a companys board of
directors (rather than shareholders) is most likely to have
access to important, nonpublic information regarding a
companys business and prospects, and is therefore
best-positioned to set corporate policy and oversee management.
The Funds therefore believe that the foundation of good
corporate governance is the election of responsible, qualified,
independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management
of the corporation in a manner that will seek to maximize
shareholder value over time. In individual cases, consideration
may be given to a director nominees history of
representing shareholder interests as a director of the company
issuing the proxy or other companies, or other factors to the
extent deemed relevant by the Committee.
These proposals concern those issues submitted to shareholders
related to the selection of auditors. As a general matter, the
Funds believe that corporate auditors have a responsibility to
represent the interests of shareholders and provide an
independent view on the propriety of financial reporting
decisions of corporate management. While the Funds anticipate
that BlackRock will generally defer to a corporations
choice of auditor, in individual cases, consideration may be
given to an auditors history of representing shareholder
interests as auditor of the company issuing the proxy or other
companies, to the extent deemed relevant.
|
|
C.
|
Compensation
and Benefits
|
These proposals concern those issues submitted to shareholders
related to management compensation and employee benefits. As a
general matter, the Funds favor disclosure of a companys
compensation and benefit policies and oppose excessive
compensation, but believe that compensation matters are normally
best determined by a corporations board of directors,
rather than shareholders. Proposals to micro-manage
a companys compensation practices or to set arbitrary
restrictions on compensation or benefits should therefore
generally not be supported.
These proposals relate to various requests, principally from
management, for approval of amendments that would alter the
capital structure of a company, such as an increase in
authorized shares. As a general matter, the Funds expect that
BlackRock will support requests that it believes enhance the
rights of common shareholders and oppose requests that appear to
be unreasonably dilutive.
|
|
E.
|
Corporate
Charter and By-Laws
|
These proposals relate to various requests for approval of
amendments to a corporations charter or by-laws. As a
general matter, the Funds generally vote against anti-takeover
proposals and proposals that would create additional barriers or
costs to corporate transactions that are likely to deliver a
premium to shareholders.
|
|
F.
|
Environmental
and Social Issues
|
These are shareholder proposals addressing either corporate
social and environmental policies or requesting specific
reporting on these issues. The Funds generally do not support
proposals on social issues that lack a demonstrable economic
benefit to the issuer and the Fund investing in such issuer.
BlackRock seeks to make proxy voting decisions in the manner
most likely to protect and promote the long-term economic value
of the securities held in client accounts. We intend to support
economically
B-3
advantageous corporate practices while leaving direct oversight
of company management and strategy to boards of directors. We
seek to avoid micromanagement of companies, as we believe that a
companys board of directors is best positioned to
represent shareholders and oversee management on shareholders
behalf. Issues of corporate social and environmental
responsibility are evaluated on a
case-by-case
basis within this framework.
III.
Conflicts Management
BlackRock maintains policies and procedures that are designed to
prevent any relationship between the issuer of the proxy (or any
shareholder of the issuer) and a Fund, a Funds affiliates
(if any), BlackRock or BlackRocks affiliates, from having
undue influence on BlackRocks proxy voting activity. In
certain instances, BlackRock may determine to engage an
independent fiduciary to vote proxies as a further safeguard
against potential conflicts of interest or as otherwise required
by applicable law. The independent fiduciary may either vote
such proxies or provide BlackRock with instructions as to how to
vote such proxies. In the latter case, BlackRock votes the proxy
in accordance with the independent fiduciarys
determination.
IV.
Reports To the Board
BlackRock will report to the Directors on proxy votes it has
made on behalf of the Funds at least annually.
B-4
APPENDIX C
General Characteristics and Risks
of Strategic Transactions
In order to manage the risk of its securities portfolio, or to
enhance income or gain as described in the Prospectus, the Trust
may engage in Strategic Transactions. The Trust may engage in
such activities in the Advisors or
Sub-Advisors
discretion, and may not necessarily be engaging in such
activities when movements in interest rates that could affect
the value of the assets of the Trust occur. The Trusts
ability to pursue certain of these strategies may be limited by
applicable regulations of the CFTC. Certain Strategic
Transactions may give rise to taxable income.
Put
and Call Options on Securities and Indices
The Trust may purchase and sell put and call options on
securities and indices. A put option gives the purchaser of the
option the right to sell and the writer the obligation to buy
the underlying security at the exercise price during the option
period. The Trust may also purchase and sell options on bond
indices (index options). Index options are similar
to options on securities except that, rather than taking or
making delivery of securities underlying the option at a
specified price upon exercise, an index option gives the holder
the right to receive cash upon exercise of the option if the
level of the bond index upon which the option is based is
greater, in the case of a call, or less, in the case of a put,
than the exercise price of the option. The purchase of a put
option on a debt security could protect the Trusts
holdings in a security or a number of securities against a
substantial decline in the market value. A call option gives the
purchaser of the option the right to buy and the seller the
obligation to sell the underlying security or index at the
exercise price during the option period or for a specified
period prior to a fixed date. The purchase of a call option on a
security could protect the Trust against an increase in the
price of a security that it intended to purchase in the future.
In the case of either put or call options that it has purchased,
if the option expires without being sold or exercised, the Trust
will experience a loss in the amount of the option premium plus
any related commissions. When the Trust sells put and call
options, it receives a premium as the seller of the option. The
premium that the Trust receives for selling the option will
serve as a partial hedge, in the amount of the option premium,
against changes in the value of the securities in its portfolio.
During the term of the option, however, a covered call seller
has, in return for the premium on the option, given up the
opportunity for capital appreciation above the exercise price of
the option if the value of the underlying security increases,
but has retained the risk of loss should the price of the
underlying security decline. Conversely, a secured put seller
retains the risk of loss should the market value of the
underlying security decline be low the exercise price of the
option, less the premium received on the sale of the option. The
Trust is authorized to purchase and sell exchange-listed options
and
over-the-counter
options (OTC Options) which are privately negotiated
with the counterparty. Listed options are issued by the Options
Clearing Corporation (OCC) which guarantees the
performance of the obligations of the parties to such options.
The Trusts ability to close out its position as a
purchaser or seller of an exchange-listed put or call option is
dependent upon the existence of a liquid secondary market on
option exchanges. Among the possible reasons for the absence of
a liquid secondary market on an exchange are:
(i) insufficient trading interest in certain options;
(ii) restrictions on transactions imposed by an exchange;
(iii) trading halts, suspensions or other restrictions
imposed with respect to particular classes or series of options
or underlying securities; (iv) interruption of the normal
operations on an exchange; (v) inadequacy of the facilities
of an exchange or OCC to handle current trading volume; or
(vi) a decision by one or more exchanges to discontinue the
trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although
outstanding options on that exchange that had been listed by the
OCC as a result of trades on that exchange would generally
continue to be exercisable in accordance with their terms. OTC
Options are purchased from or sold to dealers, financial
institutions or other counterparties which have entered into
direct agreements with the Trust. With OTC Options, such
variables as expiration date, exercise price and premium will be
agreed upon between the Trust and the counterparty, without the
C-1
intermediation of a third party such as the OCC. If the
counterparty fails to make or take delivery of the securities
underlying an option it has written, or otherwise settle the
transaction in accordance with the terms of that option as
written, the Trust would lose the premium paid for the option as
well as any anticipated benefit of the transaction. As the Trust
must rely on the credit quality of the counterparty rather than
the guarantee of the OCC, it will only enter into OTC Options
with counterparties with the highest long-term credit ratings,
and with primary United States government securities dealers
recognized by the Federal Reserve Bank of New York.
The hours of trading for options on debt securities may not
conform to the hours during which the underlying securities are
traded. To the extent that the option markets close before the
markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that
cannot be reflected in the option markets.
Futures
Contracts and Related Options
Characteristics.
The Trust may sell
financial futures contracts or purchase put and call options on
such futures as a hedge against anticipated interest rate
changes or other market movements. The sale of a futures
contract creates an obligation by the Trust, as seller, to
deliver the specific type of financial instrument called for in
the contract at a specified future time for a specified price.
Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the
purchaser the right in return for the premium paid to assume a
position in a futures contract (a long position if the option is
a call and a short position if the option is a put).
Margin Requirements.
At the time a
futures contract is purchased or sold, the Trust must allocate
cash or securities as a deposit payment (initial
margin). It is expected that the initial margin that the
Trust will pay may range from approximately 1% to approximately
5% of the value of the securities or commodities underlying the
contract. In certain circumstances, however, such as periods of
high volatility, the Trust may be required by an exchange to
increase the level of its initial margin payment. Additionally,
initial margin requirements may be increased generally in the
future by regulatory action. An outstanding futures contract is
valued daily and the payment in case of variation
margin may be required, a process known as marking
to the market. Transactions in listed options and futures
are usually settled by entering into an offsetting transaction,
and are subject to the risk that the position may not be able to
be closed if no offsetting transaction can be arranged.
Limitations on Use of Futures and Options on
Futures.
The Trusts use of futures and
options on futures will in all cases be consistent with
applicable regulatory requirements and in particular the rules
and regulations of the CFTC. Under such regulations the Trust
currently may enter into such transactions without limit for
bona fide hedging purposes, including risk management and
duration management and other portfolio strategies. The Trust
may also engage in transactions in futures contracts or related
options for non-hedging purposes to enhance income or gain
provided that the Trust will not enter into a futures contract
or related option (except for closing transactions) for purposes
other than bona fide hedging, or risk management including
duration management if, immediately thereafter, the sum of the
amount of its initial deposits and premiums on open contracts
and options would exceed 5% of the Trusts liquidation
value, i.e., net assets (taken at current value); provided,
however, that in the case of an option that is
in-the-money
at the time of the purchase, the
in-the-money
amount may be excluded in calculating the 5% limitation. The
above policies are non-fundamental and may be changed by the
Trusts board of trustees at any time. Also, when required,
an account of cash equivalents designated on the books and
records will be maintained and marked to market on a daily basis
in an amount equal to the market value of the contract. The
Trust reserves the right to comply with such different standard
as may be established from time to time by CFTC rules and
regulations with respect to the purchase or sale of futures
contracts or options thereon.
Segregation and Cover
Requirements.
Futures contracts, interest
rate swaps, caps, floors and collars, short sales, reverse
repurchase agreements and dollar rolls, and listed or OTC
options on securities, indices and futures contracts sold by the
Trust are generally subject to earmarking and
C-2
coverage requirements of either the CFTC or the SEC, with the
result that, if the Trust does not hold the security or futures
contract underlying the instrument, the Trust will be required
to designate on its books and records an ongoing basis, cash,
U.S. Government securities, or other liquid high grade debt
obligations in an amount at least equal to the Trusts
obligations with respect to such instruments. Such amounts
fluctuate as the obligations increase or decrease. The
earmarking requirement can result in the Trust maintaining
securities positions it would otherwise liquidate, segregating
assets at a time when it might be disadvantageous to do so or
otherwise restrict portfolio management.
Strategic Transactions Present Certain
Risks.
With respect to hedging and risk
management, the variable degree of correlation between price
movements of hedging instruments and price movements in the
position being hedged create the possibility that losses on the
hedge may be greater than gains in the value of the Trusts
position. The same is true for such instruments entered into for
income or gain. In addition, certain instruments and markets may
not be liquid in all circumstances. As a result, in volatile
markets, the Trust may not be able to close out a transaction
without incurring losses substantially greater than the initial
deposit. Although the contemplated use of these instruments
predominantly for hedging should tend to minimize the risk of
loss due to a decline in the value of the position, at the same
time they tend to limit any potential gain which might result
from an increase in the value of such position. The ability of
the Trust to successfully utilize Strategic Transactions will
depend on the Advisors and the
Sub-Advisors
ability to predict pertinent market movements and sufficient
correlations, which cannot be assured. Finally, the daily
deposit requirements in futures contracts that the Trust has
sold create an on going greater potential financial risk than do
options transactions, where the exposure is limited to the cost
of the initial premium. Losses due to the use of Strategic
Transactions will reduce net asset value.
Regulatory Considerations.
The Trust
has claimed an exclusion from the term commodity pool
operator under the Commodity Exchange Act and, therefore,
is not subject to registration or regulation as a commodity pool
operator under the Commodity Exchange Act.
C-3
PART C
Other
Information
|
|
Item 25.
|
Financial
Statements And Exhibits
|
(1) Financial
Statements
Part A None
Part B Statement of Assets and Liabilities(3)
(2) Exhibits
The agreements included or incorporated by reference as exhibits
to this registration statement contain representations and
warranties by each of the parties to the applicable agreement.
These representations and warranties were made solely for the
benefit of the other parties to the applicable agreement and
(i) were not intended to be treated as categorical
statements of fact, but rather as a way of allocating the risk
to one of the parties if those statements prove to be
inaccurate; (ii) may have been qualified in such agreement
by disclosures that were made to the other party in connection
with the negotiation of the applicable agreement; (iii) may
apply contract standards of materiality that are
different from materiality under the applicable
securities laws; and (iv) were made only as of the date of
the applicable agreement or such other date or dates as may be
specified in the agreement.
The Trust acknowledges that, notwithstanding the inclusion of
the foregoing cautionary statements, it is responsible for
considering whether additional specific disclosures of material
information regarding material contractual provisions are
required to make the statements in this registration statement
not misleading.
(a) Amended and Restated Agreement and Declaration of
Trust(3)
(b) By-Laws(1)
(c) Inapplicable
(d) Form of Specimen Certificate(2)
(e) Dividend Reinvestment Plan(2)
(f) Inapplicable
|
|
|
|
(g) (1)
|
Investment Management Agreement(2)
|
|
|
|
|
(g) (2)
|
Sub-Investment
Advisory Agreement(2)
|
|
|
|
|
(h) (1)
|
Form of Underwriting Agreement(2)
|
|
|
|
|
(h) (2)
|
Form of Structuring Fee Agreement with Wells Fargo Securities,
LLC(2)
|
|
|
|
|
(h) (3)
|
Form of Structuring Fee Agreement with Merrill Lynch, Pierce,
Fenner & Smith Incorporated(2)
|
|
|
|
|
(h) (4)
|
Form of Structuring Fee Agreement with Citigroup Global Markets
Inc.(2)
|
|
|
|
|
(h) (5)
|
Form of Structuring Fee Agreement with Morgan
Stanley & Co. Incorporated(2)
|
|
|
|
|
(h) (6)
|
Form of Structuring Fee Agreement with UBS Securities LLC(2)
|
|
|
|
|
(h) (7)
|
Form of Structuring Fee Agreement with Ameriprise Financial
Services, Inc.(2)
|
|
|
|
|
(h) (8)
|
Form of Structuring Fee Agreement with Raymond James &
Associates, Inc.(2)
|
|
|
|
|
(i)
|
Form of the BlackRock Closed-End Funds Amended and Restated
Deferred Compensation Plan(2)
|
C-1
|
|
|
|
(j)
|
Custodian Agreement(2)
|
|
|
|
|
(k)
|
Transfer Agency Agreement(2)
|
|
|
|
|
(l)
|
Opinion and Consent of Counsel to the Trust(2)
|
|
|
|
|
(n)
|
Consent of Independent Public Accountants(3)
|
|
|
|
|
(p)
|
Initial Subscription Agreement(2)
|
|
|
|
|
(r) (1)
|
Code of Ethics of Trust(2)
|
|
|
|
|
(r) (2)
|
Code of Ethics of Advisor and
Sub-Advisor(2)
|
|
|
|
|
(s)
|
(1) Powers of Attorney(3)
|
|
|
|
|
(2)
|
Certified Resolution of the Board of Trustees of the Trust
Regarding Powers of Attorney(3)
|
|
|
|
(1)
|
|
Previously filed as an exhibit to the Trusts Registration
Statement on
Form N-2,
filed with the Securities and Exchange Commission on
June 10, 2010.
|
|
(2)
|
|
To be filed by amendment.
|
|
|
Item 26.
|
Marketing
Arrangements
|
Reference is made to the Form of Underwriting Agreement for the
Registrants shares of beneficial interest, Form of
Structuring Fee Agreement with Wells Fargo Securities, LLC, Form
of Structuring Fee Agreement with Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Form of Structuring Fee
Agreement with Citigroup Global Markets Inc., Form of
Structuring Fee Agreement with Morgan Stanley & Co.
Incorporated, Form of Structuring Fee Agreement with UBS
Securities LLC, Form of Structuring Fee Agreement with
Ameriprise Financial Services, Inc. and Form of Structuring Fee
Agreement with Raymond James & Associates, Inc., to be
filed by amendment to this registration statement.
|
|
Item 27.
|
Other
Expenses Of Issuance And Distribution
|
The following table sets forth the estimated expenses to be
incurred in connection with the offering described in this
registration statement:
|
|
|
|
|
Registration fee
|
|
$
|
|
|
NYSE listing fee
|
|
$
|
|
|
Printing (other than certificates)
|
|
$
|
|
|
Engraving and printing certificates
|
|
$
|
|
|
Accounting fees and expenses
|
|
$
|
|
|
Legal fees and expenses
|
|
$
|
|
|
FINRA fee
|
|
$
|
|
|
Miscellaneous
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
|
Item 28.
|
Persons
Controlled By Or Under Common Control With The
Registrant
|
None.
C-2
|
|
Item 29.
|
Number Of
Holders Of Shares
|
As of July 20, 2010
|
|
|
Title Of Class
|
|
Number of Record Holders
|
|
Shares of Beneficial Interest
|
|
1
|
Article V of the Registrants Agreement and
Declaration of Trust provides as follows:
5.1
No Personal Liability of Shareholders, Trustees,
etc.
No Shareholder of the Trust shall be
subject in such capacity to any personal liability whatsoever to
any Person in connection with Trust Property or the acts,
obligations or affairs of the Trust. Shareholders shall have the
same limitation of personal liability as is extended to
stockholders of a private corporation for profit incorporated
under the Delaware General Corporation Law. No Trustee or
officer of the Trust shall be subject in such capacity to any
personal liability whatsoever to any Person, save only liability
to the Trust or its Shareholders arising from bad faith, willful
misfeasance, gross negligence or reckless disregard for his duty
to such Person; and, subject to the foregoing exception, all
such Persons shall look solely to the Trust Property for
satisfaction of claims of any nature arising in connection with
the affairs of the Trust. If any Shareholder, Trustee or
officer, as such, of the Trust, is made a party to any suit or
proceeding to enforce any such liability, subject to the
foregoing exception, he shall not, on account thereof, be held
to any personal liability. Any repeal or modification of this
Section 5.1 shall not adversely affect any right or
protection of a Trustee or officer of the Trust existing at the
time of such repeal or modification with respect to acts or
omissions occurring prior to such repeal or modification.
5.2
Mandatory Indemnification.
(a) The Trust hereby agrees to
indemnify each person who at any time serves as a Trustee or
officer of the Trust (each such person being an
indemnitee) against any liabilities and expenses,
including amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and reasonable counsel
fees reasonably incurred by such indemnitee in connection with
the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or
administrative or investigative body in which he may be or may
have been involved as a party or otherwise or with which he may
be or may have been threatened, while acting in any capacity set
forth in this Article V by reason of his having acted in
any such capacity, except with respect to any matter as to which
he shall not have acted in good faith in the reasonable belief
that his action was in the best interest of the Trust or, in the
case of any criminal proceeding, as to which he shall have had
reasonable cause to believe that the conduct was unlawful,
provided, however, that no indemnitee shall be indemnified
hereunder against any liability to any person or any expense of
such indemnitee arising by reason of (i) willful
misfeasance, (ii) bad faith, (iii) gross negligence,
or (iv) reckless disregard of the duties involved in the
conduct of his position (the conduct referred to in such
clauses (i) through (iv) being sometimes referred to
herein as disabling conduct). Notwithstanding the
foregoing, with respect to any action, suit or other proceeding
voluntarily prosecuted by any indemnitee as plaintiff,
indemnification shall be mandatory only if the prosecution of
such action, suit or other proceeding by such indemnitee
(1) was authorized by a majority of the Trustees or
(2) was instituted by the indemnitee to enforce his or her
rights to indemnification hereunder in a case in which the
indemnitee is found to be entitled to such indemnification. The
rights to indemnification set forth in this Declaration shall
continue as to a person who has ceased to be a Trustee or
officer of the Trust and shall inure to the benefit of his or
her heirs, executors and personal and legal representatives. No
amendment or restatement of this Declaration or repeal of any of
its provisions shall limit or eliminate any of the benefits
provided to any person who at any time is or was a Trustee or
officer of the Trust or otherwise entitled to indemnification
hereunder in respect of any act or omission that occurred prior
to such amendment, restatement or repeal.
C-3
(b) Notwithstanding the foregoing, no indemnification shall
be made hereunder unless there has been a determination
(i) by a final decision on the merits by a court or other
body of competent jurisdiction before whom the issue of
entitlement to indemnification hereunder was brought that such
indemnitee is entitled to indemnification hereunder or,
(ii) in the absence of such a decision, by (1) a
majority vote of a quorum of those Trustees who are neither
interested persons of the Trust (as defined in
Section 2(a)(19) of the 1940 Act) nor parties to the
proceeding (Disinterested Non-Party Trustees), that
the indemnitee is entitled to indemnification hereunder, or
(2) if such quorum is not obtainable or even if obtainable,
if such majority so directs, independent legal counsel in a
written opinion concludes that the indemnitee should be entitled
to indemnification hereunder. All determinations to make advance
payments in connection with the expense of defending any
proceeding shall be authorized and made in accordance with the
immediately succeeding paragraph (c) below.
(c) The Trust shall make advance payments in connection
with the expenses of defending any action with respect to which
indemnification might be sought hereunder if the Trust receives
a written affirmation by the indemnitee of the indemnitees
good faith belief that the standards of conduct necessary for
indemnification have been met and a written undertaking to
reimburse the Trust unless it is subsequently determined that
the indemnitee is entitled to such indemnification and if a
majority of the Trustees determine that the applicable standards
of conduct necessary for indemnification appear to have been
met. In addition, at least one of the following conditions must
be met: (i) the indemnitee shall provide adequate security
for his undertaking, (ii) the Trust shall be insured
against losses arising by reason of any lawful advances, or
(iii) a majority of a quorum of the Disinterested Non-Party
Trustees, or if a majority vote of such quorum so direct,
independent legal counsel in a written opinion, shall conclude,
based on a review of readily available facts (as opposed to a
full trial-type inquiry), that there is substantial reason to
believe that the indemnitee ultimately will be found entitled to
indemnification.
(d) The rights accruing to any indemnitee under these
provisions shall not exclude any other right which any person
may have or hereafter acquire under this Declaration, the
By-Laws of the Trust, any statute, agreement, vote of
stockholders or Trustees who are disinterested
persons (as defined in Section 2(a)(19) of the 1940
Act) or any other right to which he or she may be lawfully
entitled.
(e) Subject to any limitations provided by the 1940 Act and
this Declaration, the Trust shall have the power and authority
to indemnify and provide for the advance payment of expenses to
employees, agents and other Persons providing services to the
Trust or serving in any capacity at the request of the Trust to
the full extent corporations organized under the Delaware
General Corporation Law may indemnify or provide for the advance
payment of expenses for such Persons, provided that such
indemnification has been approved by a majority of the Trustees.
5.3
No Bond Required of Trustees.
No Trustee shall, as such, be obligated to
give any bond or other security for the performance of any of
his duties hereunder.
5.4
No Duty of Investigation; Notice in
Trust Instruments, etc.
No purchaser,
lender, transfer agent or other person dealing with the Trustees
or with any officer, employee or agent of the Trust shall be
bound to make any inquiry concerning the validity of any
transaction purporting to be made by the Trustees or by said
officer, employee or agent or be liable for the application of
money or property paid, loaned, or delivered to or on the order
of the Trustees or of said officer, employee or agent. Every
obligation, contract, undertaking, instrument, certificate,
Share, other security of the Trust, and every other act or thing
whatsoever executed in connection with the Trust shall be
conclusively taken to have been executed or done by the
executors thereof only in their capacity as Trustees under this
Declaration or in their capacity as officers, employees or
agents of the Trust. The Trustees may maintain insurance for the
protection of the Trust Property, the Shareholders,
Trustees, officers, employees and agents in such amount as the
Trustees shall deem
C-4
adequate to cover possible tort liability, and such other
insurance as the Trustees in their sole judgment shall deem
advisable or is required by the 1940 Act.
5.5
Reliance on Experts, etc.
Each
Trustee and officer or employee of the Trust shall, in the
performance of its duties, be fully and completely justified and
protected with regard to any act or any failure to act resulting
from reliance in good faith upon the books of account or other
records of the Trust, upon an opinion of counsel, or upon
reports made to the Trust by any of the Trusts officers or
employees or by any advisor, administrator, manager,
distributor, selected dealer, accountant, appraiser or other
expert or consultant selected with reasonable care by the
Trustees, officers or employees of the Trust, regardless of
whether such counsel or expert may also be a Trustee.
Reference is made to Section 6 of the underwriting
agreement attached as Exhibit (h), which is incorporated herein
by reference.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be terminated to
Trustees, officers and controlling persons of the Trust,
pursuant to the foregoing provisions or otherwise, the Trust has
been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such Trustee,
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
|
|
Item 31.
|
Business
And Other Connections Of Investment Advisor
|
Not Applicable
|
|
Item 32.
|
Location
Of Accounts And Records
|
The Registrants accounts, books and other documents are
currently located at the offices of the Registrant,
c/o BlackRock
Advisors, Inc., 100 Bellevue Parkway, Wilmington, Delaware 19809
and at the offices of State Street Bank and Trust Company,
the Registrants Custodian, and Computershare
Trust Company, N.A., the Registrants Transfer Agent.
|
|
Item 33.
|
Management
Services
|
Not Applicable
(1) The Registrant hereby undertakes to suspend the
offering of its units until it amends its Prospectus if
(a) subsequent to the effective date of its registration
statement, the net asset value declines more than
10 percent from its net asset value as of the effective
date of the Registration Statement or (b) the net asset
value increases to an amount greater than its net proceeds as
stated in the Prospectus.
(2) Not applicable
(3) Not applicable
(4) Not applicable
(5) (a) For the purposes of determining any liability
under the Securities Act of 1933, the information omitted from
the form of Prospectus filed as part of a registration statement
in reliance upon
C-5
Rule 430A and contained in the form of Prospectus filed by
the Registrant under Rule 497(h) under the Securities Act
of 1933 shall be deemed to be part of the Registration Statement
as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of Prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of the securities at that time shall
be deemed to be the initial bona fide offering thereof.
(6) The Registrant undertakes to send by first class mail
or other means designed to ensure equally prompt delivery within
two business days of receipt of a written or oral request, any
Statement of Additional Information.
C-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Trust has duly caused
this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York,
and State of New York, on the
27
th
day
of July 2010.
BLACKROCK BUILD AMERICA BOND TRUST
Anne F. Ackerley
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons
in the capacities below and on the
27
th
day
of July 2010.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/
ANNE
F. ACKERLEY
Anne
F. Ackerley
|
|
President and Chief Executive Officer (Principal Executive
Officer)
|
|
|
|
/s/
NEAL
J. ANDREWS
Neal
J. Andrews
|
|
Chief Financial Officer (Principal Financial and Accounting
Officer)
|
|
|
|
/s/
RICHARD
E. CAVANAGH*
Richard
E. Cavanagh
|
|
Trustee
|
|
|
|
/s/
RICHARD
S. DAVIS*
Richard
S. Davis
|
|
Trustee
|
|
|
|
/s/
FRANK
J. FABOZZI*
Frank
J. Fabozzi
|
|
Trustee
|
|
|
|
/s/
KATHLEEN
F. FELDSTEIN*
Kathleen
F. Feldstein
|
|
Trustee
|
|
|
|
/s/
JAMES
T. FLYNN*
James
T. Flynn
|
|
Trustee
|
|
|
|
/s/
HENRY
GABBAY*
Henry
Gabbay
|
|
Trustee
|
|
|
|
/s/
JERROLD
B. HARRIS*
Jerrold
B. Harris
|
|
Trustee
|
|
|
|
/s/
R.
GLENN HUBBARD*
R.
Glenn Hubbard
|
|
Trustee
|
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/
W.
CARL KESTER*
W.
Carl Kester
|
|
Trustee
|
|
|
|
/s/
KAREN
P. ROBARDS*
Karen
P. Robards
|
|
Trustee
|
|
|
|
* By:
|
/s/
ANNE
F. ACKERLEY
|
|
Anne F. Ackerley, as
Attorney-in-Fact
BLACKROCK BUILD AMERICA BOND TRUST
AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST
Dated as of July 16, 2010
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page
|
|
ARTICLE I
|
The Trust
|
|
1.1 Name
|
|
|
1
|
|
1.2 Definitions
|
|
|
1
|
|
|
ARTICLE II
|
Trustees
|
|
2.1 Number and Qualification
|
|
|
2
|
|
2.2 Term and Election
|
|
|
2
|
|
2.3 Resignation and Removal
|
|
|
3
|
|
2.4 Vacancies
|
|
|
3
|
|
2.5 Meetings
|
|
|
3
|
|
2.6 Trustee Action by Written Consent
|
|
|
4
|
|
2.7 Officers
|
|
|
4
|
|
|
ARTICLE III
|
Powers and Duties of Trustees
|
|
3.1 General
|
|
|
4
|
|
3.2 Investments
|
|
|
4
|
|
3.3 Legal Title
|
|
|
4
|
|
3.4 Issuance and Repurchase of Shares
|
|
|
5
|
|
3.5 Borrow Money or Utilize Leverage
|
|
|
5
|
|
3.6 Delegation; Committees
|
|
|
5
|
|
3.7 Collection and Payment
|
|
|
5
|
|
3.8 Expenses
|
|
|
5
|
|
3.9 By-Laws
|
|
|
6
|
|
3.10 Miscellaneous Powers
|
|
|
6
|
|
3.11 Further Powers
|
|
|
6
|
|
|
ARTICLE IV
|
Advisory, Management and Distribution Arrangements
|
|
4.1 Advisory and Management Arrangements
|
|
|
6
|
|
4.2 Distribution Arrangements
|
|
|
6
|
|
4.3 Parties to Contract
|
|
|
7
|
|
|
ARTICLE V
|
Limitations of Liability and Indemnification
|
|
5.1 No Personal Liability of Shareholders, Trustees, etc.
|
|
|
7
|
|
5.2 Mandatory Indemnification
|
|
|
7
|
|
5.3 No Bond Required of Trustees
|
|
|
8
|
|
5.4 No Duty of Investigation; Notice in Trust Instruments, etc.
|
|
|
8
|
|
5.5 Reliance on Experts, etc.
|
|
|
9
|
|
|
ARTICLE VI
|
Shares of Beneficial Interest
|
|
6.1 Beneficial Interest
|
|
|
9
|
|
6.2 Other Securities
|
|
|
9
|
|
6.3 Rights of Shareholders
|
|
|
9
|
|
6.4 Trust Only
|
|
|
9
|
|
6.5 Issuance of Shares
|
|
|
9
|
|
6.6 Register of Shares
|
|
|
10
|
|
6.7 Transfer Agent and Registrar
|
|
|
10
|
|
6.8 Transfer of Shares
|
|
|
10
|
|
i
|
|
|
|
|
|
|
Page
|
|
6.9 Notices
|
|
|
10
|
|
|
ARTICLE VII
|
Custodians
|
|
7.1 Appointment and Duties
|
|
|
10
|
|
7.2 Central Certificate System
|
|
|
11
|
|
|
ARTICLE VIII
|
Redemption
|
|
8.1 Redemptions
|
|
|
11
|
|
8.2 Disclosure of Holding
|
|
|
11
|
|
|
ARTICLE IX
|
Determination of Net Asset Value, Net Income and Distributions
|
|
9.1 Net Asset Value
|
|
|
11
|
|
9.2 Distributions to Shareholders
|
|
|
11
|
|
9.3 Power to Modify Foregoing Procedures
|
|
|
12
|
|
|
ARTICLE X
|
Shareholders
|
|
10.1 Meetings of Shareholders
|
|
|
12
|
|
10.2 Voting
|
|
|
12
|
|
10.3 Notice of Meeting and Record Date
|
|
|
12
|
|
10.4 Quorum and Required Vote
|
|
|
13
|
|
10.5 Proxies, etc.
|
|
|
13
|
|
10.6 Reports
|
|
|
13
|
|
10.7 Inspection of Records
|
|
|
13
|
|
10.8 Shareholder Action by Written Consent
|
|
|
13
|
|
|
ARTICLE XI
|
Duration; Termination of Trust; Amendment; Mergers, Etc.
|
|
11.1 Duration
|
|
|
14
|
|
11.2 Termination
|
|
|
14
|
|
11.3 Amendment Procedure
|
|
|
14
|
|
11.4 Merger, Consolidation and Sale of Assets
|
|
|
15
|
|
11.5 Subsidiaries
|
|
|
15
|
|
11.6 Conversion
|
|
|
15
|
|
11.7 Certain Transactions
|
|
|
16
|
|
|
ARTICLE XII
|
Miscellaneous
|
|
12.1 Filing
|
|
|
17
|
|
12.2 Resident Agent
|
|
|
17
|
|
12.3 Governing Law
|
|
|
17
|
|
12.4 Counterparts
|
|
|
17
|
|
12.5 Reliance by Third Parties
|
|
|
17
|
|
12.6 Provisions in Conflict with Law or Regulation
|
|
|
18
|
|
ii
BLACKROCK BUILD AMERICA BOND TRUST
AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST
AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST made as of the 16th
day of
July, 2010, by the Trustees hereunder, and by the holders of shares of beneficial interest issued
hereunder as hereinafter provided.
WHEREAS, this Trust has been formed to carry on business as set forth more particularly
hereinafter;
WHEREAS, this Trust is authorized to issue an unlimited number of its shares of beneficial
interest all in accordance with the provisions hereinafter set forth;
WHEREAS, the Trustees have agreed to manage all property coming into their hands as Trustees
of a Delaware statutory trust in accordance with the provisions hereinafter set forth; and
WHEREAS, the parties hereto intend that the Trust created by this Declaration filed with the
Secretary of State of the State of Delaware on June 7th, 2010 shall constitute a statutory trust
under the Delaware Statutory Trust Act and that this Declaration shall constitute the governing
instrument of such statutory trust.
NOW, THEREFORE, the Trustees hereby declare that they will hold all cash, securities, and
other assets which they may from time to time acquire in any manner as Trustees hereunder IN TRUST
to manage and dispose of the same upon the following terms and conditions for the benefit of the
holders from time to time of shares of beneficial interest in this Trust as hereinafter set forth.
ARTICLE I
The Trust
1.1
Name
. This Trust shall be known as the BlackRock Build America Bond Trust and
the Trustees shall conduct the business of the Trust under that name or any other name or names as
they may from time to time determine.
1.2
Definitions
. As used in this Declaration, the following terms shall have the
following meanings:
The
1940 Act
refers to the Investment Company Act of 1940 and the rules and
regulations promulgated thereunder and exemptions granted therefrom, as amended from time to time.
The terms
Affiliated Person
,
Assignment
,
Commission
,
Interested Person
and
Principal Underwriter
shall have the meanings given them
in the 1940 Act.
By-Laws
shall mean the By-Laws of the Trust as amended from time to time by the
Trustees.
Code
shall mean the Internal Revenue Code of 1986, as amended, and the regulations
promulgated thereunder.
Commission
shall mean the Securities and Exchange Commission.
Declaration
shall mean this Amended and Restated Agreement and Declaration of Trust,
as amended, supplemented or amended and restated from time to time.
Delaware Statutory Trust Statute
shall mean the provisions of the Delaware Statutory
Trust Act, 12
Del
.
C
. 3801,
et. seq.
, as such Act may be amended from time
to time.
Delaware General Corporation Law
means the Delaware General Corporation Law, 8
Del
.
C
. 100,
et
.
seq
., as amended from time to time.
Fundamental Policies
shall mean the investment policies and restrictions as set
forth from time to time in any Registration Statement of the Trust filed with the Commission and
designated as fundamental policies therein, as they may be amended from time to time in accordance
with the requirements of the 1940 Act.
1
Majority Shareholder Vote
shall mean a vote of a majority of the outstanding voting
securities (as such term is defined in the 1940 Act) of the Trust with each class and series of
Shares voting together as a single class, except to the extent otherwise required by the 1940 Act
or this Declaration with respect to any one or more classes or series of Shares, in which case the
applicable proportion of such classes or series of Shares voting as a separate class or series, as
the case may be, also will be required.
Person
shall mean and include individuals, corporations, partnerships, trusts,
limited liability companies, associations, joint ventures and other entities, whether or not legal
entities, and governments and agencies and political subdivisions thereof.
Prospectus
shall mean the Prospectus of the Trust, if any, as in effect from time to
time under the Securities Act of 1933, as amended.
Shareholders
shall mean as of any particular time the holders of record of
outstanding Shares of the Trust, at such time.
Shares
shall mean the transferable units of beneficial interest into which the
beneficial interest in the Trust shall be divided from time to time and includes fractions of
Shares as well as whole Shares. In addition, Shares also means any preferred shares or preferred
units of beneficial interest which may be issued from time to time, as described herein. All
references to Shares shall be deemed to be Shares of any or all series or classes as the context
may require.
Trust
shall mean the trust established by this Declaration, as amended from time to
time, inclusive of each such amendment.
Trust Property
shall mean as of any particular time any and all property, real or
personal, tangible or intangible, which at such time is owned or held by or for the account of the
Trust or the Trustees in such capacity.
Trustees
shall mean the signatories to this Declaration, so long as they shall
continue in office in accordance with the terms hereof, and all other persons who at the time in
question have been duly elected or appointed and have qualified as trustees in accordance with the
provisions hereof and are then in office.
ARTICLE II
Trustees
2.1
Number and Qualification
. Prior to a public offering of Shares there may be a sole
Trustee. Thereafter, the number of Trustees shall be determined by a written instrument signed by a
majority of the Trustees then in office, provided that the number of Trustees shall be no less than
two or more than fifteen. No reduction in the number of Trustees shall have the effect of removing
any Trustee from office prior to the expiration of his term. An individual nominated as a Trustee
shall be at least 21 years of age and not older than 80 years of age at the time of nomination and
not under legal disability. Trustees need not own Shares and may succeed themselves in office.
2.2
Term and Election
. The Board of Trustees shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible,
of one-third of the total number of trustees constituting the entire Board of Trustees. Within the
limits above specified, the number of the Trustees in each class shall be determined by resolution
of the Board of Trustees. The term of office of the first class shall expire on the date of the
first annual meeting of Shareholders or special meeting in lieu thereof following the effective
date of the Registration Statement relating to the Shares under the Securities Act of 1933, as
amended. The term of office of the second class shall expire on the date of the second annual
meeting of Shareholders or special meeting in lieu thereof following the effective date of the
initial Registration Statement relating to the Shares under the Securities Act of 1933, as amended.
The term of office of the third class shall expire on the date of the third annual meeting of
Shareholders or special meeting in lieu thereof following the effective date of the initial
Registration Statement relating to the Shares under the Securities Act of 1933, as amended. Upon
expiration of the term of office of each class as set forth above, the number of Trustees in such
2
class, as determined by the Board of Trustees, shall be elected for a term expiring on the
date of the third annual meeting of Shareholders or special meeting in lieu thereof following such
expiration to succeed the Trustees whose terms of office expire. The Trustees shall be elected at
an annual meeting of the Shareholders or special meeting in lieu thereof called for that purpose,
except as provided in Section 2.3 of this Article, and each Trustee elected shall hold office until
his or her successor shall have been elected and shall have qualified. The term of office of a
Trustee shall terminate and a vacancy shall occur in the event of the death, resignation, removal,
bankruptcy, adjudicated incompetence or other incapacity to perform the duties of the office, or
removal, of a Trustee.
2.3
Resignation and Removal
. Any of the Trustees may resign their trust (without need
for prior or subsequent accounting) by an instrument in writing signed by such Trustee and
delivered or mailed to the Trustees or the Chairman, if any, the President or the Secretary and
such resignation shall be effective upon such delivery, or at a later date according to the terms
of the instrument. Any of the Trustees may be removed (provided the aggregate number of Trustees
after such removal shall not be less than the minimum number required by Section 2.1 hereof) for
cause only, and not without cause, and only by action taken by a majority of the remaining Trustees
followed by the holders of at least seventy-five percent (75%) of the Shares then entitled to vote
in an election of such Trustee. Upon the resignation or removal of a Trustee, each such resigning
or removed Trustee shall execute and deliver such documents as the remaining Trustees shall require
for the purpose of conveying to the Trust or the remaining Trustees any Trust Property held in the
name of such resigning or removed Trustee. Upon the incapacity or death of any Trustee, such
Trustees legal representative shall execute and deliver on such Trustees behalf such documents as
the remaining Trustees shall require as provided in the preceding sentence.
2.4
Vacancies
. Whenever a vacancy in the Board of Trustees shall occur, the remaining
Trustees may fill such vacancy by appointing an individual having the qualifications described in
this Article by a written instrument signed by a majority of the Trustees then in office or may
leave such vacancy unfilled or may reduce the number of Trustees; provided the aggregate number of
Trustees after such reduction shall not be less than the minimum number required by Section 2.1
hereof; provided, further, that if the Shareholders of any class or series of Shares are entitled
separately to elect one or more Trustees, a majority of the remaining Trustees or the sole
remaining Trustee elected by that class or series may fill any vacancy among the number of Trustees
elected by that class or series. Any vacancy created by an increase in Trustees may be filled by
the appointment of an individual having the qualifications described in this Article made by a
written instrument signed by a majority of the Trustees then in office. No vacancy shall operate to
annul this Declaration or to revoke any existing agency created pursuant to the terms of this
Declaration. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled
as provided herein, the Trustees in office, regardless of their number, shall have all the powers
granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this
Declaration.
2.5
Meetings
. Meetings of the Trustees shall be held from time to time upon the call
of the Chairman, if any, or the President or any two Trustees. Regular meetings of the Trustees may
be held without call or notice at a time and place fixed by the By-Laws or by resolution of the
Trustees. Notice of any other meeting shall be given by the Secretary and shall be delivered to the
Trustees orally not less than 24 hours, or in writing not less than 72 hours, before the meeting,
but may be waived in writing by any Trustee either before or after such meeting. The attendance of
a Trustee at a meeting shall constitute a waiver of notice of such meeting except where a Trustee
attends a meeting for the express purpose of objecting to the transaction of any business on the
ground that the meeting has not been properly called or convened. Any time there is more than one
Trustee, a quorum for all meetings of the Trustees shall be one-third, but not less than two, of
the Trustees. Unless provided otherwise in this Declaration and except as required under the 1940
Act, any action of the Trustees may be taken at a meeting by vote of a majority of the Trustees
present (a quorum being present) or without a meeting by written consent of a majority of the
Trustees.
Any committee of the Trustees, including an executive committee, if any, may act with or
without a meeting. A quorum for all meetings of any such committee shall be one-third, but not less
than two, of the members thereof. Unless provided otherwise in this Declaration, any action of any
such committee may be
3
taken at a meeting by vote of a majority of the members present (a quorum being present) or
without a meeting by written consent of all of the members.
With respect to actions of the Trustees and any committee of the Trustees, Trustees who are
Interested Persons in any action to be taken may be counted for quorum purposes under this Section
and shall be entitled to vote to the extent not prohibited by the 1940 Act.
All or any one or more Trustees may participate in a meeting of the Trustees or any committee
thereof by means of a conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other; participation in a meeting pursuant
to any such communications system shall constitute presence in person at such meeting.
2.6
Trustee Action by Written Consent
. Any action which may be taken by Trustees by
vote may be taken without a meeting if that number of the Trustees, or members of a committee, as
the case may be, required for approval of such action at a meeting of the Trustees or of such
committee consent to the action in writing and the written consents are filed with the records of
the meetings of Trustees. Such consent shall be treated for all purposes as a vote taken at a
meeting of Trustees.
2.7
Officers
. The Trustees shall elect a President, a Secretary and a Treasurer and
may elect a Chairman who shall serve at the pleasure of the Trustees or until their successors are
elected. The Trustees may elect or appoint or may authorize the Chairman, if any, or President to
appoint such other officers or agents with such powers as the Trustees may deem to be advisable. A
Chairman shall, and the President, Secretary and Treasurer may, but need not, be a Trustee.
ARTICLE III
Powers and Duties of Trustees
3.1
General
. The Trustees shall owe to the Trust and its Shareholders the same
fiduciary duties as owed by directors of corporations to such corporations and their stockholders
under the Delaware General Corporation Law. The Trustees shall have exclusive and absolute control
over the Trust Property and over the business of the Trust to the same extent as if the Trustees
were the sole owners of the Trust Property and business in their own right, but with such powers of
delegation as may be permitted by this Declaration. The Trustees may perform such acts as in their
sole discretion are proper for conducting the business of the Trust. The enumeration of any
specific power herein shall not be construed as limiting the aforesaid power. Such powers of the
Trustees may be exercised without order of or resort to any court.
3.2
Investments
. The Trustees shall have power, subject to the Fundamental Policies in
effect from time to time with respect to the Trust to:
(a) manage, conduct, operate and carry on the business of an investment company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise acquire, hold, pledge,
sell, assign, transfer, exchange, distribute or otherwise deal in or dispose of any and all
sorts of property, tangible or intangible, including but not limited to securities of any type
whatsoever, whether equity or non-equity, of any issuer, evidences of indebtedness of any
person and any other rights, interests, instruments or property of any sort and to exercise any
and all rights, powers and privileges of ownership or interest in respect of any and all such
investments of every kind and description, including, without limitation, the right to consent
and otherwise act with respect thereto, with power to designate one or more Persons to exercise
any of said rights, powers and privileges in respect of any of said investments. The Trustees
shall not be limited by any law limiting the investments which may be made by fiduciaries.
3.3
Legal Title
. Legal title to all the Trust Property shall be vested in the Trustees
as joint tenants except that the Trustees shall have power to cause legal title to any Trust
Property to be held by or in the name of one or more of the Trustees, or in the name of the Trust,
or in the name of any other Person as nominee, custodian or pledgee, on such terms as the Trustees
may determine, provided that the interest of the Trust therein is appropriately protected.
4
The right, title and interest of the Trustees in the Trust Property shall vest automatically
in each person who may hereafter become a Trustee upon his due election and qualification. Upon the
ceasing of any person to be a Trustee for any reason, such person shall automatically cease to have
any right, title or interest in any of the Trust Property, and the right, title and interest of
such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting
and cessation of title shall be effective whether or not conveyancing documents have been executed
and delivered.
3.4
Issuance and Repurchase of Shares
. The Trustees shall have the power to issue,
sell, repurchase, redeem, retire, cancel, acquire, hold, resell, reissue, dispose of, transfer, and
otherwise deal in, Shares, including Shares in fractional denominations, and, subject to the more
detailed provisions set forth in Articles VIII and IX, to apply to any such repurchase, redemption,
retirement, cancellation or acquisition of Shares any funds or property whether capital or surplus
or otherwise, to the full extent now or hereafter permitted corporations formed under the Delaware
General Corporation Law.
3.5
Borrow Money or Utilize Leverage
. Subject to the Fundamental Policies in effect
from time to time with respect to the Trust, the Trustees shall have the power to borrow money or
otherwise obtain credit or utilize leverage to the maximum extent permitted by law or regulation as
such may be needed from time to time and to secure the same by mortgaging, pledging or otherwise
subjecting as security the assets of the Trust, including the lending of portfolio securities, and
to endorse, guarantee, or undertake the performance of any obligation, contract or engagement of
any other person, firm, association or corporation.
3.6
Delegation; Committees
. The Trustees shall have the power, consistent with their
continuing exclusive authority over the management of the Trust and the Trust Property, to delegate
from time to time to such of their number or to officers, employees or agents of the Trust the
doing of such things, including any matters set forth in this Declaration, and the execution of
such instruments either in the name of the Trust or the names of the Trustees or otherwise as the
Trustees may deem expedient. The Trustees may designate one or more committees which shall have all
or such lesser portion of the authority of the entire Board of Trustees as the Trustees shall
determine from time to time except to the extent action by the entire Board of Trustees or
particular Trustees is required by the 1940 Act.
3.7
Collection and Payment
. The Trustees shall have power to collect all property due
to the Trust; to pay all claims, including taxes, against the Trust Property or the Trust, the
Trustees or any officer, employee or agent of the Trust; to prosecute, defend, compromise or
abandon any claims relating to the Trust Property or the Trust, or the Trustees or any officer,
employee or agent of the Trust; to foreclose any security interest securing any obligations, by
virtue of which any property is owed to the Trust; and to enter into releases, agreements and other
instruments. Except to the extent required for a corporation formed under the Delaware General
Corporation Law, the Shareholders shall have no power to vote as to whether or not a court action,
legal proceeding or claim should or should not be brought or maintained derivatively or as a class
action on behalf of the Trust or the Shareholders.
3.8
Expenses
. The Trustees shall have power to incur and pay out of the assets or
income of the Trust any expenses which in the opinion of the Trustees are necessary or incidental
to carry out any of the purposes of this Declaration, and the business of the Trust, and to pay
reasonable compensation from the funds of the Trust to themselves as Trustees. The Trustees shall
fix the compensation of all officers, employees and Trustees. The Trustees may pay themselves such
compensation for special services, including legal, underwriting, syndicating and brokerage
services, as they in good faith may deem reasonable and reimbursement for expenses reasonably
incurred by themselves on behalf of the Trust. The Trustees shall have the power, as frequently as
they may determine, to cause each Shareholder to pay directly, in advance or arrears, for charges
of distribution, of the custodian or transfer, Shareholder servicing or similar agent, a pro rata
amount as defined from time to time by the Trustees, by setting off such charges due from such
Shareholder from declared but unpaid dividends or distributions owed such Shareholder and/or by
reducing the number of shares in the account of such Shareholder by that number of full and/or
fractional Shares which represents the outstanding amount of such charges due from such
Shareholder.
5
3.9
By-Laws
. The Trustees shall have the exclusive authority to adopt and from time to
time amend or repeal By-Laws for the conduct of the business of the Trust.
3.10
Miscellaneous Powers
. The Trustees shall have the power to: (a) employ or
contract with such Persons as the Trustees may deem desirable for the transaction of the business
of the Trust; (b) enter into joint ventures, partnerships and any other combinations or
associations; (c) purchase, and pay for out of Trust Property, insurance policies insuring the
Shareholders, Trustees, officers, employees, agents, investment advisors, distributors, selected
dealers or independent contractors of the Trust against all claims arising by reason of holding any
such position or by reason of any action taken or omitted by any such Person in such capacity,
whether or not constituting negligence, or whether or not the Trust would have the power to
indemnify such Person against such liability; (d) establish pension, profit-sharing, share
purchase, and other retirement, incentive and benefit plans for any Trustees, officers, employees
and agents of the Trust; (e) make donations, irrespective of benefit to the Trust, for charitable,
religious, educational, scientific, civic or similar purposes; (f) to the extent permitted by law,
indemnify any Person with whom the Trust has dealings, including without limitation any advisor,
administrator, manager, transfer agent, custodian, distributor or selected dealer, or any other
person as the Trustees may see fit to such extent as the Trustees shall determine; (g) guarantee
indebtedness or contractual obligations of others; (h) determine and change the fiscal year of the
Trust and the method in which its accounts shall be kept; (i) notwithstanding the Fundamental
Policies of the Trust, convert the Trust to a master-feeder structure; provided, however, the Trust
obtains the approval of shareholders holding at least a majority of the Trusts Shares present at a
meeting of Shareholders at which a quorum is present; and (j) adopt a seal for the Trust but the
absence of such seal shall not impair the validity of any instrument executed on behalf of the
Trust.
3.11
Further Powers
. The Trustees shall have the power to conduct the business of the
Trust and carry on its operations in any and all of its branches and maintain offices both within
and without the State of Delaware, in any and all states of the United States of America, in the
District of Columbia, and in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities of the United States of America and of foreign
governments, and to do all such other things and execute all such instruments as they deem
necessary, proper or desirable in order to promote the interests of the Trust although such things
are not herein specifically mentioned. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of this
Declaration, the presumption shall be in favor of a grant of power to the Trustees. The Trustees
will not be required to obtain any court order to deal with the Trust Property.
ARTICLE IV
Advisory, Management and Distribution Arrangements
4.1
Advisory and Management Arrangements
. Subject to the requirements of applicable
law as in effect from time to time, the Trustees may in their discretion from time to time enter
into advisory, administration or management contracts (including, in each case, one or more
sub-advisory, sub-administration or sub-management contracts) whereby the other party to any such
contract shall undertake to furnish such advisory, administrative and management services with
respect to the Trust as the Trustees shall from time to time consider desirable and all upon such
terms and conditions as the Trustees may in their discretion determine. Notwithstanding any
provisions of this Declaration, the Trustees may authorize any advisor, administrator or manager
(subject to such general or specific instructions as the Trustees may from time to time adopt) to
exercise any of the powers of the Trustees, including to effect investment transactions with
respect to the assets on behalf of the Trust to the full extent of the power of the Trustees to
effect such transactions or may authorize any officer, employee or Trustee to effect such
transactions pursuant to recommendations of any such advisor, administrator or manager (and all
without further action by the Trustees). Any such investment transaction shall be deemed to have
been authorized by all of the Trustees.
4.2
Distribution Arrangements
. Subject to compliance with the 1940 Act, the Trustees
may retain underwriters and/or placement agents to sell Shares and other securities of the Trust.
The Trustees may in their discretion from time to time enter into one or more contracts, providing
for the sale of securities of the Trust,
6
whereby the Trust may either agree to sell such securities to the other party to the contract
or appoint such other party its sales agent for such securities. In either case, the contract shall
be on such terms and conditions as the Trustees may in their discretion determine not inconsistent
with the provisions of this Article IV or the By-Laws; and such contract may also provide for the
repurchase or sale of securities of the Trust by such other party as principal or as agent of the
Trust and may provide that such other party may enter into selected dealer agreements with
registered securities dealers and brokers and servicing and similar agreements with persons who are
not registered securities dealers to further the purposes of the distribution or repurchase of the
securities of the Trust.
4.3
Parties to Contract
. Any contract of the character described in Sections 4.1 and
4.2 of this Article IV or in Article VII hereof may be entered into with any Person, although one
or more of the Trustees, officers or employees of the Trust may be an officer, director, trustee,
shareholder, or member of such other party to the contract, and no such contract shall be
invalidated or rendered voidable by reason of the existence of any such relationship, nor shall any
Person holding such relationship be liable merely by reason of such relationship for any loss or
expense to the Trust under or by reason of said contract or accountable for any profit realized
directly or indirectly therefrom, provided that the contract when entered into was reasonable and
fair and not inconsistent with the provisions of this Article IV or the By-Laws. The same Person
may be the other party to contracts entered into pursuant to Sections 4.1 and 4.2 above or Article
VII, and any individual may be financially interested or otherwise affiliated with Persons who are
parties to any or all of the contracts mentioned in this Section 4.3.
ARTICLE V
Limitations of Liability and Indemnification
5.1
No Personal Liability of Shareholders, Trustees, etc
. No Shareholder of the Trust
shall be subject in such capacity to any personal liability whatsoever to any Person in connection
with Trust Property or the acts, obligations or affairs of the Trust. Shareholders shall have the
same limitation of personal liability as is extended to stockholders of a private corporation for
profit incorporated under the Delaware General Corporation Law. No Trustee or officer of the Trust
shall be subject in such capacity to any personal liability whatsoever to any Person, save only
liability to the Trust or its Shareholders arising from bad faith, willful misfeasance, gross
negligence or reckless disregard for his duty to such Person; and, subject to the foregoing
exception, all such Persons shall look solely to the Trust Property for satisfaction of claims of
any nature arising in connection with the affairs of the Trust. If any Shareholder, Trustee or
officer, as such, of the Trust, is made a party to any suit or proceeding to enforce any such
liability, subject to the foregoing exception, he shall not, on account thereof, be held to any
personal liability. Any repeal or modification of this Section 5.1 shall not adversely affect any
right or protection of a Trustee or officer of the Trust existing at the time of such repeal or
modification with respect to acts or omissions occurring prior to such repeal or modification.
5.2
Mandatory Indemnification
. (a) The Trust hereby agrees to indemnify each person
who at any time serves as a Trustee or officer of the Trust (each such person being an
indemnitee) against any liabilities and expenses, including amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and reasonable counsel fees reasonably incurred
by such indemnitee in connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or investigative body in
which he may be or may have been involved as a party or otherwise or with which he may be or may
have been threatened, while acting in any capacity set forth in this Article V by reason of his
having acted in any such capacity, except with respect to any matter as to which he shall not have
acted in good faith in the reasonable belief that his action was in the best interest of the Trust
or, in the case of any criminal proceeding, as to which he shall have had reasonable cause to
believe that the conduct was unlawful, provided, however, that no indemnitee shall be indemnified
hereunder against any liability to any person or any expense of such indemnitee arising by reason
of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence, or (iv) reckless disregard of
the duties involved in the conduct of his position (the conduct referred to in such clauses (i)
through (iv) being sometimes referred to herein as disabling conduct). Notwithstanding the
foregoing, with respect to any action, suit or other proceeding voluntarily prosecuted by any
indemnitee as plaintiff, indemnification shall be mandatory only if the prosecution of such action,
suit or other proceeding by
7
such indemnitee (1) was authorized by a majority of the Trustees or (2) was instituted by the
indemnitee to enforce his or her rights to indemnification hereunder in a case in which the
indemnitee is found to be entitled to such indemnification. The rights to indemnification set forth
in this Declaration shall continue as to a person who has ceased to be a Trustee or officer of the
Trust and shall inure to the benefit of his or her heirs, executors and personal and legal
representatives. No amendment or restatement of this Declaration or repeal of any of its provisions
shall limit or eliminate any of the benefits provided to any person who at any time is or was a
Trustee or officer of the Trust or otherwise entitled to indemnification hereunder in respect of
any act or omission that occurred prior to such amendment, restatement or repeal.
(b) Notwithstanding the foregoing, no indemnification shall be made hereunder unless there has
been a determination (i) by a final decision on the merits by a court or other body of competent
jurisdiction before whom the issue of entitlement to indemnification hereunder was brought that
such indemnitee is entitled to indemnification hereunder or, (ii) in the absence of such a
decision, by (1) a majority vote of a quorum of those Trustees who are neither interested
persons of the Trust (as defined in Section 2(a)(19) of the 1940 Act) nor parties to the
proceeding (Disinterested Non-Party Trustees), that the indemnitee is entitled to
indemnification hereunder, or (2) if such quorum is not obtainable or even if obtainable, if such
majority so directs, independent legal counsel in a written opinion concludes that the indemnitee
should be entitled to indemnification hereunder. All determinations to make advance payments in
connection with the expense of defending any proceeding shall be authorized and made in accordance
with the immediately succeeding paragraph (c) below.
(c) The Trust shall make advance payments in connection with the expenses of defending any
action with respect to which indemnification might be sought hereunder if the Trust receives a
written affirmation by the indemnitee of the indemnitees good faith belief that the standards of
conduct necessary for indemnification have been met and a written undertaking to reimburse the
Trust unless it is subsequently determined that the indemnitee is entitled to such indemnification
and if a majority of the Trustees determine that the applicable standards of conduct necessary for
indemnification appear to have been met. In addition, at least one of the following conditions must
be met: (i) the indemnitee shall provide adequate security for his undertaking, (ii) the Trust
shall be insured against losses arising by reason of any lawful advances, or (iii) a majority of a
quorum of the Disinterested Non-Party Trustees, or if a majority vote of such quorum so direct,
independent legal counsel in a written opinion, shall conclude, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that there is substantial reason to
believe that the indemnitee ultimately will be found entitled to indemnification.
(d) The rights accruing to any indemnitee under these provisions shall not exclude any other
right which any person may have or hereafter acquire under this Declaration, the By-Laws of the
Trust, any statute, agreement, vote of stockholders or Trustees who are disinterested persons
(as defined in Section 2(a)(19) of the 1940 Act) or any other right to which he or she may be
lawfully entitled.
(e) Subject to any limitations provided by the 1940 Act and this Declaration, the Trust shall
have the power and authority to indemnify and provide for the advance payment of expenses to
employees, agents and other Persons providing services to the Trust or serving in any capacity at
the request of the Trust to the full extent corporations organized under the Delaware General
Corporation Law may indemnify or provide for the advance payment of expenses for such Persons,
provided that such indemnification has been approved by a majority of the Trustees.
5.3
No Bond Required of Trustees
. No Trustee shall, as such, be obligated to give any
bond or other security for the performance of any of his duties hereunder.
5.4
No Duty of Investigation; No Notice in Trust Instruments, etc
. No purchaser,
lender, transfer agent or other person dealing with the Trustees or with any officer, employee or
agent of the Trust shall be bound to make any inquiry concerning the validity of any transaction
purporting to be made by the Trustees or by said officer, employee or agent or be liable for the
application of money or property paid, loaned, or delivered to or on the order of the Trustees or
of said officer, employee or agent. Every obligation, contract, undertaking, instrument,
certificate, Share, other security of the Trust, and every other act or thing whatsoever executed
in
8
connection with the Trust shall be conclusively taken to have been executed or done by the
executors thereof only in their capacity as Trustees under this Declaration or in their capacity as
officers, employees or agents of the Trust. The Trustees may maintain insurance for the protection
of the Trust Property, the Shareholders, Trustees, officers, employees and agents in such amount as
the Trustees shall deem adequate to cover possible tort liability, and such other insurance as the
Trustees in their sole judgment shall deem advisable or is required by the 1940 Act.
5.5
Reliance on Experts, etc
. Each Trustee and officer or employee of the Trust shall,
in the performance of its duties, be fully and completely justified and protected with regard to
any act or any failure to act resulting from reliance in good faith upon the books of account or
other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of
the Trusts officers or employees or by any advisor, administrator, manager, distributor, selected
dealer, accountant, appraiser or other expert or consultant selected with reasonable care by the
Trustees, officers or employees of the Trust, regardless of whether such counsel or expert may also
be a Trustee.
ARTICLE VI
Shares of Beneficial Interest
6.1
Beneficial Interest
. The interest of the beneficiaries hereunder shall be divided
into an unlimited number of transferable shares of beneficial interest, par value $.001 per share.
All Shares issued in accordance with the terms hereof, including, without limitation, Shares issued
in connection with a dividend in Shares or a split of Shares, shall be fully paid and, except as
provided in the last sentence of Section 3.8, nonassessable when the consideration determined by
the Trustees (if any) therefor shall have been received by the Trust.
6.2
Other Securities
. The Trustees may, subject to the Fundamental Policies and the
requirements of the 1940 Act, authorize and issue such other securities of the Trust as they
determine to be necessary, desirable or appropriate, having such terms, rights, preferences,
privileges, limitations and restrictions as the Trustees see fit, including preferred interests,
debt securities or other senior securities. To the extent that the Trustees authorize and issue
preferred shares of any class or series, they are hereby authorized and empowered to amend or
supplement this Declaration as they deem necessary or appropriate, including to comply with the
requirements of the 1940 Act or requirements imposed by the rating agencies or other Persons, all
without the approval of Shareholders. Any such supplement or amendment shall be filed as is
necessary. The Trustees are also authorized to take such actions and retain such persons as they
see fit to offer and sell such securities.
6.3
Rights of Shareholders
. The Shares shall be personal property giving only the
rights in this Declaration specifically set forth. The ownership of the Trust Property of every
description and the right to conduct any business herein before described are vested exclusively in
the Trustees, and the Shareholders shall have no interest therein other than the beneficial
interest conferred by their Shares, and they shall have no right to call for any partition or
division of any property, profits, rights or interests of the Trust nor can they be called upon to
share or assume any losses of the Trust or, subject to the right of the Trustees to charge certain
expenses directly to Shareholders, as provided in the last sentence of Section 3.8, suffer an
assessment of any kind by virtue of their ownership of Shares. The Shares shall not entitle the
holder to preference, preemptive, appraisal, conversion or exchange rights (except as specified in
this Section 6.3, in Section 11.4 or as specified by the Trustees when creating the Shares, as in
preferred shares).
6.4
Trust Only
. It is the intention of the Trustees to create only the relationship of
Trustee and beneficiary between the Trustees and each Shareholder from time to time. It is not the
intention of the Trustees to create a general partnership, limited partnership, joint stock
association, corporation, bailment or any form of legal relationship other than a trust. Nothing in
this Declaration shall be construed to make the Shareholders, either by themselves or with the
Trustees, partners or members of a joint stock association.
6.5
Issuance of Shares
. The Trustees, in their discretion, may from time to time
without vote of the Shareholders issue Shares including preferred shares that may have been
established pursuant to Section 6.2, in addition to the then issued and outstanding Shares and
Shares held in the treasury, to such party or parties and for such amount and type of
consideration, including cash or property, at such time or times, and on such terms
9
as the Trustees may determine, and may in such manner acquire other assets (including the
acquisition of assets subject to, and in connection with the assumption of, liabilities) and
businesses. The Trustees may from time to time divide or combine the Shares into a greater or
lesser number without thereby changing the proportionate beneficial interest in such Shares.
Issuances and redemptions of Shares may be made in whole Shares and/or l/l,000ths of a Share or
multiples thereof as the Trustees may determine.
6.6
Register of Shares
. A register shall be kept at the offices of the Trust or any
transfer agent duly appointed by the Trustees under the direction of the Trustees which shall
contain the names and addresses of the Shareholders and the number of Shares held by them
respectively and a record of all transfers thereof. Separate registers shall be established and
maintained for each class or series of Shares. Each such register shall be conclusive as to who are
the holders of the Shares of the applicable class or series of Shares and who shall be entitled to
receive dividends or distributions or otherwise to exercise or enjoy the rights of Shareholders. No
Shareholder shall be entitled to receive payment of any dividend or distribution, nor to have
notice given to him as herein provided, until he has given his address to a transfer agent or such
other officer or agent of the Trustees as shall keep the register for entry thereon. It is not
contemplated that certificates will be issued for the Shares; however, the Trustees, in their
discretion, may authorize the issuance of share certificates and promulgate appropriate fees
therefore and rules and regulations as to their use.
6.7
Transfer Agent and Registrar
. The Trustees shall have power to employ a transfer
agent or transfer agents, and a registrar or registrars, with respect to the Shares. The transfer
agent or transfer agents may keep the applicable register and record therein, the original issues
and transfers, if any, of the said Shares. Any such transfer agents and/or registrars shall perform
the duties usually performed by transfer agents and registrars of certificates of stock in a
corporation, as modified by the Trustees.
6.8
Transfer of Shares
. Shares shall be transferable on the records of the Trust only
by the record holder thereof or by its agent thereto duly authorized in writing, upon delivery to
the Trustees or a transfer agent of the Trust of a duly executed instrument of transfer, together
with such evidence of the genuineness of each such execution and authorization and of other matters
(including compliance with any securities laws and contractual restrictions) as may reasonably be
required. Upon such delivery the transfer shall be recorded on the applicable register of the
Trust. Until such record is made, the Shareholder of record shall be deemed to be the holder of
such Shares for all purposes hereof and neither the Trustees nor any transfer agent or registrar
nor any officer, employee or agent of the Trust shall be affected by any notice of the proposed
transfer.
Any person becoming entitled to any Shares in consequence of the death, bankruptcy, or
incompetence of any Shareholder, or otherwise by operation of law, shall be recorded on the
applicable register of Shares as the holder of such Shares upon production of the proper evidence
thereof to the Trustees or a transfer agent of the Trust, but until such record is made, the
Shareholder of record shall be deemed to be the holder of such for all purposes hereof, and neither
the Trustees nor any transfer agent or registrar nor any officer or agent of the Trust shall be
affected by any notice of such death, bankruptcy or incompetence, or other operation of law.
6.9
Notices
. Any and all notices to which any Shareholder hereunder may be entitled
and any and all communications shall be deemed duly served or given if mailed, postage prepaid,
addressed to any Shareholder of record at his last known address as recorded on the applicable
register of the Trust.
ARTICLE VII
Custodians
7.1
Appointment and Duties
. The Trustees shall at all times employ a custodian or
custodians, meeting the qualifications for custodians for portfolio securities of investment
companies contained in the 1940 Act, as custodian with respect to the assets of the Trust. Any
custodian shall have authority as agent of the Trust as determined by the custodian agreement or
agreements, but subject to such restrictions, limitations and other requirements, if any, as may be
contained in the By-Laws of the Trust and the 1940 Act, including without limitation authority:
(1) to hold the securities owned by the Trust and deliver the same upon written order;
10
(2) to receive any receipt for any moneys due to the Trust and deposit the same in its own
banking department (if a bank) or elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and accounts of the Trust and furnish
clerical and accounting services; and
(5) if authorized to do so by the Trustees, to compute the net income or net asset value
of the Trust;
all upon such basis of compensation as may be agreed upon between the Trustees and the custodian.
The Trustees may also authorize each custodian to employ one or more sub-custodians from time
to time to perform such of the acts and services of the custodian and upon such terms and
conditions, as may be agreed upon between the custodian and such sub-custodian and approved by the
Trustees, provided that in every case such sub-custodian shall meet the qualifications for
custodians contained in the 1940 Act.
7.2
Central Certificate System
. Subject to such rules, regulations and orders as the
Commission may adopt, the Trustees may direct the custodian to deposit all or any part of the
securities owned by the Trust in a system for the central handling of securities established by a
national securities exchange or a national securities association registered with the Commission
under the Securities Exchange Act of 1934, or such other Person as may be permitted by the
Commission, or otherwise in accordance with the 1940 Act, pursuant to which system all securities
of any particular class of any issuer deposited within the system are treated as fungible and may
be transferred or pledged by bookkeeping entry without physical delivery of such securities,
provided that all such deposits shall be subject to withdrawal only upon the order of the Trust.
ARTICLE VIII
Redemption
8.1
Redemptions
. The Shares of the Trust are not redeemable by the holders.
8.2
Disclosure of Holding
. The holders of Shares or other securities of the Trust
shall upon demand disclose to the Trustees in writing such information with respect to direct and
indirect ownership of Shares or other securities of the Trust as the Trustees deem necessary to
comply with the provisions of the Code, the 1940 or other applicable laws or regulations, or to
comply with the requirements of any other taxing or regulatory authority.
ARTICLE IX
Determination of Net Asset Value
Net Income and Distributions
9.1
Net Asset Value
. The net asset value of each outstanding Share of the Trust shall
be determined at such time or times on such days as the Trustees may determine, in accordance with
the 1940 Act. The method of determination of net asset value shall be determined by the Trustees
and shall be as set forth in the Prospectus or as may otherwise be determined by the Trustees. The
power and duty to make the net asset value calculations may be delegated by the Trustees and shall
be as generally set forth in the Prospectus or as may otherwise be determined by the Trustees.
9.2
Distributions to Shareholders
. (a) The Trustees shall from time to time distribute
ratably among the Shareholders of any class of Shares, or any series of any such class, in
accordance with the number of outstanding full and fractional Shares of such class or any series of
such class, such proportion of the net profits, surplus (including paid-in surplus), capital, or
assets held by the Trustees as they may deem proper or as may otherwise be determined in accordance
with this Declaration. Any such distribution may be made in cash or property (including without
limitation any type of obligations of the Trust or any assets thereof) or Shares of any class or
series or any combination thereof, and the Trustees may distribute ratably among the Shareholders
of any class of shares or series of any such class, in accordance with the number of outstanding
11
full and fractional Shares of such class or any series of such class, additional Shares of any
class or series in such manner, at such times, and on such terms as the Trustees may deem proper or
as may otherwise be determined in accordance with this Declaration.
(b) Distributions pursuant to this Section 9.2 may be among the Shareholders of record of the
applicable class or series of Shares at the time of declaring a distribution or among the
Shareholders of record at such later date as the Trustees shall determine and specify.
(c) The Trustees may always retain from the net profits such amount as they may deem necessary
to pay the debts or expenses of the Trust or to meet obligations of the Trust, or as they otherwise
may deem desirable to use in the conduct of its affairs or to retain for future requirements or
extensions of the business.
(d) Inasmuch as the computation of net income and gains for Federal income tax purposes may
vary from the computation thereof on the books, the above provisions shall be interpreted to give
the Trustees the power in their discretion to distribute for any fiscal year as ordinary dividends
and as capital gains distributions, respectively, additional amounts sufficient to enable the Trust
to avoid or reduce liability for taxes.
9.3
Power to Modify Foregoing Procedures
. Notwithstanding any of the foregoing
provisions of this Article IX, the Trustees may prescribe, in their absolute discretion except as
may be required by the 1940 Act, such other bases and times for determining the per share asset
value of the Trusts Shares or net income, or the declaration and payment of dividends and
distributions as they may deem necessary or desirable for any reason, including to enable the Trust
to comply with any provision of the 1940 Act, or any securities exchange or association registered
under the Securities Exchange Act of 1934, or any order of exemption issued by the Commission, all
as in effect now or hereafter amended or modified.
ARTICLE X
Shareholders
10.1
Meetings of Shareholders
. The Trust shall hold annual meetings of the
Shareholders (provided that the Trusts initial annual meeting of Shareholders may occur up to one
year after the completion of its initial fiscal year). A special meeting of Shareholders may be
called at any time by a majority of the Trustees or the President and shall be called by any
Trustee for any proper purpose upon written request of Shareholders of the Trust holding in the
aggregate not less than fifty-one percent (51%) of the outstanding Shares of the Trust or class or
series of Shares having voting rights on the matter, such request specifying the purpose or
purposes for which such meeting is to be called. Any shareholder meeting, including a Special
Meeting, shall be held within or without the State of Delaware on such day and at such time as the
Trustees shall designate.
10.2
Voting
. Shareholders shall have no power to vote on any matter except matters on
which a vote of Shareholders is required by applicable law, this Declaration or resolution of the
Trustees. This Declaration expressly provides that no matter for which voting is required by the
Statutory Trust Act in the absence of the contrary provision in the Declaration shall require any
vote. Except as otherwise provided herein, any matter required to be submitted to Shareholders and
affecting one or more classes or series of Shares shall require approval by the required vote of
all the affected classes and series of Shares voting together as a single class; provided, however,
that as to any matter with respect to which a separate vote of any class or series of Shares is
required by the 1940 Act, such requirement as to a separate vote by that class or series of Shares
shall apply in addition to a vote of all the affected classes and series voting together as a
single class. Shareholders of a particular class or series of Shares shall not be entitled to vote
on any matter that affects only one or more other classes or series of Shares. There shall be no
cumulative voting in the election or removal of Trustees.
10.3
Notice of Meeting and Record Date
. Notice of all meetings of Shareholders,
stating the time, place and purposes of the meeting, shall be given by the Trustees by mail to each
Shareholder of record entitled to vote thereat at its registered address, mailed at least 10 days
and not more than 90 days before the meeting or otherwise in compliance with applicable law. Only
the business stated in the notice of the meeting shall be considered at such meeting. Any adjourned
meeting may be held as adjourned one or more times without
12
further notice not later than 120 days after the record date. For the purposes of determining
the Shareholders who are entitled to notice of and to vote at any meeting the Trustees may, without
closing the transfer books, fix a date not more than 90 nor less than 10 days prior to the date of
such meeting of Shareholders as a record date for the determination of the Persons to be treated as
Shareholders of record for such purposes.
10.4
Quorum and Required Vote
. (a) The holders of a majority of the Shares entitled to
vote on any matter at a meeting present in person or by proxy shall constitute a quorum at such
meeting of the Shareholders for purposes of conducting business on such matter. The absence from
any meeting, in person or by proxy, of a quorum of Shareholders for action upon any given matter
shall not prevent action at such meeting upon any other matter or matters which may properly come
before the meeting, if there shall be present thereat, in person or by proxy, a quorum of
Shareholders in respect of such other matters.
(b) Subject to any provision of applicable law, this Declaration or a resolution of the
Trustees specifying a greater or a lesser vote requirement for the transaction of any item of
business at any meeting of Shareholders, (i) the affirmative vote of a majority of the Shares
present in person or represented by proxy and entitled to vote on the subject matter shall be the
act of the Shareholders with respect to such matter, and (ii) where a separate vote of one or more
classes or series of Shares is required on any matter, the affirmative vote of a majority of the
Shares of such class or series of Shares present in person or represented by proxy at the meeting
shall be the act of the Shareholders of such class or series with respect to such matter.
10.5
Proxies, etc
. At any meeting of Shareholders, any holder of Shares entitled to
vote thereat may vote by properly executed proxy, provided that no proxy shall be voted at any
meeting unless it shall have been placed on file with the Secretary, or with such other officer or
agent of the Trust as the Secretary may direct, for verification prior to the time at which such
vote shall be taken. Pursuant to a resolution of a majority of the Trustees, proxies may be
solicited in the name of one or more Trustees or one or more of the officers or employees of the
Trust. No proxy shall be valid after the expiration of 11 months from the date thereof, unless
otherwise provided in the proxy. Only Shareholders of record shall be entitled to vote. Each full
Share shall be entitled to one vote and fractional Shares shall be entitled to a vote of such
fraction. When any Share is held jointly by several persons, any one of them may vote at any
meeting in person or by proxy in respect of such Share, but if more than one of them shall be
present at such meeting in person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect of such Share. A
proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless
challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the
challenger. If the holder of any such Share is a minor or a person of unsound mind, and subject to
guardianship or to the legal control of any other person as regards the charge or management of
such Share, he may vote by his guardian or such other person appointed or having such control, and
such vote may be given in person or by proxy.
10.6
Reports
. The Trustees shall cause to be prepared at least annually and more
frequently to the extent and in the form required by law, regulation or any exchange on which Trust
Shares are listed a report of operations containing a balance sheet and statement of income and
undistributed income of the Trust prepared in conformity with generally accepted accounting
principles and an opinion of an independent public accountant on such financial statements. Copies
of such reports shall be mailed to all Shareholders of record within the time required by the 1940
Act, and in any event within a reasonable period preceding the meeting of Shareholders. The
Trustees shall, in addition, furnish to the Shareholders at least semi-annually to the extent
required by law, interim reports containing an unaudited balance sheet of the Trust as of the end
of such period and an unaudited statement of income and surplus for the period from the beginning
of the current fiscal year to the end of such period.
10.7
Inspection of Records
. The records of the Trust shall be open to inspection by
Shareholders to the same extent as is permitted shareholders of a corporation formed under the
Delaware General Corporation Law.
10.8
Shareholder Action by Written Consent
. Any action which may be taken by
Shareholders by vote may be taken without a meeting if the holders entitled to vote thereon of the
proportion of Shares required for
13
approval of such action at a meeting of Shareholders pursuant to Section 10.4 consent to the
action in writing and the written consents are filed with the records of the meetings of
Shareholders. Such consent shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
ARTICLE XI
Duration; Termination of Trust;
Amendment; Mergers, Etc
.
11.1
Duration
. Subject to possible termination in accordance with the provisions of
Section 11.2 hereof, the Trust created hereby shall have perpetual existence
11.2
Termination
. (a) The Trust may be dissolved only upon approval of not less than
eighty percent (80%) of the Trustees. Upon the dissolution of the Trust:
(i) The Trust shall carry on no business except for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers
of the Trustees under this Declaration shall continue until the affairs of the Trust shall have
been wound up, including the power to fulfill or discharge the contracts of the Trust, collect
its assets, sell, convey, assign, exchange, merge where the Trust is not the survivor, transfer
or otherwise dispose of all or any part of the remaining Trust Property to one or more Persons
at public or private sale for consideration which may consist in whole or in part in cash,
securities or other property of any kind, discharge or pay its liabilities, and do all other
acts appropriate to liquidate its business; provided that any sale, conveyance, assignment,
exchange, merger in which the Trust is not the survivor, transfer or other disposition of all
or substantially all the Trust Property of the Trust shall require approval of the principal
terms of the transaction and the nature and amount of the consideration by Shareholders with
the same vote as required to open-end the Trust.
(iii) After paying or adequately providing for the payment of all liabilities,
and upon receipt of such releases, indemnities and refunding agreements, as they deem
necessary for their protection, the Trustees may distribute the remaining Trust
Property, in cash or in kind or partly each, among the Shareholders according to their
respective rights.
(b) After the winding up and termination of the Trust and distribution to the Shareholders as
herein provided, a majority of the Trustees or an authorized officer of the Trust shall execute and
lodge among the records of the Trust an instrument in writing setting forth the fact of such
termination and shall execute and file a certificate of cancellation with the Secretary of State of
the State of Delaware. Upon termination of the Trust, the Trustees shall thereupon be discharged
from all further liabilities and duties hereunder, and the rights and interests of all Shareholders
shall thereupon cease.
(c) The Trustees may, to the extent they deem appropriate, adopt a plan of liquidation at any
time preceding the anticipated termination date, which plan of liquidation may set forth the terms
and conditions for implementing the termination of the Trusts existence under this Article XI.
Shareholders of the Trust shall not be entitled to vote on the adoption of any such plan or the
termination of the Trusts existence under this Article XI.
11.3
Amendment Procedure
. (a) Except as provided in subsection (b) of this Section
11.3, this Declaration may be amended, after a majority of the Trustees have approved a resolution
therefor, by the affirmative vote required by Section 10.4 of this Declaration. The Trustees also
may amend this Declaration without any vote of Shareholders of any class or series to divide the
Shares of the Trust into one or more classes or additional classes, or one or more series of any
such class or classes, to determine the rights, powers, preferences, limitations and restrictions
of any class or series of Shares, to change the name of the Trust or any class or series of Shares,
to make any change that does not adversely affect the relative rights or preferences of any
Shareholder, as they may deem necessary, or to conform this Declaration to the requirements of the
1940 Act or any other applicable federal laws or regulations including pursuant to Section 6.2 or
the requirements of
14
the regulated investment company provisions of the Code, but the Trustees shall not be liable
for failing to do so.
(b) No amendment may be made to Section 2.1, Section 2.2, Section 2.3, Section 3.9, Section
5.1, Section 5.2, Section 11.2(a), this Section 11.3, Section 11.4, Section 11.6 or Section 11.7 of
this Declaration and no amendment may be made to this Declaration which would change any rights
with respect to any Shares of the Trust by reducing the amount payable thereon upon liquidation of
the Trust or by diminishing or eliminating any voting rights pertaining thereto (except that this
provision shall not limit the ability of the Trustees to authorize, and to cause the Trust to
issue, other securities pursuant to Section 6.2), except after a majority of the Trustees have
approved a resolution therefor, by the affirmative vote of the holders of not less than
seventy-five percent (75%) of the Shares of each affected class or series outstanding, voting as
separate classes or series, unless such amendment has been approved by eighty percent (80%) of the
Trustees, in which case approval by a Majority Shareholder Vote shall be required. Nothing
contained in this Declaration shall permit the amendment of this Declaration to impair the
exemption from personal liability of the Shareholders, Trustees, officers, employees and agents of
the Trust or to permit assessments upon Shareholders.
(c) An amendment duly adopted by the requisite vote of the Board of Trustees and, if required,
the Shareholders as aforesaid, shall become effective at the time of such adoption or at such other
time as may be designated by the Board of Trustees or Shareholders, as the case may be. A
certification in recordable form signed by a majority of the Trustees setting forth an amendment
and reciting that it was duly adopted by the Trustees and, if required, the Shareholders as
aforesaid, or a copy of the Declaration, as amended, in recordable form, and executed by a majority
of the Trustees, shall be conclusive evidence of such amendment when lodged among the records of
the Trust or at such other time designated by the Board.
Notwithstanding any other provision hereof, until such time as a Registration Statement under
the Securities Act of 1933, as amended, covering the first public offering of Shares of the Trust
shall have become effective, this Declaration may be terminated or amended in any respect by the
affirmative vote of a majority of the Trustees or by an instrument signed by a majority of the
Trustees.
11.4
Merger, Consolidation and Sale of Assets
. Except as provided in Section 11.7, the
Trust may merge or consolidate with any other corporation, association, trust or other organization
or may sell, lease or exchange all or substantially all of the Trust Property or the property,
including its good will, upon such terms and conditions and for such consideration when and as
authorized by two-thirds of the Trustees and approved by a Majority Shareholder Vote and any such
merger, consolidation, sale, lease or exchange shall be determined for all purposes to have been
accomplished under and pursuant to the statutes of the State of Delaware.
11.5
Subsidiaries
. Without approval by Shareholders, the Trustees may cause to be
organized or assist in organizing one or more corporations, trusts, partnerships, associations or
other organizations to take over all of the Trust Property or to carry on any business in which the
Trust shall directly or indirectly have any interest, and to sell, convey and transfer all or a
portion of the Trust Property to any such corporation, trust, limited liability company,
association or organization in exchange for the shares or securities thereof, or otherwise, and to
lend money to, subscribe for the shares or securities of, and enter into any contracts with any
such corporation, trust, limited liability company, partnership, association or organization, or
any corporation, partnership, trust, limited liability company, association or organization in
which the Trust holds or is about to acquire shares or any other interests.
11.6
Conversion
. Notwithstanding any other provisions of this Declaration or the
By-Laws of the Trust, a favorable vote of a majority of the Trustees then in office followed by the
favorable vote of the holders of not less than seventy-five percent (75%) of the Shares of each
affected class or series outstanding, voting as separate classes or series, shall be required to
approve, adopt or authorize an amendment to this Declaration that makes the Shares a redeemable
security as that term is defined in the 1940 Act, unless such amendment has been approved by
eighty percent (80%) of the Trustees, in which case approval by a Majority Shareholder Vote shall
be required. Upon the adoption of a proposal to convert the Trust from a closed-end company to
an open-end company as those terms are defined by the 1940 Act and the necessary amendments to
this
15
Declaration to permit such a conversion of the Trusts outstanding Shares entitled to vote,
the Trust shall, upon complying with any requirements of the 1940 Act and state law, become an
open-end investment company. Such affirmative vote or consent shall be in addition to the vote
or consent of the holders of the Shares otherwise required by law, or any agreement between the
Trust and any national securities exchange.
11.7
Certain Transactions
. (a) Notwithstanding any other provision of this Declaration
and subject to the exceptions provided in paragraph (d) of this Section, the types of transactions
described in paragraph (c) of this Section shall require the affirmative vote or consent of a
majority of the Trustees then in office followed by the affirmative vote of the holders of not less
than seventy-five percent (75%) of the Shares of each affected class or series outstanding, voting
as separate classes or series, when a Principal Shareholder (as defined in paragraph (b) of this
Section) is a party to the transaction. Such affirmative vote or consent shall be in addition to
the vote or consent of the holders of Shares otherwise required by law or by the terms of any class
or series of preferred stock, whether now or hereafter authorized, or any agreement between the
Trust and any national securities exchange.
(b) The term Principal Shareholder shall mean any corporation, Person or other entity
which is the beneficial owner, directly or indirectly, of five percent (5%) or more of the
outstanding Shares of all outstanding classes or series and shall include any affiliate or
associate, as such terms are defined in clause (ii) below, of a Principal Shareholder. For the
purposes of this Section, in addition to the Shares which a corporation, Person or other entity
beneficially owns directly, (a) any corporation, Person or other entity shall be deemed to be the
beneficial owner of any Shares (i) which it has the right to acquire pursuant to any agreement or
upon exercise of conversion rights or warrants, or otherwise (but excluding share options granted
by the Trust) or (ii) which are beneficially owned, directly or indirectly (including Shares deemed
owned through application of clause (i) above), by any other corporation, Person or entity with
which its affiliate or associate (as defined below) has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of Shares, or which is its
affiliate or associate as those terms are defined in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, and (b) the outstanding Shares shall include
Shares deemed owned through application of clauses (i) and (ii) above but shall not include any
other Shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights
or warrants, or otherwise.
(c) This Section shall apply to the following transactions:
(i) The merger or consolidation of the Trust or any subsidiary of the Trust with or into
any Principal Shareholder.
(ii) The issuance of any securities of the Trust to any Principal Shareholder for cash
(other than pursuant to any automatic dividend reinvestment plan).
(iii) The sale, lease or exchange of all or any substantial part of the assets of the
Trust to any Principal Shareholder (except assets having an aggregate fair market value of less
than two percent (2%) of the total assets of the Trust, aggregating for the purpose of such
computation all assets sold, leased or exchanged in any series of similar transactions within a
twelve-month period.)
(iv) The sale, lease or exchange to the Trust or any subsidiary thereof, in exchange for
securities of the Trust, of any assets of any Principal Shareholder (except assets having an
aggregate fair market value of less than two percent (2%) of the total assets of the Trust,
aggregating for the purposes of such computation all assets sold, leased or exchanged in any
series of similar transactions within a twelve-month period).
(d) The provisions of this Section shall not be applicable to (i) any of the transactions
described in paragraph (c) of this Section if eighty percent (80%) of the Trustees shall by
resolution have approved a memorandum of understanding with such Principal Shareholder with respect
to and substantially consistent with such transaction, in which case approval by a Majority
Shareholder Vote shall be the only vote of Shareholders required by this Section, or (ii) any such
transaction with any entity of which a majority of the
16
outstanding shares of all classes and series of a stock normally entitled to vote in elections
of directors is owned of record or beneficially by the Trust and its subsidiaries.
(e) The Board of Trustees shall have the power and duty to determine for the purposes of this
Section on the basis of information known to the Trust whether (i) a corporation, person or entity
beneficially owns five percent (5%) or more of the outstanding Shares of any class or series, (ii)
a corporation, person or entity is an affiliate or associate (as defined above) of another,
(iii) the assets being acquired or leased to or by the Trust or any subsidiary thereof constitute a
substantial part of the assets of the Trust and have an aggregate fair market value of less than
two percent (2%) of the total assets of the Trust, and (iv) the memorandum of understanding
referred to in paragraph (d) hereof is substantially consistent with the transaction covered
thereby. Any such determination shall be conclusive and binding for all purposes of this Section.
ARTICLE XII
Miscellaneous
12.1
Filing
. (a) This Declaration and any amendment or supplement hereto shall be
filed in such places as may be required or as the Trustees deem appropriate. Each amendment or
supplement shall be accompanied by a certificate signed and acknowledged by a Trustee stating that
such action was duly taken in a manner provided herein, and shall, upon insertion in the Trusts
minute book, be conclusive evidence of all amendments contained therein. A restated Declaration,
containing the original Declaration and all amendments and supplements theretofore made, may be
executed from time to time by a majority of the Trustees and shall, upon insertion in the Trusts
minute book, be conclusive evidence of all amendments and supplements contained therein and may
thereafter be referred to in lieu of the original Declaration and the various amendments and
supplements thereto.
(b) The Trustees hereby authorize and direct a Certificate of Trust, in the form attached
hereto as Exhibit A, to be executed and filed with the Office of the Secretary of State of the
State of Delaware in accordance with the Delaware Statutory Trust Act.
12.2
Resident Agent
. The Trust shall maintain a resident agent in the State of
Delaware, which agent shall initially be The Corporation Trust Company, 1209 Orange Street,
Wilmington, Delaware 19801. The Trustees may designate a successor resident agent, provided,
however, that such appointment shall not become effective until written notice thereof is delivered
to the office of the Secretary of the State.
12.3
Governing Law
. This Declaration is executed by the Trustees and delivered in the
State of Delaware and with reference to the laws thereof, and the rights of all parties and the
validity and construction of every provision hereof shall be subject to and construed according to
laws of said State and reference shall be specifically made to the Delaware General Corporation Law
as to the construction of matters not specifically covered herein or as to which an ambiguity
exists, although such law shall not be viewed as limiting the powers otherwise granted to the
Trustees hereunder and any ambiguity shall be viewed in favor of such powers.
12.4
Counterparts
. This Declaration may be simultaneously executed in several
counterparts, each of which shall be deemed to be an original, and such counterparts, together,
shall constitute one and the same instrument, which shall be sufficiently evidenced by any such
original counterpart.
12.5
Reliance by Third Parties
. Any certificate executed by an individual who,
according to the records of the Trust, or of any recording office in which this Declaration may be
recorded, appears to be a Trustee hereunder, certifying to: (a) the number or identity of Trustees
or Shareholders, (b) the name of the Trust, (c) the due authorization of the execution of any
instrument or writing, (d) the form of any vote passed at a meeting of Trustees or Shareholders,
(e) the fact that the number of Trustees or Shareholders present at any meeting or executing any
written instrument satisfies the requirements of this Declaration, (f) the form of any By Laws
adopted by or the identity of any officers elected by the Trustees, or (g) the existence of any
fact or facts which in any manner relate to the affairs of the Trust, shall be conclusive evidence
as to the matters so certified in favor of any person dealing with the Trustees and their
successors.
17
12.6
Provisions in Conflict with Law or Regulation
. (a) The provisions of this
Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that
any of such provisions is in conflict with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of this Declaration;
provided, however, that such determination shall not affect any of the remaining provisions of this
Declaration or render invalid or improper any action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall attach only to such provision in such
jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any
other provision of this Declaration in any jurisdiction.
18