Notice is hereby given that a joint special meeting of shareholders (the Special Meeting) of BlackRock Municipal Income Investment Quality Trust
(NYSE Ticker: BAF) (BAF), BlackRock Municipal Bond Trust (NYSE Ticker: BBK) (BBK), BlackRock MuniHoldings Fund II, Inc. (NYSE Ticker: MUH) (MUH), BlackRock MuniHoldings Quality Fund, Inc. (NYSE Ticker: MUS)
(MUS) and BlackRock MuniHoldings Fund, Inc. (NYSE Ticker: MHD) (MHD or the Acquiring Fund, and collectively with BAF, BBK, MUH and MUS, the Funds, and each, a Fund) will be held on
December 15, 2020 at 11:00 a.m. (Eastern time) for the following purposes:
Holders in respect of their common shares and VMTP Shares, respectively, and (ii) the termination by BBK of its registration under the 1940 Act, and the liquidation, dissolution and
termination of BBK in accordance with its Agreement and Declaration of Trust and Delaware law (the BBK Reorganization).
No Reorganization is contingent upon the approval of any other Reorganization. If a Reorganization is not consummated, then the Fund for which such
Reorganization(s) was not consummated would continue to exist and operate on a standalone basis.
Shareholders of record of each Fund as of the close of
business on October 16, 2020 are entitled to notice of and to vote at the Special Meeting or any adjournment or postponement thereof.
The Funds are
soliciting the vote of their common shareholders on Proposal 1(A), Proposal 1(C), Proposal 1(E), Proposal 1(G), Proposal 2(A), Proposal 2(B), Proposal 2(C) and Proposals 2(D) through the joint proxy statement/prospectus.
Each Fund is separately soliciting the votes of its respective preferred shareholders on each proposal through a separate proxy statement and not through the
joint proxy statement/prospectus.
The officers, directors or trustees of each Fund named as
proxies by shareholders may participate in the Special Meeting by remote communications, including, without limitation, by means of a conference telephone or similar communications equipment by means of which all persons participating in the Special
Meeting can hear and be heard by each other, and the participation of such officers, directors or trustees in the Special Meeting pursuant to any such communications system shall constitute presence at the Special Meeting.
JOHN M. PERLOWSKI
This Proxy Statement is furnished to you as a holder of Variable Rate Muni Term Preferred Shares (VMTP Shares and the holders thereof, VMTP
Holders) of BlackRock Municipal Income Investment Quality Trust (NYSE Ticker: BAF) (BAF), BlackRock Municipal Bond Trust (NYSE Ticker: BBK) (BBK), BlackRock MuniHoldings Fund II, Inc. (NYSE Ticker: MUH)
(MUH), BlackRock MuniHoldings Quality Fund, Inc. (NYSE Ticker: MUS) (MUS) and/or BlackRock MuniHoldings Fund, Inc. (NYSE Ticker: MHD) (MHD or the Acquiring Fund, and collectively with BAF, BBK, MUH and
MUS, the Funds, and each, a Fund) in connection with the solicitation of proxies by each Funds Board of Directors or Board of Trustees, as applicable (the Board, the members of which are referred to as
Board Members). Each of BAF, BBK, MUH and MUS may be referred to herein individually as a Target Fund or collectively as the Target Funds. The proxies will be voted at the joint special meeting of the shareholders
of each Fund and at any and all adjournments, postponements and delays thereof (the Special Meeting). The Special Meeting will be held on December 15, 2020 at 11:00 a.m. (Eastern time) to consider the proposals set forth below and
discussed in greater detail elsewhere in this Proxy Statement. Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Special Meeting will be held in a virtual meeting
format only. Shareholders will not have to travel to attend the Special Meeting, but will be able to view the meeting live and cast their votes by accessing a web link. If you are unable to attend the Special Meeting or any adjournment or
postponement thereof, the Board of your Fund recommends that you vote your preferred shares, by completing and returning the enclosed proxy card or by recording your voting instructions by telephone or via the internet. The approximate mailing date
of this Proxy Statement and accompanying form of proxy is [●], 2020.
It is expected that the effective dates (collectively, the Closing Date) of the Reorganizations will be sometime during the first quarter of 2021,
but they may be at a different time as described herein. The term Combined Fund refers to the Acquiring Fund as the surviving Fund after the consummation of each of the Reorganizations.
No Reorganization is contingent upon the approval of any other Reorganization. If a Reorganization is not consummated, then the Fund for which such
Reorganization(s) was not consummated would continue to exist and operate on a standalone basis.
The Board of each Fund has determined that including
these proposals applicable to the preferred shareholders of the Funds in one Proxy Statement will reduce costs and is in the best interest of each Funds shareholders.
Distribution to the shareholders of this Proxy Statement and the accompanying materials[, or a Notice of Internet Availability of Proxy Materials,] will
commence on or about [●], 2020.
Shareholders of record of each Fund as of the close of business on October 16, 2020 (the Record
Date) are entitled to notice of and to vote at the Special Meeting or any adjournment or postponement thereof.
Shareholders of each Fund are entitled to one vote for each common share or VMTP Share, as applicable (each, a
Share), held, with no Shares having cumulative voting rights. Preferred shareholders of each Fund will have equal voting rights with the common shareholders of such Fund with respect to the proposals that require the vote of the
Funds VMTP Shares and common shares as a single class. The quorum and voting requirements for each Fund are described in the section herein entitled Vote Required and Manner of Voting Proxies.
This Proxy Statement is only being delivered to the preferred shareholders of each Fund. Each Fund is separately soliciting the votes of its respective common
shareholders on each of the foregoing proposals that require the vote of the common shareholders and preferred shareholders as a single class through a separate joint proxy statement/prospectus and not through this Proxy Statement.
BAF and BBK are each formed as a Delaware statutory trust. MUH, MUS and the Acquiring Fund are each organized as a Maryland corporation. Each of BAF, BBK,
MUH, MUS and the Acquiring Fund is a diversified, closed-end management investment company registered under the 1940 Act. The Reorganizations seek to achieve certain economies of scale and other operational
efficiencies by combining five funds that have identical, substantially similar or similar investment objectives and similar investment strategies, policies and restrictions.
Assuming each of the Reorganizations receives the necessary approvals, the Acquiring Fund will acquire substantially all of the assets and assume
substantially all of the liabilities of BAF, BBK, MUH and MUS in exchange solely for newly issued common shares and VMTP Shares of the Acquiring Fund in the form of book-entry interests. The Acquiring Fund will list the newly issued common shares on
the New York Stock Exchange (NYSE). Such newly issued Acquiring Fund Shares will be distributed to BAF, BBK, MUH and MUS shareholders (although cash may be distributed in lieu of fractional common shares) and each of BAF, BBK, MUH and
MUS will terminate its registration under the 1940 Act. Each of BAF and BBK will liquidate, dissolve and terminate in accordance with its respective Agreement and Declaration of Trust and Delaware law. Each of MUH and MUS will liquidate, dissolve
and terminate in accordance with its respective charter and Maryland law. The Acquiring Fund will continue to operate after the Reorganizations as a registered, diversified, closed-end management investment
company with the investment objective, investment strategies, investment policies and investment restrictions described in this Proxy Statement.
The
Fund(s) in which you owned Shares on the Record Date is named on the proxy card [and Notice of Internet Availability of Proxy Materials]. If you owned Shares in more than one Fund on the Record Date, you may receive more than one proxy card. Even if
you plan to attend the Special Meeting, please sign, date and return EACH proxy card you receive or, if you provide voting instructions by telephone or via the Internet, please vote on each proposal affecting EACH Fund you own. If you vote by
telephone or via the Internet, you will be asked to enter a unique code that has been assigned to you, which is printed on your proxy card(s) [and Notice of Internet Availability of Proxy Materials]. This code is designed to confirm your identity,
provide access into the voting website and confirm that your voting instructions are properly recorded.
All properly executed proxies received prior to
the Special Meeting will be voted in accordance with the instructions marked thereon or otherwise as provided therein. On any matter coming before the Special Meeting as to which a shareholder has specified a choice on that shareholders proxy,
the Shares will be voted accordingly. If a proxy card is properly executed and returned and no choice is specified with respect to a proposal, the Shares will be voted FOR the proposal. Shareholders who execute proxies or provide voting
instructions by telephone or via the Internet may revoke them with respect to a proposal at any time before a vote is taken on the proposal by filing with the applicable Fund a written notice of revocation (addressed to the Secretary of the Fund at
the principal executive offices of the Fund at the New York address provided herein), by delivering a duly executed proxy bearing a later date or by attending the Special Meeting and voting by ballot, in all cases prior to the exercise of the
authority granted in the proxy card. Merely attending the Special Meeting, however, will not revoke any previously executed proxy. If you hold Shares through a bank or other intermediary, please consult your bank or intermediary regarding your
ability to revoke voting instructions after such instructions have been provided.
For information regarding how to access the Special Meeting, please contact Georgeson LLC, the firm assisting us in the solicitation of proxies, toll
free at 1-866-767-8867.
This
Proxy Statement sets forth concisely the information that preferred shareholders of each Fund should know before voting on the proposals set forth herein. Please read it carefully and retain it for future reference. Copies of each Funds most
recent annual report and semi-annual report can be obtained on a website maintained by BlackRock, Inc. (BlackRock) at www.blackrock.com. In addition, each Fund will furnish, without charge, a copy of its most recent annual report or
semi-annual report to any shareholder upon request. Any such request should be directed to BlackRock by calling (800) 882-0052 or by writing to the respective Fund at 100 Bellevue Parkway, Wilmington,
Delaware 19809. The annual and semi-annual reports of each Fund are available on the EDGAR Database on the SECs website at www.sec.gov. The address of the principal executive offices of the Funds is 100 Bellevue Parkway, Wilmington, Delaware
19809, and the telephone number is (800) 882-0052.
Each Fund is subject to the informational requirements of the
Securities Exchange Act of 1934 (the Exchange Act) and the 1940 Act and, in accordance therewith, file reports, proxy statements, proxy materials and other information with the Securities and Exchange Commission (the SEC).
Materials filed with the SEC can be downloaded from the SECs website at www.sec.gov. You may also request copies of these materials, upon payment at the prescribed rates of a duplicating fee, by electronic request to the SECs e-mail address (publicinfo@sec.gov). Reports, proxy statements and other information concerning the Funds may also be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
BlackRock updates performance information and certain other data for the Funds on a monthly basis on its website in the
Closed-End Funds section of www.blackrock.com as well as certain other material information as necessary from time to time. Investors and others are advised to check the website for updated
performance information and the release of other material information about the Funds. References to BlackRocks website are intended to allow investors public access to information regarding the Funds and do not, and are not intended to,
incorporate BlackRocks website in this Proxy Statement.
Please note that only one copy of shareholder documents, including annual or semi-annual
reports and proxy materials, may be delivered to two or more shareholders of the Funds who share an address, unless the Funds have received instructions to the contrary. This practice is commonly called householding and it is intended to
reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. To request a separate copy of any shareholder document or for
instructions as to how to request a separate copy of these documents or as to how to request a single copy if multiple copies of these documents are received, shareholders should contact the respective Fund at the address and phone number set forth
above.
The common shares of BlackRock MuniHoldings Fund, Inc. are listed on the NYSE under the ticker symbol MHD and will continue to be so
listed after the completion of the Reorganizations. The common shares of BlackRock Municipal Income Investment Quality Trust are listed on the NYSE under the ticker symbol BAF, the common
shares of BlackRock Municipal Bond Trust are listed on the NYSE under the ticker symbol BBK, the common shares of BlackRock MuniHoldings Fund II, Inc. are listed on the NYSE under the
ticker symbol MUH and the common shares of BlackRock MuniHoldings Quality Fund, Inc. are listed on the NYSE under the ticker symbol MUS. The preferred shares of each Fund are not listed on any exchange and have not been
registered under the Securities Act of 1933 (the Securities Act), or any state securities laws, and unless so registered under the Securities Act, may not be offered, sold, assigned, transferred, pledged, encumbered or otherwise disposed
of except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. Accordingly, the VMTP Shares to be issued in the Reorganizations are expected to
be issued only to holders of VMTP Shares of BAF, BBK, MUH and/or MUS that are qualified institutional buyers (as defined in Rule 144A under the Securities Act) in accordance with the exemption from the registration requirements of the
Securities Act provided by Section 4(a)(2) of the Securities Act and are subject to restrictions on transfer.
PROPOSAL 2 ISSUANCE OF ACQUIRING FUND COMMON SHARES
In connection with the proposed Reorganizations described under Proposal 1: Reorganizations of the Funds, the common shareholders and the VMTP
Holders of the Acquiring Fund are being asked to approve the issuance of additional Acquiring Fund common shares.
Please see Information about the
Common Shares of the Funds for information about the Funds common shares.
In the Reorganization, the Acquiring Fund will acquire
substantially all of the assets of BAF, BBK, MUH and MUS and assume substantially all of the liabilities of BAF, BBK, MUH and MUS in exchange for newly issued Acquiring Fund common shares, with a par value of $0.10 per share, and newly issued
Acquiring Fund VMTP Shares, with a par value of $0.10 per share and liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on the BAF, BBK, MUH or MUS VMTP Shares up to and including the day
immediately preceding the Closing Date if such dividends have not been paid prior to the Closing Date). The Acquiring Fund will list the newly issued common shares on the NYSE. Each of BAF, BBK, MUH and MUS will distribute Acquiring Fund Shares
received on a pro rata to BAF, BBK, MUH or MUS shareholders (although cash may be paid in lieu of any fractional common shares). The newly-issued Acquiring Fund Shares will be issued in the form of book-entry interests. Such distribution of
Acquiring Fund Shares to BAF, BBK, MUH or MUS shareholders will be accomplished by opening new accounts on the books of the Acquiring Fund in the names of the shareholders of BAF, BBK, MUH and MUS and transferring to those shareholder accounts
Acquiring Fund Shares.
The Acquiring Fund will continue to operate after the Reorganizations as a registered, diversified,
closed-end management investment company with the investment objective, investment strategies, investment policies and investment restrictions described in this Proxy Statement. As a result of the
Reorganizations, however, a shareholder of each Fund may hold a reduced percentage of ownership in the larger Combined Fund than such shareholder did in any of the individual Funds before the Reorganizations.
If the Issuance with respect to a Funds Reorganization(s) is not approved, the Investment Advisor may, in connection with the ongoing management of that
Fund and its product line, recommend alternative proposals to the Board of that Fund.
The Board of the Acquiring Fund recommends that the Acquiring Fund
VMTP Holders vote FOR each Issuance at the Special Meeting.
Each Issuance contemplated by Proposal 2(A), Proposal 2(B), Proposal 2(C) and
Proposal 2(D) requires the affirmative vote of a majority of the votes entitled to be cast by holders of the Acquiring Fund common shares and Acquiring Fund VMTP Shares present at the Special Meeting or represented by proxy voting as a single class.
Subject to the requisite approval of the shareholders of each Fund with respect to the Reorganizations, as well as certain consents, confirmations and/or
waivers from various third parties, it is expected that the Closing Date of the Reorganizations will be sometime during the first quarter of 2021, but it may be at a different time as described herein.
The affirmative vote of shareholders representing at least a majority of the votes entitled to be cast by holders of the Acquiring Fund common shares and
Acquiring Fund VMTP Shares present at the Special Meeting or represented by proxy, voting together as a single class is required to approve each Issuance. For additional information regarding voting requirements, see Vote Required and Manner
of Voting Proxies.
27
INFORMATION ABOUT THE PREFERRED SHARES OF THE FUNDS
BAFs and BBKs respective Agreement and Declaration of Trust authorizes the issuance of an unlimited number of shares, par value $.001 per share,
all of which were initially classified as common shares. MUHs, MUSs and the Acquiring Funds respective charter authorizes 200 million shares, par value $0.10 per share, all of which were initially classified as common shares.
The Board of each Fund is authorized, however, to reclassify any unissued common shares to preferred shares without the approval of its common shareholders.
Upon the Closing Date of the Reorganizations, BAF, BBK, MUH and MUS VMTP Holders will receive on a one-for-one basis one newly issued Acquiring Fund VMTP Share, par value $0.10 per share and with a liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on
the BAF, BBK, MUH or MUS VMTP Shares up to and including the day immediately preceding the Closing Date of the Reorganizations if such dividends have not been paid prior to the Closing Date), in exchange for each BAF, BBK, MUH or MUS VMTP Share held
by the BAF, BBK, MUH or MUS VMTP Holders immediately prior to the Closing Date. The newly issued Acquiring Fund VMTP Shares may be of the same series as the Acquiring Funds Series W-7 VMTP Shares or a
substantially identical series. No fractional Acquiring Fund VMTP Shares will be issued.
The newly issued Acquiring Fund VMTP Shares will have terms that
are substantially identical to the terms of the outstanding BAF, BBK, MUH and MUS VMTP Shares, including the same term redemption date of July 2, 2021.
The terms of the Acquiring Fund VMTP Shares to be issued in connection with the Reorganizations will be substantially identical to the terms of the Acquiring
Funds outstanding VMTP Shares and will rank on parity with the Acquiring Funds outstanding VMTP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the
Acquiring Fund. The Reorganizations will not result in any changes to the terms of the Acquiring Funds VMTP Shares currently outstanding.
In
connection with the Reorganizations, the Acquiring Fund expects to issue 422 additional VMTP Shares to BAF VMTP Holders, 799 additional VMTP Shares to BBK, 550 additional VMTP Shares to MUH and 870 additional VMTP Shares to MUS VMTP Holders.
Following the completion of the Reorganizations, the Combined Fund is expected to have 3,478 VMTP Shares outstanding. As a result of the Reorganizations, the Acquiring Funds Articles Supplementary will be amended to authorize an additional
2,641 VMTP Shares. A form of such amendment is attached as Appendix C.
Set forth below is information about each Funds preferred shares as
of August 31, 2020.
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|
|
|
|
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Fund
|
|
Title of
Class
|
|
Amount
Authorized
|
|
Amount Authorized
Under Each Series
|
|
Amount
Held by
Fund for
its
Own
Account
|
|
Amount
Outstanding
Exclusive of
Amount
Shown in
Previous
Column
|
|
Issue Date
|
|
Term
Redemption
Date
|
BAF
|
|
VMTP Shares
|
|
422
|
|
Series W-7 422
|
|
[0]
|
|
422
|
|
12/16/2011
|
|
7/2/2021
|
BBK
|
|
VMTP Shares
|
|
799
|
|
Series W-7 799
|
|
[0]
|
|
799
|
|
12/16/2011
|
|
7/2/2021
|
MUH
|
|
VMTP Shares
|
|
550
|
|
Series W-7 550
|
|
[0]
|
|
550
|
|
12/16/2011
|
|
7/2/2021
|
MUS
|
|
VMTP Shares
|
|
870
|
|
Series W-7 870
|
|
[0]
|
|
870
|
|
12/16/2011
|
|
7/2/2021
|
Acquiring Fund (MHD)
|
|
VMTP Shares
|
|
837
|
|
Series W-7 837
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|
[0]
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|
837
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12/16/2011
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|
7/2/2021
|
The outstanding preferred shares of each Fund are fully paid and non-assessable and
have no preemptive or cumulative voting rights.
Below is a table that details, as of August 31, 2020, (i) each Funds current leverage
attributable to preferred shares as a percentage of its total net assets, (ii) the Combined Funds leverage attributable to preferred shares on a pro forma
28
basis as a percentage of its total net assets assuming only the BAF Reorganization was consummated as of August 31, 2020, which represents the combination of completed Reorganizations
presented in this Proxy Statement that would result in the highest leverage attributable to preferred shares, and (iii) the Combined Funds leverage attributable to preferred shares on a pro forma basis as a percentage of its total net
assets assuming all of the Reorganizations were consummated as of August 31, 2020, which represents, in the Investment Advisors view, the most likely combination of the Reorganizations and the combination of completed Reorganizations that
would result in the lowest leverage attributable to preferred shares.
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Fund
|
|
Title of Class
|
|
Shares
Outstanding
|
|
Liquidation
Preference
Per Share
|
|
Aggregate
Liquidation
Preference
|
|
Total
Managed
Assets
|
|
|
As
Percentage
of Net
Assets
|
|
BAF
|
|
VMTP Shares
|
|
422
|
|
$100,000
|
|
$42,200,000
|
|
$
|
225,265,807
|
|
|
|
18.7
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%
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BBK
|
|
VMTP Shares
|
|
799
|
|
$100,000
|
|
$79,900,000
|
|
$
|
287,421,860
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|
|
|
27.8
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%
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MUH
|
|
VMTP Shares
|
|
550
|
|
$100,000
|
|
$55,000,000
|
|
$
|
282,776,832
|
|
|
|
19.4
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%
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MUS
|
|
VMTP Shares
|
|
870
|
|
$100,000
|
|
$87,000,000
|
|
$
|
297,376,250
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|
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29.3
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%
|
Acquiring Fund (MHD)
|
|
VMTP Shares
|
|
837
|
|
$100,000
|
|
$83,700,000
|
|
$
|
374,039,752
|
|
|
|
22.4
|
%
|
Pro forma Combined Fund (BAF into MHD)
|
|
VMTP Shares
|
|
1,259
|
|
$100,000
|
|
$125,900,000
|
|
$
|
599,305,559
|
|
|
|
21.0
|
%
|
Pro forma Combined Fund (BAF, BBK, MUH and MUS into MHD)
|
|
VMTP Shares
|
|
3,478
|
|
$100,000
|
|
$347,800,000
|
|
$
|
1,466,880,501
|
|
|
|
23.7
|
%
|
BAF, BBK, MUH, MUS and the Acquiring Fund have each issued VMTP Shares, $100,000 liquidation value per share, with
substantially identical terms, including the same term redemption date of July 2, 2021.
The VMTP Shares were offered to qualified institutional
buyers in private transactions exempt from registration under the Securities Act.
The annualized dividend rates for the preferred shares for each
Funds most recent fiscal year end were as follows:
|
|
|
|
|
Fund
|
|
Rate
|
|
BAF
|
|
|
1.67
|
%
|
BBK
|
|
|
1.67
|
%
|
MUH
|
|
|
2.18
|
%
|
MUS
|
|
|
2.18
|
%
|
Acquiring Fund (MHD)
|
|
|
2.18
|
%
|
Description of the VMTP Shares of Each Fund
Each Funds VMTP Shares may be redeemed, in whole or in part, at any time at the option of each Fund. The redemption price per VMTP Share is equal to the
liquidation preference per share plus any outstanding unpaid dividends. Each Fund is required to redeem its VMTP Shares on the term redemption date of the VMTP Shares, unless earlier redeemed or repurchased or unless extended. There is no assurance
that the term of each Funds VMTP Shares will be extended further or that each Funds VMTP Shares will be replaced with any other preferred shares or other form of leverage upon the redemption or repurchase of the VMTP Shares. Six months
prior to the term redemption date of the VMTP Shares, each Fund is required to begin to segregate liquid assets with its respective custodian to fund the redemption. In addition, each Fund is required to redeem certain of its outstanding VMTP Shares
if it fails to comply with certain asset coverage, basic maintenance amount or leverage requirements.
Dividends on each Funds VMTP Shares are
declared daily and payable monthly at a variable rate set weekly at a fixed rate spread to the SIFMA Municipal Swap Index. The fixed spread is determined based on the long-term preferred share rating assigned to each Funds VMTP Shares by the
ratings agencies then rating its respective VMTP Shares. At the date of issuance, each Funds VMTP Shares were assigned long-term ratings of Aaa from Moodys
29
and AAA from Fitch. Subsequent to the issuance of Funds VMTP Shares, Moodys completed a review of its methodology for rating securities issued by registered closed-end funds. As of August 31, 2020, each Funds VMTP Shares were assigned a long-term rating of [Aa1] from Moodys under its new rating methodology. Each Funds VMTP Shares continue to be
assigned a long-term rating of AAA from Fitch. The dividend rate on each Funds VMTP Shares is subject to a step-up spread if each Fund fails to comply with certain provisions, including, among other
things, the timely payment of dividends, redemptions or gross-up payments, and complying with certain asset coverage and leverage requirements. For the fiscal year ended April 30, 2020, the annualized
dividend rates for the VMTP Shares of the Acquiring Fund, MUH and MUS were 2.18%, 2.18% and 2.18%, respectively. For the fiscal year ended August 31, 2020, the annualized dividend rates for the VMTP Shares of BAF and BBK was 1.67% and 1.67%,
respectively.
Each Funds VMTP Shares are subject to certain restrictions on transfer, and each Fund may also be required to register its VMTP
Shares for sale under the Securities Act under certain circumstances. In addition, amendments to each Funds VMTP Shares governing documents generally require the consent of the holders of VMTP Shares.
Each Funds VMTP Shares rank prior to each Funds common shares as to the payment of dividends by each Fund and distribution of assets upon
dissolution or liquidation of each Fund. The 1940 Act prohibits the declaration of any dividend on each Funds common shares or the repurchase of each Funds common shares if each Fund fails to maintain asset coverage of at least 200% of
the liquidation preference of each Funds outstanding VMTP Shares. In addition, pursuant to the VMTP Shares governing instruments, each Fund is restricted from declaring and paying dividends on classes of shares ranking junior to or on
parity with each Funds VMTP Shares or repurchasing such shares if each Fund fails to declare and pay dividends on the VMTP Shares, redeem any VMTP Shares required to be redeemed under the VMTP Shares governing instruments or comply with
the basic maintenance amount requirement of the ratings agencies rating the VMTP Shares.
The holders of each Funds VMTP Shares have voting rights
equal to the voting rights of the holders of their respective common shares (one vote per share) and will vote together with holders of their respective common shares (one vote per share) as a single class on certain matters. However, the holders of
each Funds VMTP Shares, voting as a separate class, are also entitled to elect two trustees to the Board of each Fund. The holders of each Funds VMTP Shares are also entitled to elect each Funds full board of trustees if dividends
on the VMTP Shares are not paid for a period of two years. The holders of each Funds VMTP Shares are also generally entitled to a separate class vote to amend the VMTP Shares governing documents. In addition, the 1940 Act requires the
approval of the holders of a majority of any outstanding VMTP Shares, voting as a separate class, to (a) adopt any plan of reorganization that would adversely affect the VMTP Shares, (b) change each Funds sub-classification as a closed-end investment company or change its fundamental investment restrictions or (c) change its business so as to cease to be an investment
company.
30
RISK FACTORS AND SPECIAL CONSIDERATIONS
Comparison of Risks
Because of
their identical, substantially similar or similar investment objectives and similar investment strategies, each Fund is subject to similar investment risks. With respect to the differences in risks, those risks of BAF, BBK, MUH and/or MUS that are
not shared with the Acquiring Fund are generally a result of differences in the Funds principal investment strategies described above under SummaryInvestment Objective and Policies.
Each Fund utilizes leverage through the issuance of VMTP Shares and TOBs. See The Acquiring Funds InvestmentsLeverage; General
Risks of Investing in the Acquiring FundLeverage Risk; and General Risks of Investing in the Acquiring FundTender Option Bond Risk. The Acquiring Fund is expected to continue to leverage its assets after the Closing
Date of the Reorganizations through the use of VMTP Shares and TOBs. Please see Information about the Preferred Shares of the Funds for additional information about the preferred shares of each Fund.
In the normal course of business, each Fund invests in securities and enters into transactions where risks exist due to fluctuations in the market (market
risk) or failure of the issuer of a security to meet all its obligations (issuer credit risk). The value of securities held by the Funds may decline in response to certain events, including those directly involving the issuers whose securities are
owned by the Funds; conditions affecting the general economy; overall market changes; pandemics, epidemics and other global health events; local, regional or global political, social or economic instability; and currency and interest rate and price
fluctuations. Similar to issuer credit risk, the Funds may be exposed to counterparty credit risk, or the risk that an entity with which the Funds have unsettled or open transactions may fail to or be unable to perform on its commitments.
The Combined Fund will be managed in accordance with the same investment objective, investment strategies and investment policies, and subject to the same
risks, as the Acquiring Fund. Risk is inherent in all investing. An investment in the Acquiring Fund should not be considered a complete investment program. Each shareholder should take into account the Acquiring Funds investment objective as
well as the shareholders other investments when considering an investment in the Acquiring Fund. You may lose part or all of your investment in the Acquiring Fund or your investment may not perform as well as other similar investments.
General Risks of Investing in the Acquiring Fund:
Municipal Bond Market Risk. Economic exposure to the municipal securities market involves certain risks. The Acquiring Funds economic exposure to
municipal securities includes municipal securities in the Acquiring Funds portfolio and municipal securities to which the Acquiring Fund is exposed through the ownership of residual interests in municipal TOBs (TOB 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 financial crisis of 2007-2009 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 Acquiring Fund is economically exposed is generally less than that for corporate equities or bonds, and the investment performance of the Acquiring Fund
may therefore be more dependent on the analytical abilities of the Investment Advisor than would be a fund investing solely in stocks or taxable bonds. The secondary market for municipal securities, particularly the below investment grade securities
to which the Acquiring Fund may be economically exposed, also tends to be less well-developed or liquid than many other securities markets, which may adversely affect the Acquiring Funds ability to sell such securities at attractive prices or
at prices approximating those at which the Acquiring Fund currently values them.
In addition, many state and municipal governments that issue securities
are 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
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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. 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 Acquiring Fund may take possession of and manage the assets securing the issuers obligations on such securities, which may increase the Acquiring Funds operating expenses. Any income
derived from the Acquiring Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to regulated investment
companies (RICs).
Taxable Municipal Securities Risk. Build America Bonds involve similar risks as municipal bonds, including credit
and market risk. In particular, should a Build America Bonds issuer fail to continue to meet the applicable requirements imposed on the bonds as provided by the American Recovery and Reinvestment Act (ARRA), it is possible that
such issuer may not receive federal cash subsidy payments, impairing the issuers ability to make scheduled interest payments. The Build America Bond program expired on December 31, 2010 and no further issuance is permitted unless Congress
renews the program. As a result, the number of available Build America Bonds is limited, which may negatively affect the value of the Build America Bonds. In addition, there can be no assurance that Build America Bonds will be actively traded. It is
difficult to predict the extent to which a market for such bonds will continue, meaning that Build America Bonds may experience greater illiquidity than other municipal obligations. The Build America Bonds outstanding as of December 31, 2010
will continue to be eligible for the federal interest rate subsidy, which continues for the life of the Build America Bonds; however, no bonds issued following expiration of the Build America Bond program will be eligible for the U.S. federal tax
subsidy.
Municipal Securities Risks. Municipal securities risks include the ability of the issuer to repay the obligation, the relative lack of
information about certain issuers of municipal securities, and the possibility of future legislative changes which could affect the market for and the value of municipal securities. These risks include:
General Obligation Bonds Risks. General obligation bonds are typically secured by the issuers pledge of its faith, credit and taxing power for
the repayment of principal and the payment of interest. The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws, and an entitys creditworthiness will depend on many factors,
including potential erosion of its tax base due to population declines, natural disasters, declines in the states industrial base or inability to attract new industries, economic limits on the ability to tax without eroding the tax base, state
legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on federal or state aid, access to capital markets or other factors beyond the states or entitys control.
Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the issuers maintenance of its tax base.
Revenue Bonds Risks. Revenue or special obligation bonds are typically payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue sources such as payments from the user of the facility being financed. Accordingly, the timely payment of interest and the repayment of principal in
accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source. 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 associated with municipal securities generally, including that the underlying properties may not generate sufficient income to pay expenses
and interest costs. Such bonds 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.
Private Activity Bonds
Risks. The Acquiring Fund may invest in certain tax-exempt securities classified as private activity bonds. These bonds may subject certain investors in the Acquiring Fund to the federal
alternative minimum tax.
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Moral Obligation Bonds Risks. Municipal bonds may also include moral obligation bonds, which
are normally issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality in
question.
Municipal Notes Risks. Municipal notes are shorter term municipal debt obligations. They may provide interim financing in anticipation
of tax collection, bond sales or revenue receipts. If there is a shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid, and the Acquiring Fund may lose money.
Municipal Lease Obligations Risks. Also included within the general category of municipal bonds are certificates of participation (COPs)
issued by government authorities or entities to finance the acquisition or construction of equipment, land and/or facilities. COPs represent participations in a lease, an installment purchase contract or a conditional sales contract (hereinafter
collectively called lease obligations) relating to such equipment, land or facilities. Municipal leases, like other municipal debt obligations, are subject to the risk of non-payment. Although
lease obligations do not constitute general obligations of the issuer for which the issuers unlimited taxing power is pledged, a lease obligation is frequently backed by the issuers covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations contain non-appropriation clauses which provide that the issuer has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a yearly basis. Although non-appropriation lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult and the value of the property may be insufficient to issue lease obligations. Certain investments in lease obligations may be illiquid.
The ability of issuers of municipal leases to make timely lease payments may be adversely impacted in general economic downturns and as relative governmental
cost burdens are allocated and reallocated among federal, state and local governmental units. Such non-payment would result in a reduction of income to the Acquiring Fund, and could result in a reduction in
the value of the municipal lease experiencing non-payment and a potential decrease in the NAV of the Acquiring Fund. Issuers of municipal lease obligations might seek protection under the bankruptcy laws. In
the event of bankruptcy of such an issuer, the Acquiring Fund could experience delays and limitations with respect to the collection of principal and interest on such municipal leases and the Acquiring Fund may not, in all circumstances, be able to
collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in lease payments, the Acquiring Fund might take possession of and manage the assets securing the issuers obligations on such
securities, which may increase the Acquiring Funds operating expenses and adversely affect the NAV of the Acquiring Fund. When the lease contains a non-appropriation clause, however, the failure to pay
would not be a default and the Acquiring Fund would not have the right to take possession of the assets. Any income derived from the Acquiring Funds ownership or operation of such assets may not be
tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to regulated investment companies. In addition, the Acquiring Funds intention to qualify as a regulated
investment company under the Code, may limit the extent to which the Acquiring Fund may exercise its rights by taking possession of such assets, because as a regulated investment company the Acquiring Fund is subject to certain limitations on its
investments and on the nature of its income.
Liquidity of Investments. Certain municipal securities in which the Acquiring Fund invests may lack
an established secondary trading market or are otherwise considered illiquid. Liquidity of a security relates to the ability to easily dispose of the security and the price to be obtained and does not generally relate to the credit risk or
likelihood of receipt of cash at maturity. Illiquid securities may trade at a discount from comparable, more liquid investments.
The financial markets in
general, and certain segments of the municipal securities markets in particular, have in recent years experienced periods of extreme secondary market supply and demand imbalance, resulting in a loss of liquidity during which market prices were
suddenly and substantially below traditional measures of intrinsic value. During such periods some securities could be sold only at arbitrary prices and with substantial losses. Periods of such market dislocation may occur again at any time.
Tax-Exempt Status Risk. In making investments, the Acquiring Fund and the Investment Advisor will rely on the
opinion of issuers bond counsel and, in the case of derivative securities, sponsors counsel, on the tax-exempt status of interest on municipal obligations and payments under tax-exempt derivative securities. Neither the Acquiring Fund nor the Investment Advisor will independently review the bases for those tax opinions. If any of those tax opinions
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are ultimately determined to be incorrect or if events occur after the security is acquired that impact the securitys tax-exempt status, the
Acquiring Fund and its shareholders could be subject to substantial tax liabilities. An assertion by the Internal Revenue Service (the IRS) that a portfolio security is not exempt from U.S. federal income tax (contrary to indications
from the issuer) could affect the Acquiring Funds and its shareholders income tax liability for the current or past years and could create liability for information reporting penalties. In addition, an IRS assertion of taxability may
cause the Acquiring Fund to be ineligible to pay exempt-interest dividends or may impair the liquidity and the fair market value of the securities.
Taxability Risk. The Acquiring Fund intends to minimize the payment of taxable income to shareholders by investing in
tax-exempt or municipal securities in reliance at the time of purchase on an opinion of bond counsel to the issuer that the interest paid on those securities will be excludable from gross income for U.S.
federal income tax purposes. Such securities, however, may be determined to pay, or have paid, taxable income subsequent to the Acquiring Funds acquisition of the securities. In that event, the IRS may demand that the Acquiring Fund pay U.S.
federal income taxes on the affected interest income, and, if the Acquiring Fund agrees to do so, the Acquiring Funds yield could be adversely affected. In addition, the treatment of dividends previously paid or to be paid by the Acquiring
Fund as exempt interest dividends could be adversely affected, subjecting the Acquiring Funds shareholders to increased U.S. federal income tax liabilities. In addition, future laws, regulations, rulings or court decisions may
cause interest on municipal securities to be subject, directly or indirectly, to U.S. federal income taxation or interest on state municipal securities to be subject to state or local income taxation, or the value of state municipal securities to be
subject to state or local intangible personal property tax, or may otherwise prevent the Acquiring Fund from realizing the full current benefit of the tax-exempt status of such securities. Any such change
could also affect the market price of such securities, and thus the value of an investment in the Acquiring Fund.
Alternative Minimum Tax
Risk. The Acquiring Fund expects that a portion of the interest or income it produces will be includable in alternative minimum taxable income. Exempt interest dividends also are likely to be subject to state and local income
taxes. Distributions of any capital gain or other taxable income will be taxable to shareholders. The Acquiring Fund may not be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to
such tax by purchasing shares of the Acquiring Fund. The suitability of an investment in the Acquiring Fund will depend upon a comparison of the after tax yield likely to be provided from the Acquiring Fund with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position. Special considerations apply to corporate
investors.
Nonpayment Risk. Municipal bonds, like other debt obligations, are subject to the risk of nonpayment. The ability of issuers of
municipal securities to make timely payments of interest and principal may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated among federal, state and local governmental units.
Such nonpayment would result in a reduction of income to the Acquiring Fund and could result in a reduction in the value of the municipal security experiencing nonpayment and a potential decrease in the net asset value of the Acquiring Fund.
Fixed Income Securities Risks. Fixed income securities in which the Acquiring Fund may invest are generally subject to the following risks:
Interest Rate Risk. The market value of bonds and other fixed-income securities changes in response to interest rate changes and other factors.
Interest rate risk is the risk that prices of bonds and other fixed-income securities will increase as interest rates fall and decrease as interest rates rise. The Acquiring Fund may be subject to a greater risk of rising interest rates due to the
current period of historically low interest rates, including the Federal Reserves recent lowering of the target for the federal funds rate to a range of 0%-0.25% as part of its efforts to ease the
economic effects of the coronavirus pandemic. The magnitude of these fluctuations in the market price of bonds and other fixed-income securities is generally greater for those securities with longer maturities. Fluctuations in the market price of
the Acquiring Funds investments will not affect interest income derived from instruments already owned by the Acquiring Fund, but will be reflected in the Acquiring Funds NAV. The Acquiring Fund may lose money if short-term or long-term
interest rates rise sharply in a manner not anticipated by the Acquiring Funds management. To the extent the Acquiring Fund invests in debt securities that may be prepaid at the option of the obligor (such as mortgage-related securities), the
sensitivity of such securities to changes in interest rates may increase (to the detriment of the Acquiring Fund) when interest rates rise. Moreover, because rates on certain floating rate debt securities typically
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reset only periodically, changes in prevailing interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the NAV of the Acquiring Fund to the
extent that it invests in floating rate debt securities. These basic principles of bond prices also apply to U.S. Government securities. A security backed by the full faith and credit of the U.S. Government is guaranteed only as to its
stated interest rate and face value at maturity, not its current market price. Just like other fixed-income securities, government-guaranteed securities will fluctuate in value when interest rates change.
The Acquiring Funds use of leverage, as described below, will tend to increase the Acquiring Funds interest rate risk. The Acquiring Fund may
utilize certain strategies, including taking positions in futures or interest rate swaps, for the purpose of reducing the interest rate sensitivity of fixed income securities held by the Acquiring Fund and decreasing the Acquiring Funds
exposure to interest rate risk. The Acquiring Fund 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 Acquiring Fund to reduce interest rate risk will
be successful or that any hedges that the Acquiring Fund may establish will perfectly correlate with movements in interest rates.
The Acquiring Fund may
invest in variable and floating rate debt instruments, which generally are less sensitive to interest rate changes than longer duration fixed rate instruments, but may decline in value in response to rising interest rates if, for example, the rates
at which they pay interest do not rise as much, or as quickly, as market interest rates in general. Conversely, variable and floating rate instruments generally will not increase in value if interest rates decline. The Acquiring Fund also may invest
in inverse floating rate debt securities, which may decrease in value if interest rates increase, and which also may exhibit greater price volatility than fixed rate debt obligations with similar credit quality.
Issuer Risk. The value of fixed income securities may decline for a number of reasons which directly relate to the issuer, such as management
performance, financial leverage, reduced demand for the issuers goods and services, historical and prospective earnings of the issuer and the value of the assets of the issuer.
Credit Risk. Credit risk is the risk that one or more fixed income securities in the Acquiring Funds portfolio will decline in price or fail to
pay interest or principal when due because the issuer of the security experiences a decline in its financial status. Credit risk is increased when a portfolio security is downgraded or the perceived creditworthiness of the issuer deteriorates. To
the extent the Acquiring Fund invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund which only invests in investment grade securities. In addition, to the extent the Acquiring Fund uses
credit derivatives, such use will expose it to additional risk in the event that the bonds underlying the derivatives default. The degree of credit risk depends on the issuers financial condition and on the terms of the securities. If rating
agencies lower their ratings of municipal securities in the Acquiring Funds portfolio, the value of those securities could decline, which could jeopardize rating agencies ratings of Acquiring Fund VMTP Shares or the Combined Fund VMTP
Shares, as applicable. Because a significant source of income for the Acquiring Fund is the interest and principal payments on the municipal securities in which it invests, any default by an issuer of a municipal security could have a negative
impact on the Acquiring Funds ability to pay dividends on common shares or any VMTP Shares then outstanding and could result in the redemption of some or all of any VMTP Shares then outstanding.
Prepayment Risk. During periods of declining interest rates, borrowers may exercise their option to prepay principal earlier than scheduled. For fixed
rate securities, such payments often occur during periods of declining interest rates, forcing the Acquiring Fund to reinvest in lower yielding securities, resulting in a possible decline in the Acquiring Funds income and distributions to
shareholders. This is known as prepayment or call risk. Below investment grade securities frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price (typically
greater than par) only if certain prescribed conditions are met (call protection). For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Acquiring Fund, prepayment risk may be enhanced.
Reinvestment Risk. Reinvestment risk is the risk that income from the Acquiring Funds portfolio will decline if the Acquiring Fund invests
the proceeds from matured, traded or called fixed income securities at market interest rates that are below the Acquiring Fund portfolios current earnings rate.
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Duration and Maturity Risk. The Investment Advisor may seek to adjust the portfolios duration or
maturity based on its assessment of current and projected market conditions and all factors that the Investment Advisor deems relevant. In comparison to maturity (which is the date on which the issuer of a debt instrument is obligated to repay the
principal amount), duration 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.
Specifically, duration measures the anticipated percentage change in NAV that is expected for every percentage point change in interest rates. The two have an inverse relationship. Duration can be a useful tool to estimate anticipated price changes
to a fixed pool of income securities associated with changes in interest rates. For example, a duration of five years means that a 1% decrease in interest rates will increase the NAV of the portfolio by approximately 5%; if interest rates increase
by 1%, the NAV will decrease by 5%. However, in a managed portfolio of fixed income securities having differing interest or dividend rates or payment schedules, maturities, redemption provisions, call or prepayment provisions and credit qualities,
actual price changes in response to changes in interest rates may differ significantly from a duration-based estimate at any given time. Actual price movements experienced by a portfolio of fixed income securities will be affected by how interest
rates move (i.e., changes in the relationship of long-term interest rates to short-term interest rates and in the relationship of interest rates for highly rated securities and rates for below investment grade securities), the magnitude of
any move in interest rates, actual and anticipated prepayments of principal through call or redemption features, the extension of maturities through restructuring, the sale of securities for portfolio management purposes, the reinvestment of
proceeds from prepayments on and from sales of securities, and credit quality-related considerations whether associated with financing costs to lower credit quality borrowers or otherwise, as well as other factors. Accordingly, while duration maybe
a useful tool to estimate potential price movements in relation to changes in interest rates, investors are cautioned that duration alone will not predict actual changes in the net asset or market value of the Acquiring Funds shares and that
actual price movements in the Acquiring Funds portfolio may differ significantly from duration-based estimates. 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. Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with
shorter durations. In general, a portfolio of securities with a longer duration can be expected to be more sensitive to interest rate changes than a portfolio with a shorter duration. Any decisions as to the targeted duration or maturity of any
particular category of investments or of the Acquiring Funds portfolio generally will be made based on all pertinent market factors at any given time. The Acquiring Fund may incur costs in seeking to adjust the portfolios average
duration or maturity. There can be no assurances that the Investment Advisors assessment of current and projected market conditions will be correct or that any strategy to adjust the portfolios duration or maturity will be successful at
any given time.
Leverage Risk. The use of leverage creates an opportunity for increased common share net investment income dividends, but also
creates risks for the common shareholders. The Acquiring Fund cannot assure you that the use of leverage, if employed, will result in a higher yield on the common shares. Any leveraging strategy the Acquiring Fund employs may not be successful.
Leverage involves risks and special considerations for common shareholders, including:
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the likelihood of greater volatility of NAV, market price and dividend rate of the common shares than a
comparable portfolio without leverage;
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the risk that fluctuations in interest rates or dividend rates on any leverage that the Acquiring Fund must pay
will reduce the return to the common shareholders;
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the effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the common
shares than if the Acquiring Fund were not leveraged, which may result in a greater decline in the market price of the common shares;
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when the Acquiring Fund uses financial leverage, the investment advisory fee payable to the Investment Advisor
will be higher than if the Acquiring Fund did not use leverage; and
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leverage may increase operating costs, which may reduce total return.
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Any decline in the NAV of the Acquiring Funds investments will be borne entirely by the common
shareholders. Therefore, if the market value of the Acquiring Funds portfolio declines, leverage will result in a greater decrease in NAV to the common shareholders than if the Acquiring Fund were not leveraged. This greater NAV decrease will
also tend to cause a greater decline in the market price for the common shares. Changes in the future direction of interest rates are very difficult to predict accurately. If the Acquiring Fund were to reduce any outstanding leverage based on a
prediction about future changes to interest rates, and that prediction turned out to be incorrect, the reduction in any outstanding leverage would likely operate to reduce the income and/or total returns to common shareholders relative to the
circumstance where the Acquiring Fund had not reduced any of its outstanding leverage. The Acquiring Fund may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and share price if the prediction
were to turn out to be correct, and determine not to reduce any of its outstanding leverage as described above.
The Acquiring Fund currently utilizes
leverage through the issuance of VMTP Shares (see Information about the Preferred Shares of the Funds) and investments in TOB Residuals (see Tender Option Bond Risk). The use of TOB Residuals may require the Acquiring
Fund to segregate or designate on its books and records assets to cover its obligations. While the segregated or earmarked assets may be invested in liquid assets, they may not be used for other operational purposes. Consequently, the use of
leverage may limit the Acquiring Funds flexibility and may require that the Acquiring Fund sell other portfolio investments to pay Fund expenses, to maintain assets in an amount sufficient to cover the Acquiring Funds leveraged exposure
or to meet other obligations at a time when it may be disadvantageous to sell such assets.
Certain types of leverage used by the Acquiring Fund may
result in the Acquiring Fund being subject to covenants relating to asset coverage and portfolio composition requirements. The Acquiring Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies,
which issue ratings for the VMTP Shares issued by the Acquiring Fund or the governing instrument for the Acquiring Fund VMTP Shares. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those
imposed by the 1940 Act. The Investment Advisor does not believe that these covenants or guidelines will impede it from managing the Acquiring Funds portfolio in accordance with the Acquiring Funds investment objective and policies.
While there are any preferred shares of the Acquiring Fund outstanding, the Acquiring Fund may not declare any cash dividend or other distribution on its
common shares, unless at the time of such declaration, (i) all accrued preferred shares dividends have been paid and (ii) the value of the Acquiring Funds total assets (determined after deducting the amount of such dividend or other
distribution), less all liabilities and indebtedness of the Acquiring Fund, is at least 200% (as required by the 1940 Act) of the liquidation preference of the outstanding preferred shares (expected to equal the aggregate original purchase price of
the outstanding preferred shares plus any accrued and unpaid dividends thereon, whether or not earned or declared on a cumulative basis). In addition to the requirements of the 1940 Act, the Acquiring Fund may be required to comply with other asset
coverage requirements as a condition of the Acquiring Fund obtaining a rating of its preferred shares from a nationally recognized rating service. These requirements may include an asset coverage test more stringent than that under the 1940 Act.
This limitation on the Acquiring Funds ability to make distributions on its common shares could in certain circumstances impair the ability of the Acquiring Fund to maintain its qualification for taxation as a regulated investment company
under the Code. The Acquiring Fund may, however, to the extent possible, purchase or redeem preferred shares from time to time to maintain compliance with such asset coverage requirements and may pay special dividends to the holders of the preferred
shares in certain circumstances in connection with any such impairment of the Acquiring Funds status as a regulated investment company under the Code.
In addition to the foregoing, the use of leverage treated as indebtedness of the Acquiring Fund for U.S. federal income tax purposes may reduce the amount of
Acquiring Fund dividends that are otherwise eligible for the dividends received deduction in the hands of corporate shareholders.
The Acquiring Fund may
utilize leverage through investment derivatives. The use of certain derivatives will require the Acquiring to segregate assets to cover its obligations. While the segregated assets may be invested in liquid assets, they may not be used for other
operational purposes. Consequently, the use of leverage may limit the Acquiring Funds flexibility and may require that the Acquiring Fund sell other portfolio investments to pay Acquiring Fund
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expenses, to maintain assets in an amount sufficient to cover the Acquiring Funds leveraged exposure or to meet other obligations at a time when it may be disadvantageous to sell such
assets.
The Acquiring Fund may invest in the securities of other investment companies. Such investment companies 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 NAV of the Acquiring Funds common shares and the returns to the common shareholders.
Tender Option Bond Risk. The Acquiring Fund currently leverages its assets through the use of TOB Residuals, which are derivative interests in
municipal bonds. The TOB Residuals in which the Acquiring Fund may invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax. No independent investigation will
be made to confirm the tax-exempt status of the interest or income paid by TOB Residuals held by the Acquiring Fund. There is no assurance that the Acquiring Funds strategy of using TOB Residuals to
leverage its assets will be successful.
TOB Residuals represent beneficial interests in a special purpose trust formed for the purpose of holding
municipal bonds contributed by one or more funds (a TOB Trust). A TOB Trust typically issues two classes of beneficial interests: short-term floating rate interests (TOB Floaters), which are sold to third-party investors, and
TOB Residuals, which are generally issued to the fund(s) that transferred municipal bonds to the TOB Trust. TOB Floaters may have first priority on the cash flow from the municipal bonds held by the TOB Trust and are enhanced with a liquidity
support arrangement provided by a third-party bank or other financial institution (the TOBs Liquidity Provider) which allows holders to tender their position at par (plus accrued interest). The Acquiring Fund, as a holder of TOB
Residuals, is paid the residual cash flow from the TOB Trust. As result, distributions on TOB Residuals will bear an inverse relationship to short-term municipal bond interest rates. Distributions on the TOB Residuals paid to the Acquiring Fund 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 TOB Floaters
sold by the TOB Trust relative to the amount of the TOB Residuals that it sells. The greater the amount of TOB Floaters sold relative to the TOB Residuals, the more volatile the distributions on the TOB Residuals will be. Short-term interest rates
are at historic lows and may be more likely to rise in the current market environment.
The municipal bonds transferred to a TOB Trust typically are high
grade municipal bonds. In certain cases, when municipal bonds transferred are lower grade municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely payment of principal and interest on the bonds to
the TOB Trust by a credit enhancement provider. The TOB Trust would be responsible for the payment of the credit enhancement fee and the Acquiring Fund, as a TOB Residual holder, would be responsible for reimbursement of any payments of principal
and interest made by the credit enhancement provider.
Any economic leverage achieved through the Acquiring Funds investment in TOB Residuals will
increase the possibility that common share long-term returns will be diminished if the cost of the TOB Floaters issued by a TOB Trust exceeds the return on the securities in the TOB Trust. If the income and gains earned on municipal securities owned
by a TOB Trust that issues TOB Residuals to the Acquiring Fund are greater than the payments due on the TOB Floaters issued by the TOB Trust, the Acquiring Funds returns will be greater than if it had not invested in the TOB Residuals.
Although the Acquiring Fund generally would unwind a TOB transaction rather than try to sell a TOB Residual, if it did try to sell a TOB Residual, its ability
to do so would depend on the liquidity of the TOB Residual. TOB Residuals have varying degrees of liquidity based, among other things, upon the liquidity of the underlying securities deposited in the TOB Trust. The market price of TOB Residuals is
more volatile than the underlying municipal bonds due to leverage.
The leverage attributable to the Acquiring Funds use of TOB Residuals may be
called away on relatively short notice and therefore may be less permanent than more traditional forms of leverage. The TOB Trust may be collapsed without the consent of the Acquiring Fund upon the occurrence of termination events, as
defined in the TOB Trust agreements. Upon the occurrence of a termination event, a TOB Trust would be liquidated with the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and
the
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TOBs Liquidity Provider. Upon certain termination events, the holders of the TOB Floaters would be paid before the TOB Residual holders (i.e., the Acquiring Fund) whereas in other
termination events, the holders of TOB Floaters and the TOB Residual holders would be paid pro rata.
The Acquiring Fund may invest in a TOB Trust on
either a non-recourse or recourse basis. If the Acquiring Fund invests in a TOB Trust on a recourse basis, it will typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to
which the Acquiring Fund is required to reimburse the TOBs Liquidity Provider the balance, if any, of the amount owed under the liquidity facility over the liquidation proceeds (the Liquidation Shortfall). As a result, if the Acquiring
Fund invests in a recourse TOB Trust, the Acquiring Fund will bear the risk of loss with respect to any Liquidation Shortfall.
The use of TOB Residuals
will require the Acquiring Fund to earmark or segregate liquid assets in an amount equal to any TOB Floaters, plus any accrued but unpaid interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, the Acquiring Fund that
are not owned by the Acquiring Fund. The use of TOB Residuals may also require the Acquiring Fund to earmark or segregate liquid assets in an amount equal to loans provided by the TOBs Liquidity Provider to the TOB Trust to purchase tendered TOB
Floaters. While the segregated assets may be invested in liquid securities, they may not be used for other operational purposes. Consequently, the use of leverage through TOB Residuals may limit the Acquiring Funds flexibility and may require
that the Acquiring Fund sell other portfolio investments to pay the Acquiring Funds expenses, to maintain assets in an amount sufficient to cover the Acquiring Funds leveraged exposure or to meet other obligations at a time when it may
be disadvantageous to sell such assets. Future regulatory requirements or SEC guidance may necessitate more onerous contractual or regulatory requirements, which may increase the costs or reduce the degree of potential economic benefits of TOB Trust
transactions or limit the Acquiring Funds ability to enter into or manage TOB Trust transactions.
The Acquiring Fund structures and
sponsors the TOB Trusts in which it holds TOB Residuals and has certain duties and responsibilities, which may give rise to certain additional risks including, but not limited to, compliance, securities law and operational risks.
The SEC and various federal banking and housing agencies adopted credit risk retention rules for securitizations (the Risk Retention Rules). The
Risk Retention Rules require the sponsor of a TOB Trust to retain at least 5% of the credit risk of the underlying assets supporting the TOB Trusts municipal bonds. The Risk Retention Rules may adversely affect the Acquiring Funds
ability to engage in TOB Trust transactions or increase the costs of such transactions in certain circumstances.
TOB Trusts
constitute an important component of the municipal bond market. Any modifications or changes to the rules governing TOB Trusts may adversely impact the municipal market and the Acquiring Fund, including through reduced demand for and liquidity of
municipal bonds and increased financing costs for municipal issuers. The ultimate impact of any potential modifications on the TOB market and the overall municipal market is not yet certain.
Please see The Acquiring Funds InvestmentsLeverageTender Option Bonds for additional information.
Insurance Risk. With respect to an insured municipal security, insurance guarantees that interest payments on the municipal security will be made on
time and that the principal will be repaid when the security matures. Insurance is expected to protect the Acquiring Fund against losses caused by a municipal security issuers failure to make interest and principal payments. However, insurance
does not protect the Acquiring Fund or its shareholders against losses caused by declines in a municipal securitys value. Also, the Acquiring Fund cannot be certain that any insurance company will make the payments it guarantees. Certain
significant providers of insurance for municipal securities incurred significant losses as a result of exposure to sub-prime mortgages and other lower credit quality investments that experienced defaults or
otherwise suffered extreme credit deterioration during the financial crisis of 2007-2009. These losses have reduced the insurers capital and called into question their continued ability to perform their obligations under such insurance if they
are called upon to do so in the future. While an insured municipal security will typically be deemed to have the rating of its insurer, if the insurer of a municipal security suffers a downgrade in its credit rating or the market discounts the value
of the insurance provided by the insurer, the rating of the underlying municipal security will be more relevant and the value of the municipal security would more closely, if not entirely, reflect such rating. The Acquiring Fund may lose money on
its investment if the insurance company does not make
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payments it guarantees. If a municipal securitys insurer fails to fulfill its obligations or loses its credit rating, the value of the security could drop.
Yield and Ratings Risk. The yields on debt obligations are dependent on a variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer, the size of the offering, the maturity of the obligation and the ratings of the issue. The ratings of Moodys, S&P and Fitch, which are described in Appendix
D, represent their respective opinions as to the quality of the obligations which they undertake to rate. Ratings, however, are general and are not absolute standards of quality. Consequently, obligations with the same rating, maturity and
interest rate may have different market prices. Subsequent to its purchase by the Acquiring Fund, a rated security may cease to be rated. The Investment Advisor will consider such an event in determining whether the Acquiring Fund should continue to
hold the security.
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 Investment Advisor also will independently evaluate these securities and the ability of
the issuers of such securities to pay interest and principal. To the extent that the Acquiring Fund invests in lower grade securities that have not been rated by a rating agency, the Acquiring Funds ability to achieve its investment objective
will be more dependent on the Investment Advisors credit analysis than would be the case when the Acquiring Fund invests in rated securities.
High Yield Securities Risk. Subject to its investment policies, the Acquiring Fund may invest in securities rated, at the time of
investment, below investment grade quality such as those rated Ba or below by Moodys, BB or below by S&P or Fitch, or securities comparably rated by other rating agencies or in unrated securities determined by the Investment Advisor to be
of comparable quality. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the
security and generally involve greater price volatility than securities in higher rating categories. Often the protection of interest and principal payments with respect to such securities may be very moderate and issuers of such securities 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 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
Acquiring Fund to sell certain securities or could result in lower prices than those used in calculating the Acquiring Funds NAV.
The prices of
fixed-income 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. The investor receives this higher coupon 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 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, Fitch 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 Investment Advisor also will independently evaluate these securities and the ability of the issuers of such securities to pay interest and principal. To the extent that the Acquiring Fund invests in lower grade securities
that have not been rated by a rating agency, the Acquiring Funds ability to achieve its investment objective will be more dependent on the Investment Advisors credit analysis than would be the case when the Acquiring Fund invests in
rated securities.
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Unrated Securities Risk. Because the Acquiring Fund may purchase securities that are not rated by any
rating organization, the Investment Advisor may, after assessing their credit quality, internally assign ratings to certain of those securities in categories similar to those of rating organizations. Some unrated securities may not have an active
trading market or may be difficult to value, which means the Acquiring Fund might have difficulty selling them promptly at an acceptable price. To the extent that the Acquiring Fund invests in unrated securities, the Acquiring Funds ability to
achieve its investment objective will be more dependent on the Investment Advisors credit analysis than would be the case when the Acquiring Fund invests in rated securities.
Zero-Coupon Securities Risk. Municipal bonds may include zero-coupon bonds. Zero-coupon securities are bonds
that are sold at a discount to par value and do not pay interest during the life of the security. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity at a rate of interest
reflecting the market rate of the security at the time of issuance. Upon maturity, the holder of a zero-coupon security is entitled to receive the par value of the security.
While interest payments are not made on zero-coupon securities, holders of such securities are deemed to have received
income (phantom income) annually, notwithstanding that cash may not be received currently. The effect of owning instruments that do not make current interest payments is that a fixed yield is earned not only on the original investment
but also, in effect, on all discount accretion during the life of the obligations. This implicit reinvestment of earnings at a fixed rate eliminates the risk of being unable to invest distributions at a rate as high as the implicit yield on the zero-coupon bond, but at the same time eliminates the holders ability to reinvest at higher rates in the future. For this reason, some of these securities may be subject to substantially greater price
fluctuations during periods of changing market interest rates than are comparable securities that pay interest currently. Longer term zero-coupon bonds are more exposed to interest rate risk than shorter term zero-coupon bonds. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of cash.
The Acquiring Fund accrues income with respect to these securities for U.S. federal income tax and accounting purposes prior to the receipt of cash
payments. Zero-coupon securities may be subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash interest at regular intervals.
Further, to maintain its qualification for pass-through treatment under the federal tax laws, the Acquiring Fund is required to distribute income to its
shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself by borrowing in order to generate the cash to satisfy these distributions. The required
distributions may result in an increase in the Acquiring Funds exposure to zero-coupon securities.
In
addition to the above-described risks, there are certain other risks related to investing in zero-coupon securities. During a period of severe market conditions, the market for such securities may become even
less liquid. In addition, as these securities do not pay cash interest, the Acquiring Funds investment exposure to these securities and their risks, including credit risk, will increase during the time these securities are held in the
Acquiring Funds portfolio.
Variable Rate Demand Obligations Risk. Variable rate demand obligations
(VRDOs) are floating rate securities that combine an interest in a long-term municipal bond with a right to demand payment before maturity from a bank or other financial institution. If the bank or financial institution is unable to pay,
the Acquiring Fund may lose money.
Indexed and Inverse Securities Risk. Investments in inverse floaters, residual interest TOBs and similar
instruments expose the Acquiring Fund to the same risks as investments in fixed income securities and derivatives, as well as other risks, including those associated with leverage and increased volatility. An investment in these securities typically
will involve greater risk than an investment in a fixed rate security. Distributions on inverse floaters, residual interest TOBs and similar instruments will typically bear an inverse relationship to short-term interest rates and typically will be
reduced or, potentially, eliminated as interest rates rise. Inverse floaters, residual interest TOBs and similar instruments will underperform the market for fixed rate securities in a rising interest rate environment. Inverse floaters may be
considered to be leveraged to the extent that their interest rates vary by a magnitude that exceeds the magnitude
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of the change in a reference rate of interest (typically a short-term interest rate). The leverage inherent in inverse floaters is associated with greater volatility in their market values.
Investments in inverse floaters, residual interest TOBs and similar instruments that have fixed income securities underlying them will expose the Acquiring Fund to the risks associated with those fixed income securities and the values of those
investments may be especially sensitive to changes in prepayment rates on the underlying fixed income securities.
When-Issued, Forward Commitment and
Delayed Delivery Transactions Risk. The Acquiring Fund may purchase securities on a when-issued basis (including on a forward commitment or TBA (to be announced) basis) and may purchase or sell those securities for delayed delivery.
When-issued and delayed delivery transactions occur when securities are purchased or sold by the Acquiring Fund with payment and delivery taking place in the future to secure an advantageous yield or price. Securities purchased on a when-issued or
delayed delivery basis may expose the Acquiring Fund to counterparty risk of default as well as the risk that securities may experience fluctuations in value prior to their actual delivery. The Acquiring Fund will not accrue income with respect to a
when-issued or delayed delivery security prior to its stated delivery date. Purchasing securities on a when-issued or delayed delivery basis can involve the additional risk that the price or yield available in the market when the delivery takes
place may not be as favorable as that obtained in the transaction itself.
Repurchase Agreements Risk. Repurchase agreements typically involve the
acquisition by the Acquiring Fund of fixed income securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Acquiring Fund will sell the securities back to the
institution at a fixed time in the future. The Acquiring Fund does not bear the risk of a decline in the value of the underlying security unless the seller defaults under its repurchase obligation. In the event of the bankruptcy or other default of
a seller of a repurchase agreement, the Acquiring Fund could experience both delays in liquidating the underlying securities and losses, including possible decline in the value of the underlying security during the period in which the Acquiring Fund
seeks to enforce its rights thereto; possible lack of access to income on the underlying security during this period; and expenses of enforcing its rights. While repurchase agreements involve certain risks not associated with direct investments in
fixed income securities, the Acquiring Fund follows procedures approved by the Board that are designed to minimize such risks. The value of the collateral underlying the repurchase agreement will be at least equal to the repurchase price, including
any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, the Acquiring Fund generally will seek to liquidate such collateral. However, the exercise of the Acquiring
Funds right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Acquiring Fund could suffer a
loss.
Reverse Repurchase Agreements Risk. Reverse repurchase agreements involve the risks that the interest income earned on the investment of the
proceeds will be less than the interest expense of the Acquiring Fund, that the market value of the securities sold by the Acquiring Fund may decline below the price at which the Acquiring Fund is obligated to repurchase the securities and that the
securities may not be returned to the Acquiring Fund. There is no assurance that reverse repurchase agreements can be successfully employed.
Securities Lending Risk. The Acquiring Fund may lend securities to financial institutions. Securities lending involves exposure to certain risks,
including operational risk (i.e., the risk of losses resulting from problems in the settlement and accounting process), gap risk (i.e., the risk of a mismatch between the return on cash collateral reinvestments and the fees
the Acquiring Fund has agreed to pay a borrower), and credit, legal, counterparty and market risk. If a securities lending counterparty were to default, the Acquiring Fund would be subject to the risk of a possible delay in receiving collateral or
in recovering the loaned securities, or to a possible loss of rights in the collateral. In the event a borrower does not return the Acquiring Funds securities as agreed, the Acquiring Fund may experience losses if the proceeds received from
liquidating the collateral do not at least equal the value of the loaned security at the time the collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities. This event could trigger adverse tax consequences
for the Acquiring Fund. The Acquiring Fund could lose money if its short-term investment of the collateral declines in value over the period of the loan. Substitute payments for dividends received by the Acquiring Fund for securities loaned out by
the Acquiring Fund will generally not be considered qualified dividend income. The securities lending agent will take the tax effects on shareholders of this difference into account in connection with the Acquiring Funds securities lending
program. Substitute payments received on tax-exempt securities loaned out will generally not be tax-exempt income.
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Restricted and Illiquid Securities Risk. The Acquiring Fund may invest in illiquid or less liquid
investments or investments in which no secondary market is readily available or which are otherwise illiquid, including private placement securities. The Acquiring Fund may not be able to readily dispose of such investments at prices that
approximate those at which the Acquiring Fund could sell such investments if they were more widely-traded and, as a result of such illiquidity, the Acquiring Fund may have to sell other investments or engage in borrowing transactions if necessary to
raise cash to meet its obligations. Limited liquidity can also affect the market price of investments, thereby adversely affecting the Acquiring Funds NAV and ability to make dividend distributions. The financial markets in general, and
certain segments of the mortgage related securities markets in particular, have in recent years experienced periods of extreme secondary market supply and demand imbalance, resulting in a loss of liquidity during which market prices were suddenly
and substantially below traditional measures of intrinsic value. During such periods, some investments could be sold only at arbitrary prices and with substantial losses. Periods of such market dislocation may occur again at any time. Privately
issued debt securities are often of below investment grade quality, frequently are unrated and present many of the same risks as investing in below investment grade public debt securities.
Restricted securities are securities that may not be sold to the public without an effective registration statement under the Securities Act, or that may be
sold only in a privately negotiated transaction or pursuant to an exemption from registration. For example, Rule 144A under the Securities Act provides an exemption from the registration requirements of the Securities Act for the resale of certain
restricted securities to qualified institutional buyers, such as the Acquiring Fund. However, an insufficient number of qualified institutional buyers interested in purchasing the Rule 144A-eligible securities that the Acquiring Fund holds could
affect adversely the marketability of certain Rule 144A securities, and the Acquiring Fund might be unable to dispose of such securities promptly or at reasonable prices. When registration is required to sell a security, the Acquiring Fund may be
obligated to pay all or part of the registration expenses and considerable time may pass before the Acquiring Fund is permitted to sell a security under an effective registration statement. If adverse market conditions develop during this period,
the Acquiring Fund might obtain a less favorable price than the price that prevailed when the Acquiring Fund decided to sell. The Acquiring Fund may be unable to sell restricted and other illiquid investments at opportune times or prices.
Investment Companies Risk. Subject to the limitations set forth in the 1940 Act and the Acquiring Funds governing documents or as otherwise
permitted by the SEC, the Acquiring Fund may acquire shares in other affiliated and unaffiliated investment companies, including exchange-traded funds (ETFs) and business development companies (BDCs). The market value of the
shares of other investment companies may differ from their NAV. As an investor in investment companies, including ETFs or BDCs, the Acquiring Fund would bear its ratable share of that entitys expenses, including its investment advisory and
administration fees, while continuing to pay its own advisory and administration fees and other expenses. As a result, shareholders will be absorbing duplicate levels of fees with respect to investments in other investment companies, including ETFs
or BDCs.
The securities of other investment companies, including ETFs or BDCs, in which the Acquiring Fund may invest may be leveraged. As a result, the
Acquiring Fund may be indirectly exposed to leverage through an investment in such securities. An investment in securities of other investment companies, including ETFs or BDCs, that use leverage may expose the Acquiring Fund to higher volatility in
the market value of such securities and the possibility that the Acquiring Funds long-term returns on such securities (and, indirectly, the long-term returns of the Acquiring Funds common shares) will be diminished.
ETFs are generally not actively managed and may be affected by a general decline in market segments relating to its index. An ETF typically invests in
securities included in, or representative of, its index regardless of their investment merits and does not attempt to take defensive positions in declining markets.
Strategic Transactions and Derivatives Risk. The Acquiring Fund may engage in various derivative transactions or portfolio strategies (Strategic
Transactions) for duration management and other risk management purposes, including to attempt to protect against possible changes in the market value of the Acquiring Funds portfolio resulting from trends in the securities markets and
changes in interest rates or to protect the Acquiring Funds unrealized gains in the value of its portfolio securities, to facilitate the sale of portfolio securities for investment purposes or to establish a position in the securities markets
as a temporary substitute for purchasing particular securities or to enhance income or gain. Derivatives are financial contracts or instruments whose value depends on, or is derived from, the value of an underlying asset, reference rate or index (or
relationship between two indices). The Acquiring Fund also may use
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derivatives to add leverage to the portfolio and/or to hedge against increases in the Acquiring Funds costs associated with any leverage strategy that it may employ. The use of Strategic
Transactions to enhance current income may be particularly speculative.
Strategic Transactions involve risks. The risks associated with Strategic
Transactions include (i) the imperfect correlation between the value of such instruments and the underlying assets, (ii) the possible default of the counterparty to the transaction, (iii) illiquidity of the derivative instruments, and
(iv) high volatility losses caused by unanticipated market movements, which are potentially unlimited. Although both over-the-counter (OTC) and
exchange-traded derivatives markets may experience a lack of liquidity, OTC non-standardized derivative transactions are generally less liquid than exchange-traded instruments. The illiquidity of the
derivatives markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and technical and operational or system
failures. In addition, daily limits on price fluctuations and speculative position limits on exchanges on which the Acquiring Fund may conduct its transactions in derivative instruments may prevent prompt liquidation of positions, subjecting the
Acquiring Fund to the potential of greater losses. Furthermore, the Acquiring Funds ability to successfully use Strategic Transactions depends on the Investment Advisors ability to predict pertinent securities prices, interest rates,
currency exchange rates and other economic factors, which cannot be assured. The use of Strategic Transactions may result in losses greater than if they had not been used, may require the Acquiring Fund to sell or purchase portfolio securities at
inopportune times or for prices other than current market values, may limit the amount of appreciation the Acquiring Fund can realize on an investment or may cause the Acquiring Fund to hold a security that it might otherwise sell. Additionally,
segregated or earmarked liquid assets, amounts paid by the Acquiring Fund as premiums and cash or other assets held in margin accounts with respect to Strategic Transactions are not otherwise available to the Acquiring Fund for investment purposes.
Exchange-traded derivatives and OTC derivative transactions submitted for clearing through a central counterparty are also subject to minimum initial and
variation margin requirements set by the relevant clearinghouse, as well as possible SEC- or Commodity Futures Trading Commission (CFTC) mandated margin requirements. The CFTC and federal banking
regulators also have imposed margin requirements on non-cleared OTC derivatives, and the SEC has proposed (but not yet finalized) such non-cleared margin requirements.
As applicable, margin requirements will increase the overall costs for the Acquiring Fund.
Many OTC derivatives are valued on the basis of dealers
pricing of these instruments. However, the price at which dealers value a particular derivative and the price that the same dealers would actually be willing to pay for such derivative should the Acquiring Fund wish or be forced to sell such
position may be materially different. Such differences can result in an overstatement of the Acquiring Funds NAV and may materially adversely affect the Acquiring Fund in situations in which the Acquiring Fund is required to sell derivative
instruments.
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 assurances that the Acquiring Funds hedging transactions will be effective.
Derivatives may give rise to a form of leverage and may expose the Acquiring Fund to greater risk and increase its costs. Recent legislation calls for new
regulation of the derivatives markets. The extent and impact of the regulation is not yet known and may not be known for some time. New regulation may make derivatives more costly, may limit the availability of derivatives, or may otherwise
adversely affect the value or performance of derivatives.
In November 2019, the SEC proposed new regulations governing the use of derivatives by
registered investment companies. If adopted as proposed, new Rule 18f-4 would impose limits on the amount of derivatives a fund could enter into, eliminate the asset segregation framework currently used by
funds to comply with Section 18 of the 1940 Act, treat derivatives as senior securities so that a failure to comply with the proposed limits would result in a statutory violation and require funds whose use of derivatives is more than a limited
specified exposure amount to establish and maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager.
The
Acquiring Funds use of derivative instruments involves risks different from, and possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number
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of risks such as credit risk, currency risk, leverage risk, liquidity risk, correlation risk, index risk and volatility as described below:
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Credit Riskthe risk that the counterparty in a derivative transaction will be unable to honor its
financial obligation to the Acquiring Fund, or the risk that the reference entity in a derivative will not be able to honor its financial obligations. In particular, derivatives traded in over-the-counter (OTC) markets often are not guaranteed by an Exchange (as defined herein) or clearing corporation and often do not require payment of margin, and to the extent that the Acquiring
Fund has unrealized gains in such instruments or has deposited collateral with its counterparties, the Acquiring Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor their obligations.
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Currency Riskthe risk that changes in the exchange rate between two currencies will adversely affect
the value (in U.S. dollar terms) of an investment.
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Leverage Riskthe 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 transactions in derivatives (such as futures transactions or sales of put
options) involve substantial leverage risk and may expose the Acquiring Fund to potential losses that exceed the amount originally invested by the Acquiring Fund. When the Acquiring Fund engages in such a transaction, the Acquiring Fund will deposit
in a segregated account, or earmark on its books and records, liquid assets with a value at least equal to the Acquiring Funds exposure, on a mark-to-market basis,
to the transaction (as calculated pursuant to requirements of the SEC). Such segregation or earmarking will ensure that the Acquiring Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the
Acquiring Funds exposure to loss.
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Liquidity Riskthe risk that certain securities may be difficult or impossible to sell at the time
that the Acquiring Fund would like or at the price that the Acquiring Fund as seller believes the security is currently worth. There can be no assurances that, at any specific time, either a liquid secondary market will exist for a derivative or the
Acquiring Fund 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. The absence of liquidity may also make it
more difficult for the Acquiring Fund to ascertain a market value for such instruments. Although both OTC and exchange-traded derivatives markets may experience a lack of liquidity, certain derivatives traded in OTC markets, including indexed
securities, swaps and OTC options, involve substantial illiquidity risk. The illiquidity of the derivatives markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the participation of
speculators, government regulation and intervention, and technical and operational or system failures. In addition, the liquidity of a secondary market in an exchange-traded derivative contract may be adversely affected by daily price
fluctuation limits established by the exchanges which limit the amount of fluctuation in an exchange-traded contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days. If it is not possible to close an open derivative position entered into by the
Acquiring Fund, the Acquiring Fund would continue to be required to make daily cash payments of variation margin in the event of adverse price movements. In such a situation, if the Acquiring Fund has insufficient cash, it may have to sell portfolio
securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so.
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Correlation Riskthe 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 Acquiring Fund seeks exposure through the use of the derivative. There are a number of factors which may prevent a derivative instrument from
achieving the desired correlation (or inverse correlation) with an underlying asset, rate or index, such as the impact of fees, expenses and transaction costs, the timing of pricing, and disruptions or illiquidity in the markets for such derivative
instrument.
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Index Riskif 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 Acquiring Fund could receive lower interest payments or
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experience a reduction in the value of the derivative to below the price that the Acquiring Fund paid for such derivative. 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.
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Volatility Riskthe risk that the Acquiring Funds use of derivatives may reduce income or gain
and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price over a defined time period. The Acquiring Fund could suffer losses related to its derivative positions as
a result of unanticipated market movements, which losses are potentially unlimited.
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When a derivative is used as a hedge against a
position that the Acquiring Fund 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 assurances that the Acquiring Funds hedging transactions will be effective. The Acquiring Fund could also suffer
losses related to its derivative positions as a result of unanticipated market movements, which losses are potentially unlimited. The Investment Advisor may not be able to predict correctly the direction of securities prices, interest rates and
other economic factors, which could cause the Acquiring Funds derivatives positions to lose value. 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 Acquiring Fund to sell or otherwise close a derivatives position could expose the Acquiring Fund to losses and could make derivatives more difficult for the Acquiring
Fund to value accurately.
When engaging in a hedging transaction, the Acquiring Fund may determine not to seek to establish a perfect correlation between
the hedging instruments utilized and the portfolio holdings being hedged. Such an imperfect correlation may prevent the Acquiring Fund from achieving the intended hedge or expose the Acquiring Fund to a risk of loss. The Acquiring Fund may also
determine not to hedge against a particular risk because it does not regard the probability of the risk occurring to be sufficiently high as to justify the cost of the hedge or because it does not foresee the occurrence of the risk. It may not be
possible for the Acquiring Fund to hedge against a change or event at attractive prices or at a price sufficient to protect the assets of the Acquiring Fund from the decline in value of the portfolio positions anticipated as a result of such change.
The Acquiring Fund may also be restricted in its ability to effectively manage the portion of its assets that are segregated or earmarked to cover its obligations. In addition, it may not be possible to hedge at all against certain risks.
If the Acquiring Fund invests in a derivative instrument it could lose more than the principal amount invested. Moreover, derivatives raise certain tax,
legal, regulatory and accounting issues that may not be presented by investments in securities, and there is some risk that certain issues could be resolved in a manner that could adversely impact the performance of the Acquiring Fund.
The Acquiring Fund is not required to use derivatives or other portfolio strategies to seek to increase return or to seek to hedge its portfolio and may
choose not to do so. Also, suitable derivative transactions may not be available in all circumstances and there can be no assurances that the Acquiring Fund will engage in these transactions to reduce exposure to other risks when that would be
beneficial. Although the Investment Advisor seeks to use derivatives to further the Acquiring Funds investment objective, there is no assurance that the use of derivatives will achieve this result.
Options Risk. 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 objective. In addition, a liquid secondary market for particular options, whether traded
OTC or on a recognized securities exchange (e.g., NYSE), separate trading boards of a securities exchange or through a market system that provides contemporaneous transaction pricing information (an 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 Office of the Comptroller of the
Currency (OCC) may not at all times
46
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.
Futures Transactions and Options Risk. 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 Acquiring Fund 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 Investment Advisors inability
to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations.
Investment in futures contracts involves the risk of imperfect correlation between movements in the price of the futures contract and the price of the
security being hedged. The hedge will not be fully effective when there is imperfect correlation between the movements in the prices of two financial instruments. For example, if the price of the futures contract moves more or less than the price of
the hedged security, the Acquiring Fund will experience either a loss or gain on the futures contract which is not completely offset by movements in the price of the hedged securities. To compensate for imperfect correlations, the Acquiring Fund may
purchase or sell futures contracts in a greater dollar amount than the hedged securities if the volatility of the hedged securities is historically greater than the volatility of the futures contracts. Conversely, the Acquiring Fund may purchase or
sell fewer futures contracts if the volatility of the price of the hedged securities is historically lower than that of the futures contracts.
The
particular securities comprising the index underlying a securities index financial futures contract may vary from the securities held by the Acquiring Fund. As a result, the Acquiring Funds ability to hedge effectively all or a portion of the
value of its securities through the use of such financial futures contracts will depend in part on the degree to which price movements in the index underlying the financial futures contract correlate with the price movements of the securities held
by the Acquiring Fund. The correlation may be affected by disparities in the average maturity, ratings, geographical mix or structure of the Acquiring Funds investments as compared to those comprising the securities index and general economic
or political factors. In addition, the correlation between movements in the value of the securities index may be subject to change over time as additions to and deletions from the securities index alter its structure. The correlation between futures
contracts on U.S. Government securities and the securities held by the Acquiring Fund may be adversely affected by similar factors and the risk of imperfect correlation between movements in the prices of such futures contracts and the prices of
securities held by the Acquiring Fund may be greater. The trading of futures contracts also is subject to certain market risks, such as inadequate trading activity, which could at times make it difficult or impossible to liquidate existing
positions.
The Acquiring Fund may liquidate futures contracts it enters into through offsetting transactions on the applicable contract market. There can
be no assurances, however, that a liquid secondary market will exist for any particular futures contract at any specific time. Thus, it may not be possible to close out a futures position. In the event of adverse price movements, the Acquiring Fund
would continue to be required to make daily cash payments of variation margin. In such situations, if the Acquiring Fund has insufficient cash, it may be required to sell portfolio securities to meet daily variation margin requirements at a time
when it may be disadvantageous to do so. The inability to close out futures positions also could have an adverse impact on the Acquiring Funds ability to hedge effectively its investments in securities. The liquidity of a secondary market in a
futures contract may be adversely affected by daily price fluctuation limits established by commodity exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been
reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days. The
Acquiring Fund will enter into a futures position only if, in the judgement of the Investment Advisor, there appears to be an actively traded secondary market for such futures contracts.
The successful use of transactions in futures and related options also depends on the ability of the Investment Advisor to forecast correctly the direction
and extent of interest rate movements within a given time frame. To the extent interest rates remain stable during the period in which a futures contract or option is held by the Acquiring Fund or
47
such rates move in a direction opposite to that anticipated, the Acquiring Fund may realize a loss on the Strategic Transaction which is not fully or partially offset by an increase in the value
of portfolio securities. As a result, the Acquiring Funds total return for such period may be less than if it had not engaged in the Strategic Transaction.
Because of low initial margin deposits made upon the opening of a futures position, futures transactions involve substantial leverage. As a result, relatively
small movements in the price of the futures contracts can result in substantial unrealized gains or losses. There is also the risk of loss by the Acquiring Fund of margin deposits in the event of bankruptcy of a broker with which the Acquiring Fund
has an open position in a financial futures contract. Because the Acquiring Fund will engage in the purchase and sale of futures contracts for hedging purposes or to seek to enhance the Acquiring Funds return, any losses incurred in connection
therewith may, if the strategy is successful, be offset in whole or in part by increases in the value of securities held by the Acquiring Fund or decreases in the price of securities the Acquiring Fund intends to acquire.
The amount of risk the Acquiring Fund assumes when it purchases an option on a futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an option on a futures contract also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option
purchased.
Counterparty Risk. The Acquiring Fund will be subject to credit risk with respect to the counterparties to the derivative contracts
purchased by the Acquiring Fund. Because derivative transactions in which the Acquiring Fund may engage may involve instruments that are not traded on an exchange or cleared through a central counterparty but are instead traded between
counterparties based on contractual relationships, the Acquiring Fund is subject to the risk that a counterparty will not perform its obligations under the related contracts. If a counterparty becomes bankrupt or otherwise fails to perform its
obligations due to financial difficulties, the Acquiring Fund may experience significant delays in obtaining any recovery in bankruptcy or other reorganization proceedings. The Acquiring Fund may obtain only a limited recovery, or may obtain no
recovery, in such circumstances. Although the Acquiring Fund intends to enter into transactions only with counterparties that the Investment Advisor believes to be creditworthy, there can be no assurances that, as a result, a counterparty will not
default and that the Acquiring Fund will not sustain a loss on a transaction. In the event of the counterpartys bankruptcy or insolvency, the Acquiring Funds collateral may be subject to the conflicting claims of the counterpartys
creditors, and the Acquiring Fund may be exposed to the risk of a court treating the Acquiring Fund as a general unsecured creditor of the counterparty, rather than as the owner of the collateral.
The counterparty risk for cleared derivatives is generally lower than for uncleared OTC derivative transactions since generally a clearing organization
becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties performance under the contract as each party to a trade looks only to the clearing organization for performance of financial
obligations under the derivative contract. However, there can be no assurances that a clearing organization, or its members, will satisfy its obligations to the Acquiring Fund, or that the Acquiring Fund would be able to recover the full amount of
assets deposited on its behalf with the clearing organization in the event of the default by the clearing organization or the Acquiring Funds clearing broker. In addition, cleared derivative transactions benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Uncleared OTC derivative transactions generally do not benefit
from such protections. This exposes the Acquiring Fund to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or
because of a credit or liquidity problem, thus causing the Acquiring Fund to suffer a loss. Such counterparty risk is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the
Acquiring Fund has concentrated its transactions with a single or small group of counterparties.
In addition, the Acquiring Fund is subject to the risk
that issuers of the instruments in which it invests and trades may default on their obligations under those instruments, and that certain events may occur that have an immediate and significant adverse effect on the value of those instruments. There
can be no assurances that an issuer of an instrument in which the Acquiring Fund invests will not default, or that an event that has an immediate and significant adverse effect on the value of an instrument will not occur, and that the Acquiring
Fund will not sustain a loss on a transaction as a result.
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Swaps Risk. Swaps are a type of derivative. Swap agreements involve the risk that the party with which the
Acquiring Fund has entered into the swap will default on its obligation to pay the Acquiring Fund and the risk that the Acquiring Fund will not be able to meet its obligations to pay the other party to the agreement. In order to seek to hedge the
value of the Acquiring Funds portfolio, to hedge against increases in the Acquiring Funds cost associated with interest payments on any outstanding borrowings or to seek to increase the Acquiring Funds return, the Acquiring Fund
may enter into swaps, including interest rate swap, total return swap and/or credit default swap transactions. In interest rate swap transactions, there is a risk that yields will move in the direction opposite of the direction anticipated by the
Acquiring Fund, which would cause the Acquiring Fund to make payments to its counterparty in the transaction that could adversely affect Acquiring Fund performance. In addition to the risks applicable to swaps generally (including counterparty risk,
high volatility, liquidity risk and credit risk), credit default swap transactions involve special risks 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).
Historically, swap transactions have been individually negotiated non-standardized transactions entered into in OTC
markets and have not been subject to the same type of government regulation as exchange-traded instruments. However, since the global financial crisis, the OTC derivatives markets have recently become subject to comprehensive statutes and
regulations. In particular, in the United States, the Dodd-Frank Act requires that certain derivatives with U.S. persons must be executed on a regulated market and a substantial portion of OTC derivatives must be submitted for clearing to regulated
clearinghouses. As a result, swap transactions entered into by the Acquiring Fund may become subject to various requirements applicable to swaps under the Dodd-Frank Act, including clearing, exchange-execution, reporting and recordkeeping
requirements, which may make it more difficult and costly for the Acquiring Fund to enter into swap transactions and may also render certain strategies in which the Acquiring Fund might otherwise engage impossible or so costly that they will no
longer be economical to implement. Furthermore, the number of counterparties that may be willing to enter into swap transactions with the Acquiring Fund may also be limited if the swap transactions with the Acquiring Fund are subject to the swap
regulation under the Dodd-Frank Act.
Credit default and total return swap agreements may effectively add leverage to the Acquiring Funds portfolio
because, in addition to its managed assets, the Acquiring Fund would be subject to investment exposure on the notional amount of the swap. Total return swap agreements are subject to the risk that a counterparty will default on its payment
obligations to the Acquiring Fund thereunder. The Acquiring Fund is not required to enter into swap transactions for hedging purposes or to enhance income or gain and may choose not to do so. In addition, the swaps market is subject to a changing
regulatory environment. It is possible that regulatory or other developments in the swaps market could adversely affect the Acquiring Funds ability to successfully use swaps.
Over-the-Counter Trading Risk. The derivative instruments that may be
purchased or sold by the Acquiring Fund may include instruments not traded on an exchange. The risk of nonperformance by the counterparty to an instrument may be greater than, and the ease with which the Acquiring Fund can dispose of or enter into
closing transactions with respect to an instrument may be less than, the risk associated with an exchange traded instrument. In addition, significant disparities may exist between bid and asked prices for derivative
instruments that are not traded on an exchange. Derivative instruments not traded on exchanges also are not subject to the same type of government regulation as exchange traded instruments, and many of the protections afforded to participants in a
regulated environment may not be available in connection with the transactions. Because derivatives traded in OTC markets generally are not guaranteed by an exchange or clearing corporation, to the extent that the Acquiring Fund has unrealized gains
in such instruments or has deposited collateral with its counterparties, the Acquiring Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor its obligations.
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 Acquiring Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more difficult for the Acquiring Fund to ascertain a market value for such instruments.
The Acquiring Fund 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
Investment Advisor anticipates the Acquiring Fund 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
49
guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that the Acquiring Fund has unrealized gains in such instruments or has deposited
collateral with its counterparties the Acquiring Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor its obligations. The Acquiring Fund 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 Acquiring Fund with a third-party guaranty or other credit enhancement.
Legal and Regulatory Risk. At any time after the date hereof, legislation or additional regulations may be enacted that could negatively affect the
assets of the Acquiring Fund. Changing approaches to regulation may have a negative impact on the securities in which the Acquiring Fund invests. Legislation or regulation may also change the way in which the Acquiring Fund itself is regulated.
There can be no assurance that future legislation, regulation or deregulation will not have a material adverse effect on the Acquiring Fund or will not impair the ability of the Acquiring Fund to achieve its investment objective. In addition, as new
rules and regulations resulting from the passage of the Dodd-Frank Act are implemented and new international capital and liquidity requirements are introduced under the Basel III Accords, the market may not react the way the Investment Advisor
expects. Whether the Acquiring Fund achieves its investment objective may depend on, among other things, whether the Investment Advisor correctly forecasts market reactions to this and other legislation. In the event the Investment Advisor
incorrectly forecasts market reaction, the Acquiring Fund may not achieve its investment objective.
Dodd-Frank Act Risk. Title VII of the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) (the Derivatives Title) imposed a substantially new regulatory structure on derivatives markets, with particular emphasis on swaps (which
were subject to oversight by the CFTC) and security-based swaps (which were subject to oversight by the SEC). The regulatory framework covers a broad range of swap market participants, including banks,
non-banks, credit unions, insurance companies, broker-dealers and investment advisers. Prudential regulators were granted authority to regulate margining of swaps and security-based swaps of banks and
bank-related entities.
Although the CFTC and the prudential regulators have adopted and have begun implementing required regulations, the SEC rules were
not finalized until December 2019 and firms have until October 2021 to come into compliance.
Current regulations for swaps require the mandatory central
clearing and mandatory exchange trading of particular types of interest rate swaps and index credit default swaps (together, Covered Swaps). The Fund is required to clear its Covered Swaps through a clearing broker, which requires, among
other things, posting initial margin and variation margin to the Funds clearing broker in order to enter into and maintain positions in Covered Swaps.
Covered Swaps generally are required to be executed through a swap execution facility (SEF), which can involve additional transaction fees.
Additionally, under the Dodd-Frank Act, swaps (and both swaps and security-based swaps entered into with banks) are subject to margin requirements and swap
dealers are required to collect margin from the Fund and post variation margin to the Fund with respect to such derivatives. Specifically, regulations are now in effect that require swap dealers to post and collect variation margin (comprised of
specified liquid instruments and subject to a required haircut) in connection with trading of OTC swaps with the Fund. Shares of investment companies (other than certain money market funds) may not be posted as collateral under these regulations.
Requirements for posting of initial margin in connection with OTC swaps (as well as security-based swaps in addition to OTC swaps where the dealer is a bank or subsidiary of a bank holding company) will be
phased-in through September 2021. The CFTC has not yet adopted capital requirements for swap dealers. As uncleared capital requirements for swap dealers and uncleared capital and margin requirements for
security-based swaps are phased in and implemented, such requirements may make certain types of trades and/or trading strategies more costly. There may be market dislocations due to uncertainty during the implementation period of any new regulation
and the Investment Advisor cannot know how the derivatives market will adjust to the CFTCs new capital regulations and to the new SEC regulations governing security-based swaps.
In addition, regulations adopted by global prudential regulators that are now in effect require certain bank- regulated counterparties and certain of their
affiliates to include in qualified financial contracts, including many derivatives contracts as well as repurchase agreements and securities lending agreements, terms that delay or restrict the rights of
50
counterparties to terminate such contracts, foreclose upon collateral, exercise other default rights or restrict transfers of affiliate credit enhancements (such as guarantees) in the event that
the bank-regulated counterparty and/or its affiliates are subject to certain types of resolution or insolvency proceedings.
Regulation as a
Commodity Pool. The CFTC subjects advisers to registered investment companies to regulation by the CFTC if a fund that is advised by the investment adviser either (i) invests, directly or indirectly, more than a prescribed level
of its liquidation value in CFTC-regulated futures, options and swaps (CFTC Derivatives), or (ii) markets itself as providing investment exposure to such instruments. To the extent the Acquiring Fund uses CFTC Derivatives, it
intends to do so below such prescribed levels and will not market itself as a commodity pool or a vehicle for trading such instruments. Accordingly, the Investment Advisor has claimed an exclusion from the definition of the term
commodity pool operator under the Commodity Exchange Act (CEA) pursuant to Rule 4.5 under the CEA. The Investment Advisor is not, therefore, subject to registration or regulation as a commodity pool operator under
the CEA in respect of the Acquiring Fund.
Failure of Futures Commission Merchants and Clearing Organizations. The Acquiring Fund is required to
deposit funds to margin open positions in cleared derivative instruments (both futures and swaps) with a clearing broker registered as a futures commission merchant (FCM). The CEA requires an FCM to segregate all funds
received from customers with respect to any orders for the purchase or sale of U.S. domestic futures contracts and cleared swaps from the FCMs proprietary assets. Similarly, the CEA requires each FCM to hold in a separate secure account all
funds received from customers with respect to any orders for the purchase or sale of foreign futures contracts and segregate any such funds from the funds received with respect to domestic futures contracts. However, all funds and other property
received by an FCM from its customers are held by an FCM on a commingled basis in an omnibus account and amounts in excess of assets posted to the clearing organization may be invested by an FCM in certain instruments permitted under the applicable
regulation. There is a risk that assets deposited by the Acquiring Fund with any FCM as margin for futures contracts or commodity options may, in certain circumstances, be used to satisfy losses of other clients of the Acquiring Funds FCM. In
addition, the assets of the Acquiring Fund posted as margin against both swaps and futures contracts may not be fully protected in the event of the FCMs bankruptcy.
Legal, Tax and Regulatory Risks. Legal, tax and regulatory changes could occur that may have material adverse effects on the Acquiring Fund. For
example, the regulatory and tax environment for derivative instruments in which the Acquiring Fund may participate is evolving, and such changes in the regulation or taxation of derivative instruments may have material adverse effects on the value
of derivative instruments held by the Acquiring Fund and the ability of the Acquiring Fund to pursue its investment strategies.
To qualify for the
favorable U.S. federal income tax treatment generally accorded to RICs, the Acquiring Fund must, among other things, derive in each taxable year at least 90% of its gross income from certain prescribed sources and distribute for each taxable year at
least 90% of its investment company taxable income (generally, ordinary income plus the excess, if any, of net short-term capital gain over net long-term capital loss) and at least 90% of its net
tax-exempt interest income, if any. If for any taxable year the Acquiring Fund does not qualify as a RIC, all of its taxable income for that year (including its net capital gain) would be subject to tax at
regular corporate rates without any deduction for distributions to shareholders, and such distributions would be taxable as ordinary dividends to the extent of the Acquiring Funds current and accumulated earnings and profits.
The current presidential administration has called for, and in certain instances has begun to implement, significant changes to U.S. fiscal, tax, trade,
healthcare, immigration, foreign, and government regulatory policy. In this regard, there is significant uncertainty with respect to legislation, regulation and government policy at the federal level, as well as the state and local levels. Recent
events have created a climate of heightened uncertainty and introduced new and difficult-to-quantify macroeconomic and political risks with potentially far-reaching implications. There has been a corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the
extent the U.S. Congress or the current presidential administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate
taxes, healthcare, the U.S. regulatory environment, inflation and other areas. Some particular areas identified as subject to potential change, amendment or repeal include the Dodd-Frank Act, including the Volcker Rule and various swaps and
derivatives regulations, credit risk retention requirements and the authorities of the Federal Reserve, the Financial Stability Oversight Council and the SEC. Although the Acquiring Fund cannot predict the impact, if any, of these changes to
51
the Acquiring Funds business, they could adversely affect the Acquiring Funds business, financial condition, operating results and cash flows. Until the Acquiring Fund knows what
policy changes are made and how those changes impact the Acquiring Funds business and the business of the Acquiring Funds competitors over the long term, the Acquiring Fund will not know if, overall, the Acquiring Fund will benefit from
them or be negatively affected by them.
The risks and uncertainties associated with these policy proposals are heightened by the 2018 U.S. federal
election, which has resulted in different political parties controlling the U.S. House of Representatives, on the one hand, and the U.S. Senate and the Executive Branch, on the other hand. Additional risks arising from the differences in expressed
policy preferences among the various constituencies in these branches of the U.S. government has led in the past, and may lead in the future, to short-term or prolonged policy impasses, which could, and has, resulted in shutdowns of the U.S. federal
government. U.S. federal government shutdowns, especially prolonged shutdowns, could have a significant adverse impact on the economy in general and could impair the ability of issuers to raise capital in the securities markets. Any of these effects
could have an adverse impact on companies in the Acquiring Funds portfolio and consequently on the value of their securities and the Acquiring Funds NAV.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S.
Treasury Department. The Acquiring Fund cannot predict how any changes in the tax laws might affect its investors or the Acquiring Fund itself. New legislation, U.S. Treasury regulations, administrative interpretations or court decisions, with or
without retroactive application, could significantly and negatively affect the Acquiring Funds ability to qualify as a RIC or the U.S. federal income tax consequences to its investors and itself of such qualification, or could have other
adverse consequences. You are urged to consult with your tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in the Acquiring Funds shares.
1940 Act Regulation. The Acquiring Fund is a registered closed-end management investment company and as
such is subject to regulations under the 1940 Act. Generally speaking, any contract or provision thereof that is made, or where performance involves a violation of the 1940 Act or any rule or regulation thereunder is unenforceable by either party
unless a court finds otherwise.
Legislation Risk. At any time after the date of this Proxy Statement, legislation may be enacted that could
negatively affect the assets of the Acquiring Fund. Legislation or regulation may change the way in which the Acquiring Fund itself is regulated. The Investment Advisor cannot predict the effects of any new governmental regulation that may be
implemented and there can be no assurance that any new governmental regulation will not adversely affect the Acquiring Funds ability to achieve its investment objective.
LIBOR Risk. The Acquiring Fund may be exposed to financial instruments that are tied to the London Interbank Offered Rate (LIBOR) to
determine payment obligations, financing terms, hedging strategies or investment value. The Acquiring Funds investments may pay interest at floating rates based on LIBOR or may be subject to interest caps or floors based on LIBOR. The
Acquiring Fund may also obtain financing at floating rates based on LIBOR. Derivative instruments utilized by the Acquiring Fund may also reference LIBOR.
In 2017, the head of the United Kingdoms Financial Conduct Authority announced a desire to phase out the use of LIBOR by the end of 2021, and it is
expected that LIBOR will cease to be published after that time. The Acquiring Fund may have investments linked to other interbank offered rates, such as the Euro Overnight Index Average (EONIA), which may also cease to be published.
Various financial industry groups have begun planning for the transition away from LIBOR, but there are challenges to converting certain securities and transactions to a new reference rate (e.g., the Secured Overnight Financing Rate
(SOFR), which is intended to replace the U.S. dollar LIBOR).
Neither the effect of the LIBOR transition process nor its ultimate success can
yet be known. The transition process might lead to increased volatility and illiquidity in markets for, and reduce the effectiveness of new hedges placed against, instruments whose terms currently include LIBOR. While some existing LIBOR-based
instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies to replicate
LIBOR. Not all existing LIBOR-based instruments may have alternative rate-setting provisions and
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there remains uncertainty regarding the willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments. In addition, a liquid market for newly
issued instruments that use a reference rate other than LIBOR still may be developing. There may also be challenges for the Acquiring Fund to enter into hedging transactions against such newly issued instruments until a market for such hedging
transactions develops. All of the aforementioned may adversely affect the Acquiring Funds performance or NAV.
Risks Associated with Recent
Market Events. Stresses associated with the 2008 financial crisis in the United States and global economies peaked approximately a decade ago, but periods of unusually high volatility in the financial markets and restrictive credit conditions,
sometimes limited to a particular sector or a geography, continue to recur. Some countries, including the United States, have adopted and/or are considering the adoption of more protectionist trade policies, a move away from the tighter financial
industry regulations that followed the financial crisis, and/or substantially reducing corporate taxes. The exact shape of these policies is still being considered, but the equity and debt markets may react strongly to expectations of change, which
could increase volatility, especially if the markets expectations are not borne out. A rise in protectionist trade policies, and the possibility of changes to some international trade agreements, could affect the economies of many nations in
ways that cannot necessarily be foreseen at the present time. In addition, geopolitical and other risks, including environmental and public health, may add to instability in world economies and markets generally. Economies and financial markets
throughout the world are becoming increasingly interconnected. As a result, whether or not the Fund invests in securities of issuers located in or with significant exposure to countries experiencing economic, political and/or financial difficulties,
the value and liquidity of the Funds investments may be negatively affected by such events.
An outbreak of respiratory disease caused by a novel
coronavirus was first detected in China in December 2019 and has now developed into a global pandemic. The pandemic has resulted in closing borders, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations,
disruptions to supply chains and customer activity, as well as general concern and uncertainty. The impact of this pandemic, and other pandemics and epidemics that may arise in the future, could affect the economies of many nations, individual
companies and the market in general in ways that cannot necessarily be foreseen at the present time. In addition, the impact of infectious diseases in developing or emerging market countries may be greater due to less established health care
systems. Health crises caused by the novel coronavirus pandemic may exacerbate other pre-existing political, social and economic risks in certain countries. The impact of the pandemic may last for an extended
period of time.
Market Disruption and Geopolitical Risk. The occurrence of events similar to those in recent years, such as the aftermath of the
war in Iraq, instability in Afghanistan, Pakistan, Egypt, Libya, Syria, Russia, Ukraine and the Middle East, new and ongoing epidemics and pandemics of infectious diseases and other global health events, natural/environmental disasters, terrorist
attacks in the United States and around the world, social and political discord, debt crises (such as the Greek crisis), sovereign debt downgrades, increasingly strained relations between the United States and a number of foreign countries,
including traditional allies, such as certain European countries, and historical adversaries, such as North Korea, Iran, China and Russia, and the international community generally, new and continued political unrest in various countries, such as
Venezuela and Spain, the exit or potential exit of one or more countries from the European Union (the EU) or the European Monetary Union (the EMU), continued changes in the balance of political power among and within the
branches of the U.S. government, among others, 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 coronavirus
pandemic has led to illiquidity and volatility in the municipal bond markets and may lead to downgrades in the credit quality of certain municipal issuers.
China and the United States have each recently imposed tariffs on the other countrys products. These actions may trigger a significant reduction in
international trade, the oversupply of certain manufactured goods, substantial price reductions of goods and possible failure of individual companies and/or large segments of Chinas export industry, which could have a negative impact on the
Acquiring Funds performance. U.S. companies that source material and goods from China and those that make large amounts of sales in China would be particularly vulnerable to an escalation of trade tensions. Uncertainty regarding the outcome of
the trade tensions and the potential for a trade war could cause the U.S. dollar to decline against safe haven currencies, such as the Japanese yen and the euro. Events such as these and their consequences are difficult to predict and it is unclear
whether further tariffs may be imposed or other escalating actions may be taken in the future.
53
The decision made in the British referendum of June 23, 2016 to leave the EU, an event widely referred to as
Brexit, has led to volatility in the financial markets of the United Kingdom and more broadly across Europe and may also lead to weakening in consumer, corporate and financial confidence in such markets. The formal notification to the
European Council required under Article 50 of the Treaty on EU was made on March 29, 2017, following which the terms of exit were negotiated. Pursuant to an agreement between the United Kingdom and the EU, the United Kingdom left the EU on
January 31, 2020, subject to a transition period ending December 31, 2020. The longer term economic, legal, political and social framework to be put in place between the United Kingdom and the EU are unclear at this stage and are likely to
lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. In particular, the decision made in Brexit may lead to a call for similar referendums in
other European jurisdictions which may cause increased economic volatility in the European and global markets. This mid- to long-term uncertainty may have an adverse effect on the economy generally and on the
ability of the Acquiring Fund to execute its strategies and to receive attractive returns. In particular, currency volatility may mean that the returns of the Acquiring Fund and its investments are adversely affected by market movements and may make
it more difficult, or more expensive, for the Acquiring Fund to execute prudent currency hedging policies. Potential decline in the value of the British Pound and/or the Euro against other currencies, along with the potential downgrading of the
United Kingdoms sovereign credit rating, may also have an impact on the performance of portfolio companies or investments located in the United Kingdom or Europe. In light of the above, no definitive assessment can currently be made regarding
the impact that Brexit will have on the Acquiring Fund, its investments or its organization more generally.
The occurrence of any of these above events
could have a significant adverse impact on the value and risk profile of the Acquiring Funds portfolio. The Acquiring Fund does not know how long the securities markets may be affected by similar events and cannot predict the effects of
similar events in the future on the U.S. economy and securities markets. There can be no assurance that similar events and other market disruptions will not have other material and adverse implications.
Regulation and Government Intervention Risk. The U.S. Government and the Federal Reserve, as well as certain foreign governments, recently have taken
unprecedented actions designed to support certain financial institutions and segments of the financial markets that experienced extreme volatility, such as implementing stimulus packages, providing liquidity in fixed-income, commercial paper and
other markets, and providing tax breaks, among other actions. The reduction or withdrawal of Federal Reserve or other U.S. or non-U.S. governmental support could negatively affect financial markets generally
and reduce the value and liquidity of certain securities. Additionally, with the cessation of certain market support activities, the Acquiring Fund may face a heightened level of interest rate risk as a result of a rise or increased volatility in
interest rates.
Federal, state, and other governments, their regulatory agencies or self-regulatory organizations may take actions that affect the
regulation of the issuers in which the Acquiring Fund invests. Legislation or regulation may also change the way in which the Acquiring Fund is regulated. Such legislation or regulation could limit or preclude the Acquiring Funds ability to
achieve its investment objective.
In the aftermath of the global financial crisis, there appears to be a renewed popular, political and judicial focus on
finance related consumer protection. Financial institution practices are also subject to greater scrutiny and criticism generally. In the case of transactions between financial institutions and the general public, there may be a greater tendency
toward strict interpretation of terms and legal rights in favor of the consuming public, particularly where there is a real or perceived disparity in risk allocation and/or where consumers are perceived as not having had an opportunity to exercise
informed consent to the transaction. In the event of conflicting interests between retail investors holding common shares of a closed-end investment company such as the Acquiring Fund and a large financial
institution, a court may similarly seek to strictly interpret terms and legal rights in favor of retail investors. The Acquiring Fund may be affected by governmental action in ways that are not foreseeable, and there is a possibility that such
actions could have a significant adverse effect on the Acquiring Fund and its ability to achieve its investment objective.
Potential Conflicts of
Interest of the Investment Advisor and Others. The investment activities of BlackRock, Inc. (BlackRock), the ultimate parent company of the Investment Advisor, and its affiliates (including BlackRock and its subsidiaries
(collectively, the Affiliates)), and their respective directors, officers or employees, in the management of, or their interest in, their own accounts and other accounts they manage, may present conflicts of
54
interest that could disadvantage the Acquiring Fund and its shareholders. BlackRock and its Affiliates provide investment management services to other funds and discretionary managed accounts
that may follow investment programs similar to that of the Acquiring Fund. Subject to the requirements of the 1940 Act, BlackRock and its Affiliates intend to engage in such activities and may receive compensation from third parties for their
services. Neither BlackRock nor any Affiliate is under any obligation to share any investment opportunity, idea or strategy with the Acquiring Fund. As a result, BlackRock and its Affiliates may compete with the Acquiring Fund for appropriate
investment opportunities. The results of the Acquiring Funds investment activities, therefore, may differ from those of an Affiliate and of other accounts managed by BlackRock or an Affiliate and it is possible that the Acquiring Fund could
sustain losses during periods in which one or more Affiliates and other accounts achieve profits on their trading for proprietary or other accounts. BlackRock has adopted policies and procedures designed to address potential conflicts of interests.
Market and Selection Risk. Market risk is the possibility that the market values of securities owned by the Acquiring Fund will decline. There is
a risk that equity and/or bond markets will go down in value, including the possibility that such markets will go down sharply and unpredictably.
Stock
markets are volatile, and the price of equity securities fluctuates based on changes in a companys financial condition and overall market and economic conditions. An adverse event, such as an unfavorable earnings report, may depress the value
of a particular common stock held by the Acquiring Fund. Also, the price of common stocks is sensitive to general movements in the stock market and a drop in the stock market may depress the price of common stocks to which the Acquiring Fund has
exposure. Common stock prices fluctuate for several reasons, including changes in investors perceptions of the financial condition of an issuer or the general condition of the relevant stock market, or when political or economic events
affecting the issuers occur.
The prices of fixed income securities tend to fall as interest rates rise, and such declines tend to be greater among fixed
income securities with longer maturities. Market risk is often greater among certain types of fixed income securities, such as zero-coupon bonds that do not make regular interest payments but are instead
bought at a discount to their face values and paid in full upon maturity. As interest rates change, these securities often fluctuate more in price than securities that make regular interest payments and therefore subject the Acquiring Fund to
greater market risk than a fund that does not own these types of securities.
When-issued and delayed delivery transactions are subject to changes in
market conditions from the time of the commitment until settlement, which may adversely affect the prices or yields of the securities being purchased. The greater the Acquiring Funds outstanding commitments for these securities, the greater
the Acquiring Funds exposure to market price fluctuations.
Selection risk is the risk that the securities that the Acquiring Funds management
selects will underperform the equity and/or bond market, the market relevant indices or other funds with similar investment objectives and investment strategies.
Defensive Investing Risk. For defensive purposes, the Acquiring Fund may allocate assets into cash or short-term fixed income securities. In doing so,
the Acquiring Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective. Further, the value of short-term fixed income securities may be affected by changing interest rates and by changes in credit ratings of the
investments. If the Acquiring Fund holds cash uninvested it will be subject to the credit risk of the depository institution holding the cash.
Decision-Making Authority Risk. Investors have no authority to make decisions or to exercise business discretion on behalf of the Acquiring Fund,
except as set forth in the Acquiring Funds governing documents. The authority for all such decisions is generally delegated to the Board, which in turn, has delegated the
day-to-day management of the Acquiring Funds investment activities to the Investment Advisor, subject to oversight by the Board.
Management Risk. The Acquiring Fund is subject to management risk because it is an actively managed investment portfolio. The Investment Advisor and
the individual portfolio managers will apply investment techniques and risk analyses in making investment decisions for the Acquiring Fund, but there can be no guarantee that these will produce the desired results. The Acquiring Fund may be subject
to a relatively high level of management risk because the
55
Acquiring Fund may invest in derivative instruments, which may be highly specialized instruments that require investment techniques and risk analyses different from those associated with equities
and bonds.
Valuation Risk. The Acquiring Fund is subject to valuation risk, which is the risk that one or more of the securities in which the
Acquiring Fund invests are valued at prices that the Acquiring Fund is unable to obtain upon sale due to factors such as incomplete data, market instability or human error. The Investment Advisor may use an independent pricing service or prices
provided by dealers to value securities at their market value. Because the secondary markets for certain investments may be limited, such instruments may be difficult to value. When market quotations are not available, the Investment Advisor may
price such investments pursuant to a number of methodologies, such as computer-based analytical modeling or individual security evaluations. These methodologies generate approximations of market values, and there may be significant professional
disagreement about the best methodology for a particular type of financial instrument or different methodologies that might be used under different circumstances. In the absence of an actual market transaction, reliance on such methodologies is
essential, but may introduce significant variances in the ultimate valuation of the Acquiring Funds investments. Technological issues and/or errors by pricing services or other third-party service providers may also impact the Acquiring
Funds ability to value its investments and the calculation of the Acquiring Funds NAV.
When market quotations are not readily available or
are deemed to be inaccurate or unreliable, the Acquiring Fund values its investments at fair value as determined in good faith pursuant to policies and procedures approved by the Board. Fair value is defined as the amount for which assets could be
sold in an orderly disposition over a reasonable period of time, taking into account the nature of the asset. Fair value pricing may require determinations that are inherently subjective and inexact about the value of a security or other asset. As a
result, there can be no assurance that fair value priced assets will not result in future adjustments to the prices of securities or other assets, or that fair value pricing will reflect a price that the Acquiring Fund is able to obtain upon sale,
and it is possible that the fair value determined for a security or other asset will be materially different from quoted or published prices, from the prices used by others for the same security or other asset and/or from the value that actually
could be or is realized upon the sale of that security or other asset. For example, the Acquiring Funds NAV could be adversely affected if the Acquiring Funds determinations regarding the fair value of the Acquiring Funds
investments were materially higher than the values that the Acquiring Fund ultimately realizes upon the disposal of such investments. Where market quotations are not readily available, valuation may require more research than for more liquid
investments. In addition, elements of judgment may play a greater role in valuation in such cases than for investments with a more active secondary market because there is less reliable objective data available. The Acquiring
Fund prices its shares daily and therefore all assets, including assets valued at fair value, are valued daily.
Reliance on the Investment Advisor
Risk. The Acquiring Fund is dependent upon services and resources provided by the Investment Advisor, and therefore the Investment Advisors parent, BlackRock. The Investment Advisor is not required to devote its full time to the business
of the Acquiring Fund and there is no guarantee or requirement that any investment professional or other employee of the Investment Advisor will allocate a substantial portion of his or her time to the Acquiring Fund. The loss of one or more
individuals involved with the Investment Advisor could have a material adverse effect on the performance or the continued operation of the Acquiring Fund.
Reliance on Service Providers Risk. The Acquiring Fund must rely upon the performance of service providers to perform certain functions, which may
include functions that are integral to the Acquiring Funds operations and financial performance. Failure by any service provider to carry out its obligations to the Acquiring Fund in accordance with the terms of its appointment, to exercise
due care and skill or to perform its obligations to the Acquiring Fund at all as a result of insolvency, bankruptcy or other causes could have a material adverse effect on the Acquiring Funds performance and returns to common shareholders. The
termination of the Acquiring Funds relationship with any service provider, or any delay in appointing a replacement for such service provider, could materially disrupt the business of the Acquiring Fund and could have a material adverse effect
on the Acquiring Funds performance and returns to common shareholders.
Information Technology Systems Risk. The Acquiring Fund is dependent
on the Investment Advisor for certain management services as well as back-office functions. The Investment Advisor depends on information technology systems in order to assess investment opportunities, strategies and markets and to monitor and
control risks for the Acquiring Fund. It is possible that a failure of some kind which causes disruptions to these information technology systems could materially limit the Investment Advisors ability to adequately assess and adjust
investments, formulate
56
strategies and provide adequate risk control. Any such information technology-related difficulty could harm the performance of the Acquiring Fund. Further, failure of the back-office functions of
the Investment Advisor to process trades in a timely fashion could prejudice the investment performance of the Acquiring Fund.
Cyber Security
Risk. With the increased use of technologies such as the Internet to conduct business, the Acquiring Fund is susceptible to operational, information security and related risks. In general, cyber incidents can result from deliberate attacks or
unintentional events. Cyber-attacks include, but are not limited to, gaining unauthorized access to digital systems (e.g., through hacking or malicious software coding) for purposes of misappropriating assets or sensitive
information, corrupting data, or causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing
denial-of-service attacks on websites (i.e., efforts to make network services unavailable to intended users). Cyber security failures by or breaches of the
Investment Advisor and other service providers (including, but not limited to, fund accountants, custodians, transfer agents and administrators), and the issuers of securities in which the Acquiring Fund invests, have the ability to cause
disruptions and impact business operations, potentially resulting in financial losses, interference with the Acquiring Funds ability to calculate its NAV, impediments to trading, the inability of shareholders to transact business, violations
of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, or additional compliance costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents
in the future. While the Acquiring Fund has established business continuity plans in the event of, and risk management systems to prevent, such cyber-attacks, there are inherent limitations in such plans and systems including the possibility that
certain risks have not been identified. Furthermore, the Acquiring Fund cannot control the cyber security plans and systems put in place by service providers to the Acquiring Fund and issuers in which the Acquiring Fund invests. As a result, the
Acquiring Fund or its shareholders could be negatively impacted.
Misconduct of Employees and of Service Providers Risk. Misconduct or
misrepresentations by employees of the Investment Advisor or the Acquiring Funds service providers could cause significant losses to the Acquiring Fund. Employee misconduct may include binding the Acquiring Fund to transactions that exceed
authorized limits or present unacceptable risks and unauthorized trading activities, concealing unsuccessful trading activities (which, in any case, may result in unknown and unmanaged risks or losses) or making misrepresentations regarding any of
the foregoing. Losses could also result from actions by the Acquiring Funds service providers, including, without limitation, failing to recognize trades and misappropriating assets. In addition, employees and service providers may improperly
use or disclose confidential information, which could result in litigation or serious financial harm, including limiting the Acquiring Funds business prospects or future marketing activities. Despite the Investment Advisors due diligence
efforts, misconduct and intentional misrepresentations may be undetected or not fully comprehended, thereby potentially undermining the Investment Advisors due diligence efforts. As a result, no assurances can be given that the due diligence
performed by the Investment Advisor will identify or prevent any such misconduct.
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 Acquiring Fund would likely increase, which would tend to further reduce returns to the common shareholders.
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 Acquiring
Funds portfolio.
Portfolio Turnover Risk. The Acquiring Funds annual portfolio turnover rate may vary greatly from year to year, as
well as within a given year. Portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Acquiring Fund. A higher portfolio turnover rate results in correspondingly greater brokerage commissions and
other transactional expenses that are borne by the Acquiring Fund. High portfolio turnover may result in an increased realization of net short-term capital gains by the Acquiring Fund which, when distributed to common shareholders, will be taxable
as ordinary income. Additionally, in a declining market, portfolio turnover may create realized capital losses.
57
Anti-Takeover Provisions Risk. The charter and bylaws of the Acquiring Fund and Maryland law include
provisions that could limit the ability of other entities or persons to acquire control of the Acquiring Fund or convert the Acquiring Fund to open-end status or to change the composition of the Board.
58
A DESCRIPTION OF THE FUNDS
BAF and BBK are each formed as a Delaware statutory trust pursuant to its Agreement and Declaration of Trust governed by the laws of the State of Delaware.
MUH, MUS, and the Acquiring Fund are each organized as a Maryland corporation pursuant to its Articles of Incorporation (the Charter) and governed by the laws of the State of Maryland. Each of BAF, BBK, MUH, MUS and the Acquiring Fund is
a diversified, closed-end management investment company registered under the 1940 Act. Each Funds principal office is located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and each Funds
telephone number is (800) 882-0052.
BAF was formed as a Delaware statutory trust pursuant to an Agreement and
Declaration of Trust governed by the laws of the State of Delaware on August 30, 2002, and commenced operations on October 31, 2002.
BBK was
formed as a Delaware statutory trust pursuant to an Agreement and Declaration of Trust governed by the laws of the State of Delaware on February 15, 2002, and commenced operations on April 30, 2002.
MUH was organized as a Maryland corporation trust governed by the laws of the State of Maryland on April 24, 1997, and commenced operations on
February 27, 1998.
MUS was organized as a Maryland corporation trust governed by the laws of the State of Maryland on March 11, 1998, and
commenced operations on May 1, 1998.
The Acquiring Fund was organized as a Maryland corporation governed by the laws of the State of Maryland on
February 27, 1997, and commenced operations on May 2, 1997.
The Acquiring Fund common shares are listed on the NYSE as MHD.
BAFs common shares are listed on the NYSE as BAF. BBKs common shares are listed on the NYSE as BBK. MUHs common shares are listed on the NYSE as MUH. MUSs common shares are listed on the
NYSE as MUS.
Each of the Acquiring Fund, MUH and MUS has an April 30 fiscal year end.
Each of BAF and BBK has an August 31 fiscal year end.
Each Fund has VMTP Shares outstanding. Each Funds VMTP Shares are not listed on a national stock exchange and have not been registered under the
Securities Act, or any state securities laws, and unless so registered, may not be offered, sold, assigned, transferred, pledged, encumbered or otherwise disposed of except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state securities laws. Please see Information about the Preferred Shares of the Funds for additional information.
The Board of Trustees or Board of Directors and Officers
The Board of Trustees or Board of Directors, as applicable (the Board), of each Fund currently consists of ten individuals (each, a Board
Member), eight of whom are not interested persons of each Fund as defined in the 1940 Act (the Independent Board Members). The registered investment companies advised by the Investment Advisor or its affiliates (the
BlackRock-Advised Funds) are organized into one complex of closed-end funds and open-end non-index fixed-income funds
(the BlackRock Fixed-Income Complex), one complex of open-end equity, multi-asset, index and money market funds (the BlackRock Multi-Asset Complex) and one complex of exchange-traded
funds (each, a BlackRock Fund Complex). Each Fund is included in the BlackRock Fixed-Income Complex. The Board Members also oversee as Board members the operations of the other closed-end
registered investment companies included in the BlackRock Fixed-Income Complex.
Certain biographical and other information relating to the Board Members
and officers of each Fund is set forth below, including their year of birth, their principal occupation for at least the last five years, the length of time served, the total number of investment companies overseen in the BlackRock Fund Complexes
and any public directorships or trusteeships.
59
Please refer to the below table which identifies the Board Members and sets forth certain biographical
information about the Board Members for each Fund.
|
|
|
|
|
|
|
|
|
Name and Year of Birth(1)
|
|
Position(s)
Held
(Length of
Service) (3)
|
|
Principal Occupation(s) During Past Five Years
|
|
Number of
BlackRock-
Advised
Registered
Investment
Companies
(RICs)
Consisting of
Investment
Portfolios
(Portfolios)
Overseen(4)
|
|
Other Public
Company or
Investment
Company
Directorships Held
During Past Five
Years(5)
|
Independent Board
Members(2)
|
|
|
|
|
|
Richard E. Cavanagh
1946
|
|
Co-Chair of the Board and Board Member (Since 2007)
|
|
Director, The Guardian Life Insurance Company of America since 1998; Board Chair, Volunteers of America (a not-for-profit organization) from
2015 to 2018 (board member since 2009); Director, Arch Chemicals (chemical and allied products) from 1999 to 2011; Trustee, Educational Testing Service from 1997 to 2009 and Chairman thereof from 2005 to 2009; Senior Advisor, The Fremont Group since
2008 and Director thereof since 1996; Faculty Member/Adjunct Lecturer, Harvard University since 2007 and Executive Dean from 1987 to 1995; President and Chief Executive Officer, The Conference Board, Inc. (global business research organization) from
1995 to 2007.
|
|
[●] RICs consisting of [●] Portfolios
|
|
None
|
|
|
|
|
|
Karen P. Robards
1950
|
|
Co-Chair of the Board and Board Member (Since 2007)
|
|
Principal of Robards & Company, LLC (consulting and private investing) since 1987; Co-founder and Director of the Cooke Center for Learning and Development (a not-for-profit organization) since 1987; Director of Enable Injections, LLC (medical devices) since 2019; Investment Banker at Morgan Stanley from 1976 to
1987.
|
|
[●] RICs consisting of [●] Portfolios
|
|
Greenhill & Co., Inc.; AtriCure, Inc. (medical devices) from 2000 until 2017
|
|
|
|
|
|
Michael J. Castellano
1946
|
|
Board Member (Since 2011)
|
|
Chief Financial Officer of Lazard Group LLC from 2001 to 2011; Chief Financial Officer of Lazard Ltd from 2004 to 2011; Director, Support Our Aging Religious (non-profit) from 2009
to June 2015 and since 2017; Director, National Advisory Board of Church Management at Villanova University since 2010; Trustee, Domestic Church Media Foundation since 2012; Director, CircleBlack Inc. (financial technology company) since 2015.
|
|
[●] RICs consisting of [●] Portfolios
|
|
None
|
|
|
|
|
|
Cynthia L. Egan
1955
|
|
Board Member (Since 2016)
|
|
Advisor, U.S. Department of the Treasury from 2014 to 2015; President, Retirement Plan Services, for T. Rowe Price Group, Inc. from 2007 to 2012; executive positions within Fidelity Investments from 1989 to 2007.
|
|
[●] RICs consisting of [●] Portfolios
|
|
Unum (insurance); The Hanover Insurance Group (insurance); Envestnet (investment platform) from 2013 until 2016
|
|
|
|
|
|
Frank J. Fabozzi
1948
|
|
Board Member (Since 2007)
|
|
Editor of The Journal of Portfolio Management since 1986; Professor of Finance, EDHEC Business School (France) since 2011; Visiting Professor, Princeton University for the 2013 to 2014 academic year and Spring 2017 semester;
Professor in the Practice of Finance, Yale University School of Management from 1994 to 2011 and currently a Teaching Fellow in Yales Executive Programs; Board Member, BlackRock Equity-Liquidity Funds from 2014 to 2016; affiliated professor
Karlsruhe Institute of Technology from 2008 to 2011; Visiting Professor, Rutgers University for the Spring 2019 semester; Visiting Professor, New York University for the 2019 academic year.
|
|
[●] RICs consisting of [●] Portfolios
|
|
None
|
60
|
|
|
|
|
|
|
|
|
Name and Year of Birth(1)
|
|
Position(s)
Held
(Length of
Service) (3)
|
|
Principal Occupation(s) During Past Five Years
|
|
Number of
BlackRock-
Advised Registered
Investment
Companies
(RICs)
Consisting of
Investment
Portfolios
(Portfolios)
Overseen(4)
|
|
Other Public
Company or
Investment
Company
Directorships Held
During Past Five
Years(5)
|
R. Glenn Hubbard
1958
|
|
Board Member (Since 2007)
|
|
Dean, Columbia Business School from 2004 to 2019; Faculty member, Columbia Business School since 1988.
|
|
[●] RICs consisting of [●] Portfolios
|
|
ADP (data and information services); Metropolitan Life Insurance Company (insurance); KKR Financial Corporation (finance) from 2004 until 2014
|
|
|
|
|
|
W. Carl Kester
1951
|
|
Board Member (Since 2007)
|
|
George Fisher Baker Jr. Professor of Business Administration, Harvard Business School since 2008; Deputy Dean for Academic Affairs from 2006 to 2010; Chairman of the Finance Unit, from 2005 to 2006; Senior Associate Dean and
Chairman of the MBA Program from 1999 to 2005; Member of the faculty of Harvard Business School since 1981.
|
|
[●] RICs consisting of [●] Portfolios
|
|
None
|
|
|
|
|
|
Catherine A. Lynch
1961
|
|
Board Member (Since 2016)
|
|
Chief Executive Officer, Chief Investment Officer and various other positions, National Railroad Retirement Investment Trust from 2003 to 2016; Associate Vice President for Treasury Management, The George Washington University from
1999 to 2003; Assistant Treasurer, Episcopal Church of America from 1995 to 1999.
|
|
[●] RICs consisting of [●] Portfolios
|
|
None
|
Interested Board
Members(5)
|
|
|
|
|
|
Robert Fairbairn
1965
|
|
Board Member (Since 2018)
|
|
Vice Chairman of BlackRock, Inc. since 2019; Member of BlackRocks Global Executive and Global Operating Committees; Co-Chair of BlackRocks Human Capital Committee; Senior
Managing Director of BlackRock, Inc. from 2010 to 2019; oversaw BlackRocks Strategic Partner Program and Strategic Product Management Group from 2012 to 2019; Member of the Board of Managers of BlackRock Investments, LLC from 2011 to 2018;
Global Head of BlackRocks Retail and iShares® businesses from 2012 to 2016.
|
|
[●] RICs consisting of [●] Portfolios
|
|
None
|
|
|
|
|
|
John M. Perlowski
1964
|
|
Board Member (Since 2015), President and Chief Executive Officer (Since 2010)
|
|
Managing Director of BlackRock, Inc. since 2009; Head of BlackRock Global Accounting and Product Services since 2009; Advisory Director of Family Resource Network (charitable foundation) since 2009.
|
|
[●] RICs consisting of [●] Portfolios
|
|
None
|
(1)
|
The address of each Board Member is c/o BlackRock, Inc., 55 East 52nd Street, New York, NY 10055.
|
(2)
|
Each Independent Board Member holds office until his or her successor is elected and qualifies, or until his or
her earlier death, resignation, retirement or removal, or until December 31 of the year in which he or she turns 75. Board Members who are interested persons, as defined in the 1940 Act, serve until their successor is elected and
qualifies or until their earlier death, resignation, retirement or removal as provided by each Funds bylaws or statute, or until December 31 of the year in which they turn 72. The Board may determine to extend the terms of Independent
Board Members on a case-by-case basis, as appropriate.
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(3)
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Date shown is the earliest date a person has served for the Funds covered by this Proxy Statement. Following
the combination of Merrill Lynch Investment Managers, L.P. (MLIM) and BlackRock, Inc. in September 2006, the various legacy MLIM and legacy BlackRock fund
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61
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boards were realigned and consolidated into three new fund boards in 2007. Certain Independent Board Members first became members of the boards of other legacy MLIM or legacy BlackRock funds as
follows: Richard E. Cavanagh, 1994; Frank J. Fabozzi, 1988; R. Glenn Hubbard, 2004; W. Carl Kester, 1995; and Karen P. Robards, 1998. Certain other Independent Board Members became members of the boards of
the closed-end funds in the BlackRock Fixed-Income Complex as follows: Michael J. Castellano, 2011; Cynthia L. Egan, 2016; and Catherine A. Lynch, 2016.
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(4)
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Dr. Fabozzi, Dr. Kester, Ms. Lynch and Mr. Perlowski are also trustees of the BlackRock
Credit Strategies Fund.
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(5)
|
Mr. Fairbairn and Mr. Perlowski are both interested persons, as defined in the 1940 Act,
of each Fund based on their positions with BlackRock, Inc. and its affiliates. Mr. Fairbairn and Mr. Perlowski are also board members of the BlackRock Multi-Asset Complex.
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Information Pertaining to the Officers
Certain biographical and other information relating to the officers of the Funds who are not Board Members is set forth below, including their address and year
of birth, principal occupations for at least the last five years and length of time served. With the exception of the Chief Compliance Officer (CCO), executive officers receive no compensation from the Funds. The Acquiring Fund
compensates the CCO for his services as its CCO.
Each executive officer is an interested person of the Funds (as defined in the 1940 Act) by
virtue of that individuals position with BlackRock or its affiliates described in the table below.
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|
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Name, Address(1),(2)
and Year of Birth
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Position(s) Held
(Length of Service)
|
|
Principal Occupations(s)
During Past Five
Years
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Jonathan Diorio
1980
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Vice President
(Since 2015)
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Managing Director of BlackRock since 2015; Director of BlackRock, Inc. from 2011 to 2015.
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Neal J. Andrews
1966
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Chief Financial Officer
(Since
2007)
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Chief Financial Officer of the iShares® exchange traded funds from 2019 to 2020; Managing Director of BlackRock, Inc. since 2006
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Jay M. Fife
1970
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Treasurer
(Since 2007)
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Managing Director of BlackRock, Inc. since 2007.
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Charles Park
1967
|
|
Chief Compliance Officer
(Since
2014)
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|
Anti-Money Laundering Compliance Officer for certain BlackRock-advised Funds from 2014 to 2015; Chief Compliance Officer of BlackRock Advisors, LLC and the BlackRock-advised Funds in the BlackRock Multi-Asset Complex and the
BlackRock Fixed-Income Complex since 2014; Principal of and Chief Compliance Officer for iShares® Delaware Trust Sponsor LLC since 2012 and BlackRock Fund Advisors (BFA) since
2006; Chief Compliance Officer for the BFA-advised iShares® exchange traded funds since 2006; Chief Compliance Officer for BlackRock Asset Management
International Inc. since 2012.
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Janey Ahn
1975
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|
Secretary
(Since 2012)
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Managing Director of BlackRock, Inc. since 2018; Director of BlackRock, Inc. from 2009 to 2017.
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(1)
|
The address of each executive officer is c/o BlackRock, Inc., 55 East 52nd Street, New York, NY 10055.
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(2)
|
Officers of the Funds service at the pleasure of the Board.
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The Investment Advisor
BlackRock Advisors, LLC serves as the investment adviser for each Fund and is expected to continue to serve as investment adviser for the Combined Fund. The
Investment Advisor is responsible for the management of each Funds portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of each Fund.
62
Each Fund entered into an Investment Management Agreement with the Investment Advisor to provide investment
advisory services. For such services, BAF currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average weekly managed assets. BBK currently pays the Investment Advisor a monthly
fee at an annual contractual investment management fee rate of 0.65% of its average weekly managed assets. For purposes of calculating these fees, managed assets means the total assets of the relevant Fund (including any assets
attributable to money borrowed for investment purposes) minus the sum of its accrued liabilities (other than money borrowed for investment purposes, including liabilities represented by TOB leverage and the liquidation preference of the Funds
VMTP Shares). Each of MUH, MUS and the Acquiring Fund currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.55% of its average daily net assets. For purposes of calculating these fees,
net assets means the Acquiring Funds total assets minus the sum of the Acquiring Funds accrued liabilities (which does not include liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP
Shares).
Each Fund and the Investment Advisor have entered into the Fee Waiver Agreement, pursuant to which the Investment Advisor has contractually
agreed to waive the management fee with respect to any portion of each Funds assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Investment Advisor or its affiliates that have a contractual
fee, through June 30, 2022. In addition, effective December 1, 2019, pursuant to the Fee Waiver Agreement, the Investment Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees each Fund
pays to the Investment Advisor indirectly through its investment in money market funds advised by the Investment Advisor or its affiliates, through June 30, 2022. The Fee Waiver Agreement may be continued from year to year thereafter, provided
that such continuance is specifically approved by the Investment Advisor and each Fund (including by a majority of each Funds Independent Board Members). Neither the Investment Advisor nor the Funds are obligated to extend the Fee Waiver
Agreement. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by each Fund (upon the vote of a majority of the Independent Board Members or a majority of the outstanding voting securities of each Fund),
upon 90 days written notice by each Fund to the Investment Advisor.
If any of the Reorganizations are consummated, the annual contractual
investment management fee rate of the Acquiring Fund will be the annual contractual investment management fee rate of the Combined Fund, which will be 0.55% of the average daily net assets of the Combined Fund. The annual contractual investment
management fee rate of the Combined Fund represents a 10 basis point reduction in the annual contractual investment management fee rate for BBK and no change in the annual contractual investment management fee rates for BAF, MUH and MUS.
Additionally, if any of the Reorganizations are consummated, the Investment Advisor has agreed to the Combined Fund Contractual Waiver through June 30, 2022, resulting in an actual investment management fee rate of 0.54% of the average daily
net assets of the Combined Fund.
Based on a pro forma Broadridge peer expense universe for the Combined Fund, the estimated total annual fund
expense ratio (excluding investment-related expenses and taxes) is expected to be in the second quartile and contractual investment management fee rate and actual investment management fee rate over total assets are each expected to be in the first
quartile.
The level of expense savings (or increases) will vary depending on the combination of the Funds in the Reorganizations, and furthermore, there
can be no assurance that future expenses will not increase or that any expense savings for any Fund will be realized as a result of any Reorganization.
A
discussion regarding the basis for the approval of the Investment Management Agreement by the Board of each Fund is provided in such Funds Form N-CSR for BAF and BBKs fiscal year ended
August 31, 2020 and for the Acquiring Funds, MUHs and MUSs semi-annual fiscal period ended October 31, 2020 available at www.sec.gov or by visiting www.blackrock.com.
[The Investment Advisor is located at 100 Bellevue Parkway, Wilmington, Delaware 19809 and is a wholly owned subsidiary of BlackRock. BlackRock is one of the
worlds largest publicly-traded investment management firms. As of [●], 2020, BlackRocks assets under management were approximately $[●] trillion. BlackRock has over 25 years of experience managing closed-end products and, as of [●], 2020, advised a registered closed-end family of [●] exchange-listed active funds with approximately $[●] billion in
assets.]
63
[BlackRock is a global leader in investment management, risk management and advisory services for institutional
and retail clients. BlackRock helps clients meet their goals and overcome challenges with a range of products that include 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 [●], 2020, the firm had approximately [●] employees in more than [●] countries and a major presence in key global
markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa.]
Portfolio Management
BAF is managed by a team of investment professionals led by Michael Perilli, CFA, Theodore Jaeckel, CFA, and Phillip Soccio. Messrs. Perilli, Jaeckel
and Soccio are BAFs portfolio managers and are responsible for the day-to-day management of each Funds portfolio and the selection of its investments.
Messrs. Perilli, Jaeckel and Soccio have been members of BAFs portfolio management team since 2016, 2006, and 2018, respectively.
BBK is managed by
a team of investment professionals led by Theodore Jaeckel, CFA, Walter OConnor, CFA, Christian Romaglino and Kevin Maloney. Messrs. Jaeckel, OConnor, Romaglino and Maloney are BBKs portfolio managers and are responsible for the day-to-day management of each Funds portfolio and the selection of its investments. Messrs. Jaeckel, OConnor, Romaglino and Maloney have been members of BBKs
portfolio management team since 2017, 2008, 2018 and 2018, respectively.
MUH is managed by a team of investment professionals led by Theodore Jaeckel,
CFA, Walter OConnor, CFA and Christian Romaglino. Messrs. Jaeckel, OConnor and Romaglino are each of MUHs portfolio managers and are responsible for the
day-to-day management of MUHs portfolio and the selection of its investments. Messrs. Jaeckel, OConnor and Romaglino have been members of MUHs
portfolio management team since 2006, 2006 and 2018, respectively.
MUS is managed by a team of investment professionals led by Phillip Soccio, Theodore
Jaeckel, CFA and Christian Romaglino. Messrs. Soccio, Jaeckel and Romaglino are MUSs portfolio managers and are responsible for the day-to-day management of each
Funds portfolio and the selection of its investments. Messrs. Soccio, Jaeckel and Romaglino have been members of MUSs portfolio management team since 2016, 2006 and 2017, respectively.
The Acquiring Fund is managed by a team of investment professionals led by Theodore Jaeckel, CFA and Walter OConnor, CFA. Messrs. Jaeckel and
OConnor are the Acquiring Funds portfolio managers and are responsible for the day-to-day management of the Acquiring Funds portfolio and the selection
of its investments. Messrs. Jaeckel and OConnor have both been members of the Acquiring Funds portfolio management team since 2006.
The
biography of each portfolio manager of the Funds are set forth below:
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Portfolio Manager
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Biography
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Michael Perilli, CFA
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Vice President of BlackRock since 2014; Associate of BlackRock from 2008 to 2014.
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Walter OConnor, CFA
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Managing Director of BlackRock since 2006; Managing Director of MLIM from 2003 to 2006; Director of MLIM from 1998 to 2003.
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Theodore Jaeckel, CFA
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Managing Director of BlackRock since 2006; Managing Director of MLIM from 2005 to 2006; Director of MLIM from 1997 to 2005.
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Phillip Soccio
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Director of BlackRock since 2009; Vice President of BlackRock from 2005 to 2008.
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Christian Romaglino
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Director of BlackRock since 2017; Portfolio Manager for the Municipal Mutual Fund Desk within BlackRocks Global Fixed Income Group since 2017; Portfolio Manager at Brown Brothers Harriman from 2007 to 2017.
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64
|
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Portfolio Manager
|
|
Biography
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Kevin Maloney
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Vice President of BlackRock since 2018; Associate of BlackRock from 2014 to 2017; Analyst of BlackRock from 2011 to 2013.
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Following the Reorganizations, it is expected that the Combined Fund will be managed by a team of investment professionals led
by Messrs. Jaeckel and OConnor.
Other Service Providers
The professional service providers for the Funds are or will be as follows:
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Service
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Service Providers to the Funds
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Accounting Agent
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State Street Bank and Trust Company
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Custodian
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State Street Bank and Trust Company
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Transfer Agent, Dividend Disbursing Agent and Registrar
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Computershare Trust Company, N.A.
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Redemption and Paying Agent to VMTP Shares
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The Bank of New York Mellon
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Independent Registered Public Accounting Firm
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Deloitte & Touche LLP
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Fund Counsel
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Willkie Farr & Gallagher LLP
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Counsel to the Independent Board Members
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Debevoise & Plimpton LLP
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It is not anticipated that the Reorganizations will result in any change in the organizations providing services to the
Acquiring Fund as set forth above. As a result of the Reorganizations, the service providers to the Acquiring Fund are anticipated to be the service providers to the Combined Fund.
Accounting Agent
State Street
Bank and Trust Company provides certain administration and accounting services to the Funds pursuant to an Administration and Fund Accounting Services Agreement (the Administration Agreement). Pursuant to the Administration Agreement,
State Street Bank and Trust Company provides the Funds with, among other things, customary fund accounting services, including computing each Funds NAV and maintaining books, records and other documents relating to each Funds financial
and portfolio transactions, and customary fund administration services, including assisting the Funds with regulatory filings, tax compliance and other oversight activities. For these and other services it provides to the Funds, State Street Bank
and Trust Company is paid a monthly fee from the Funds at an annual rate ranging from 0.0075% to 0.015% of each Funds managed assets, along with an annual fixed fee ranging from $0 to $10,000 for the services it provides to the Funds.
Custody of Assets
The custodian
of the assets of each Fund is State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. The custodian is responsible for, among other things, receipt of and disbursement of funds from each Funds accounts,
establishment of segregated accounts as necessary, and transfer, exchange and delivery of Fund portfolio securities.
Transfer
Agent, Dividend Disbursing Agent and Registrar
Computershare Trust Company, N.A., 150 Royall Street, Canton, Massachusetts 02021, serves as each
Funds transfer agent with respect to such Funds common shares.
65
VMTP Shares Redemption and Paying Agent
The Bank of New York Mellon, One Wall Street, New York, New York 10286, acts as the transfer agent and registrar, dividend disbursing agent and paying agent
and redemption price disbursing agent with respect to each Funds VMTP Shares and will serve in such capacity in connection with the VMTP Shares of the Combined Fund.
66
THE ACQUIRING FUNDS INVESTMENTS
Investment Objective and Policies
The Acquiring
Funds investment objective is to provide stockholders with current income exempt from federal income taxes. There can be no assurance that the Acquiring Funds investment objective will be realized. The Acquiring Funds investment
policies provide that it seeks to achieve its investment objective by investing, as a fundamental policy at least 80% of an aggregate of the Acquiring Funds net assets (including proceeds from the issuance of any preferred stock) and the
proceeds of any borrowings for investment purposes, in a portfolio of municipal obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities, each of
which pays interest that, in the opinion of bond counsel to the issuer, is excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum
tax) (previously defined as Municipal Bonds).
The Acquiring Funds investment objective and its policy of investing at least 80% of an
aggregate of the Acquiring Funds net assets (including proceeds from the issuance of any preferred stock) and the proceeds of any borrowings for investment purposes, in Municipal Bonds are fundamental policies that may not be changed without
the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the VMTP Shares, voting together as a single class, and of the holders of a majority of the outstanding preferred shares,
including the VMTP Shares, voting as a separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or
(2) more than 50% of the outstanding shares, whichever is less. See Description of VMTP Shares Voting Rights for additional information with respect to the voting rights of holders of VMTP Shares.
The Acquiring Funds investment policies provide that it will invest at least 75% of its total assets in a portfolio of Municipal Bonds that are commonly
referred to as investment grade securities, which are obligations rated at the time of purchase within the four highest quality ratings as determined by either Moodys Investors Service, Inc. (Moodys) (currently
Aaa, Aa, A and Baa), Standard & Poors (S&P) (currently AAA, AA, A and BBB) or Fitch Ratings (Fitch) (currently AAA, AA, A and BBB). In the case of short-term notes, the investment grade rating categories
are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys and BBB and F-3 for Fitch), while considered investment grade, may have certain
speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the
foregoing requirements, the Investment Advisor takes into account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided
such credit enhancement. If unrated, such securities will possess creditworthiness comparable, in the opinion of the Investment Advisor, to other obligations in which the Acquiring Fund may invest.
The Acquiring Fund may invest up to 25% of its total assets in Municipal Bonds that are rated below Baa by Moodys or below BBB by S&P or Fitch or,
if unrated, are considered by the Investment Advisor to possess similar credit characteristics. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to
pay interest and repay principal. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms
of the security and generally involve a greater volatility of price than securities in higher rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with
respect to the issuers ability to pay interest and any required redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing credit quality policies apply only at the time a security is purchased, and the Acquiring Fund is not required to dispose of a security if a
rating agency downgrades its assessment of the credit characteristics of a
67
particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Investment Advisor may consider such factors as the Investment Advisors
assessment of the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. Appendix D contains a general description of
Moodys, S&Ps and Fitchs ratings of municipal bonds. In the event that the Acquiring Fund disposes of a portfolio security subsequent to its being downgraded, the Acquiring Fund may experience a greater risk of loss than if such
security had been sold prior to such downgrade.
The Acquiring Fund may also purchase Municipal Bonds 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 Acquiring Funds income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. The Acquiring Fund
may purchase insured bonds and may purchase insurance for bonds in its portfolio.
The Acquiring Fund may invest in certain tax exempt securities
classified as private activity bonds (or industrial development bonds, under pre-1986 law) (in general, bonds that benefit non-governmental entities) that
may subject certain investors in the Acquiring Fund to an alternative minimum tax. The percentage of the Acquiring Funds total assets invested in private activity bonds will vary from time to time. The Acquiring Fund has not established any
limit on the percentage of its portfolio that may be invested in Municipal Bonds subject to the federal alternative minimum tax provisions of federal tax law, and the Acquiring Fund expects that a portion of the income it produces will be includable
in alternative minimum taxable income. VMTP Shares therefore would not ordinarily be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing VMTP Shares. The
suitability of an investment in VMTP Shares will depend upon a comparison of the after-tax yield likely to be provided from the Acquiring Fund with that from comparable
tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position. Special considerations may apply to
corporate investors.
The Acquiring Fund also may not invest more than 25% of its total assets (taken at market value at the time of each investment) in
Municipal Bonds whose issuers are located in the same state.
The average maturity of the Acquiring Funds portfolio securities varies from time to
time based upon an assessment of economic and market conditions by the Investment Advisor. The Acquiring Funds portfolio at any given time may include both long-term, intermediate-term and short-term Municipal Bonds.
The Acquiring Funds stated expectation is that it will invest in Municipal Bonds that, in the Investment Advisors opinion, are underrated or
undervalued. Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Investment Advisor, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Investment Advisor, are
worth more than the value assigned to them in the marketplace. The Investment Advisor may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a
particular municipal issuer, are undervalued. The Investment Advisor may purchase those bonds for the Acquiring Funds portfolio because they represent a market sector or issuer that the Investment Advisor considers undervalued, even if the
value of those particular bonds appears to be consistent with the value of similar bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer)
may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that
are considered undervalued. The Acquiring Funds investment in underrated or undervalued Municipal Bonds will be based on the Investment Advisors belief that their yield is higher than that available on bonds bearing equivalent levels of
interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by the Acquiring Fund will generally result in capital gain
distributions subject to federal capital gains taxation.
The Acquiring Fund ordinarily does not intend to realize significant investment income not
exempt from federal income tax. From time to time, the Acquiring Fund may realize taxable capital gains.
68
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal
income tax exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by the Acquiring Fund.
Description of Municipal Bonds
Set forth below is a
detailed description of the Municipal Bonds in which the Acquiring Fund invests. Information with respect to ratings assigned to tax-exempt obligations that the Acquiring Fund may purchase is set forth in
Appendix D. Obligations are included within the term Municipal Bonds if the interest paid thereon is excluded from gross income for federal income tax purposes in the opinion of bond counsel to the issuer.
Municipal Bonds include debt obligations issued to obtain funds for various public purposes, including the construction of a wide range of public facilities,
refunding of outstanding obligations and obtaining funds for general operating expenses and loans to other public institutions and facilities. In addition, certain types of PABs are issued by or on behalf of public authorities to finance various
privately owned or operated facilities, including among other things, airports, public ports, mass commuting facilities, multi-family housing projects, as well as facilities for water supply, gas, electricity, sewage or solid waste disposal and
other specialized facilities. Other types of PABs, the proceeds of which are used for the construction, equipment or improvement of privately operated industrial or commercial facilities, may constitute Municipal Bonds. The interest on Municipal
Bonds may bear a fixed rate or be payable at a variable or floating rate. The two principal classifications of Municipal Bonds are general obligation bonds and revenue bonds, which latter category includes PABs and, for bonds
issued on or before August 15, 1986, industrial development bonds. Municipal Bonds typically are issued to finance public projects, such as roads or public buildings, to pay general operating expenses or to refinance outstanding debt. Municipal
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. Municipal Bonds 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 Bonds 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 Municipal Bonds in which the Acquiring Fund invests pay interest or income that, in the opinion of bond counsel to the issuer, is exempt from regular
Federal income tax. The Investment Advisor does not conduct its own analysis of the tax status of the interest paid by Municipal Bonds held by the Acquiring Fund, but will rely on the opinion of counsel to the issuer of each such instrument. The
Acquiring Fund may also invest in Municipal Bonds issued by United States Territories (such as Puerto Rico or Guam) that are exempt from regular Federal income tax. In addition to the types of Municipal Bonds described in this Prospectus, the
Acquiring Fund may invest in other securities that pay interest or income that is, or make other distributions that are, exempt from regular Federal income tax and/or state and local personal taxes, regardless of the technical structure of the
issuer of the instrument. The Acquiring Fund treats all of such tax-exempt securities as Municipal Bonds.
The yields on Municipal Bonds are dependent on a variety of factors, including prevailing interest rates and the condition of the general money market and the
Municipal Bond market, the size of a particular offering, the maturity of the obligation and the rating of the issue. The market value of Municipal Bonds 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.
The Acquiring Fund has not established any limit on the percentage of its portfolio that
may be invested in PABs. The Acquiring Fund may not be a suitable investment for investors who are already subject to the federal alternative minimum tax or who would become subject to the federal alternative minimum tax as a result of an investment
in the Acquiring Funds common shares.
General Obligation Bonds. General obligation bonds are typically secured by the issuers pledge
of its faith, credit and taxing power for the repayment of principal and the payment of interest. The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws, and an entitys
creditworthiness will
69
depend on many factors, including potential erosion of its tax base due to population declines, natural disasters, declines in the states industrial base or inability to attract new
industries, economic limits on the ability to tax without eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on federal or state aid, access to
capital markets or other factors beyond the states or entitys control. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the
issuers maintenance of its tax base.
Revenue Bonds. Revenue or special obligation bonds are typically payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue sources such as payments from the user of the facility being financed. Accordingly, the timely payment of
interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source. 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 associated with municipal securities generally, including that the underlying properties may not generate
sufficient income to pay expenses and interest costs. Such bonds 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.
Municipal Notes. Municipal notes are shorter term municipal debt obligations. They may provide interim financing in anticipation of tax collection,
bond sales or revenue receipts. If there is a shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid, and the Acquiring Fund may lose money.
Municipal Commercial Paper. Municipal commercial paper is generally unsecured and issued to meet short-term financing needs. The lack of security
presents some risk of loss to the Acquiring Fund since, in the event of an issuers bankruptcy, unsecured creditors are repaid only after the secured creditors out of the assets, if any, that remain.
PABs. The Acquiring Fund may purchase Municipal Bonds classified as PABs. Interest received on certain PABs is treated as an item of tax
preference for purposes of the federal alternative minimum tax and may impact the overall tax liability of certain investors in the Acquiring Fund. PABs, formerly referred to as industrial development bonds, are issued by, or on behalf of,
states, municipalities or 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 PABs, the proceeds of which are used for the construction, equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute
Municipal Bonds, although the federal tax laws may place substantial limitations on the size of such issues. Such bonds are secured primarily by revenues derived from loan repayments or lease payments due from the entity which may or may not be
guaranteed by a parent company or otherwise secured. PABs generally are not secured by a pledge of the taxing power of the issuer of such bonds. Therefore, an investor should be aware that repayment of such bonds generally depends on the revenues of
a private entity and be aware of the risks that such an investment may entail. The continued ability of an entity to generate sufficient revenues for the payment of principal and interest on such bonds will be affected by many factors including the
size of the entity, capital structure, demand for its products or services, competition, general economic conditions, government regulation and the entitys dependence on revenues for the operation of the particular facility being financed.
Moral Obligation Bonds. Municipal Bonds may also include moral obligation bonds, which are normally issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality in question.
Municipal Lease Obligations. Also included within the general category of Municipal Bonds are certificates of participation (COPs) issued
by government authorities or entities to finance the acquisition or construction of equipment, land and/or facilities. COPs represent participations in a lease, an installment purchase contract or a conditional sales contract (hereinafter
collectively called lease obligations) relating to such equipment, land or facilities. Municipal leases, like other municipal debt obligations, are subject to the risk of non-payment. Although
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lease obligations do not constitute general obligations of the issuer for which the issuers unlimited taxing power is pledged, a lease obligation is frequently backed by the issuers
covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain lease obligations contain non-appropriation clauses which provide that the issuer has no
obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. Although non-appropriation lease obligations are secured
by the leased property, disposition of the property in the event of foreclosure might prove difficult and the value of the property may be insufficient to issue lease obligations. Certain investments in lease obligations may be illiquid.
The ability of issuers of municipal leases to make timely lease payments may be adversely impacted in general economic downturns and as relative governmental
cost burdens are allocated and reallocated among federal, state and local governmental units. Such non-payment would result in a reduction of income to the Acquiring Fund, and could result in a reduction in
the value of the municipal lease experiencing non-payment and a potential decrease in the NAV of the Acquiring Fund. Issuers of municipal lease obligations might seek protection under the bankruptcy laws. In
the event of bankruptcy of such an issuer, the Acquiring Fund could experience delays and limitations with respect to the collection of principal and interest on such municipal leases and the Acquiring Fund may not, in all circumstances, be able to
collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in lease payments, the Acquiring Fund might take possession of and manage the assets securing the issuers obligations on such
securities, which may increase the Acquiring Funds operating expenses and adversely affect the NAV of the Acquiring Fund. When the lease contains a non-appropriation clause, however, the failure to pay
would not be a default and the Acquiring Fund would not have the right to take possession of the assets. Any income derived from the Acquiring Funds ownership or operation of such assets may not be
tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to regulated investment companies. In addition, the Acquiring Funds intention to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the Code), may limit the extent to which the Acquiring Fund may exercise its rights by taking possession of such assets, because as a regulated investment company
the Acquiring Fund is subject to certain limitations on its investments and on the nature of its income.
Zero-Coupon Bonds. Municipal Bonds may
include zero-coupon bonds. Zero-coupon bonds are securities that are sold at a discount to par value and do not pay interest during the life of the security. The discount approximates the total amount of
interest the security will accrue and compound over the period until maturity at a rate of interest reflecting the market rate of the security at the time of issuance. Upon maturity, the holder of a
zero-coupon bond is entitled to receive the par value of the security.
While interest payments are not made on
such securities, holders of such securities are deemed to have received income (phantom income) annually, notwithstanding that cash may not be received currently. The effect of owning instruments that do not make current interest
payments is that a fixed yield is earned not only on the original investment but also, in effect, on all discount accretion during the life of the obligations. This implicit reinvestment of earnings at a fixed rate eliminates the risk of being
unable to invest distributions at a rate as high as the implicit yield on the zero-coupon bond, but at the same time eliminates the holders ability to reinvest at higher rates in the future. For this
reason, some of these securities may be subject to substantially greater price fluctuations during periods of changing market interest rates than are comparable securities that pay interest currently. Longer term
zero-coupon bonds are more exposed to interest rate risk than shorter term zero-coupon bonds. These investments benefit the issuer by mitigating its need for cash to
meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of cash.
The Acquiring Fund accrues
income with respect to these securities for U.S. federal income tax and accounting purposes prior to the receipt of cash payments. Zero-coupon bonds may be subject to greater fluctuation in value and less liquidity in the event of adverse market
conditions than comparably rated securities that pay cash interest at regular intervals.
Further, to maintain its qualification for pass-through
treatment under the federal tax laws, the Acquiring Fund is required to distribute income to its shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to
leverage itself by borrowing in order to generate the cash to satisfy these distributions. The required distributions may result in an increase in the Acquiring Funds exposure to zero-coupon bonds.
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In addition to the above-described risks, there are certain other risks related to investing in zero-coupon bonds. During a period of severe market conditions, the market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, the Acquiring Funds
investment exposure to these securities and their risks, including credit risk, will increase during the time these securities are held in the Acquiring Funds portfolio.
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.
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 security established by the Mello-Roos Community Facilities 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.
Indexed and Inverse Floating Rate Securities. The Acquiring Fund may invest in Municipal Bonds (and
Non-Municipal Tax-Exempt Securities) that yield a return based on a particular index of value or interest rates. For example, the Acquiring Fund may invest in Municipal
Bonds that pay interest based on an index of Municipal Bond interest rates. The principal amount payable upon maturity of certain Municipal Bonds also may be based on the value of the index. To the extent the Acquiring Fund invests in these types of
Municipal Bonds, the Acquiring Funds return on such Municipal Bonds will be subject to risk with respect to the value of the particular index. Interest and principal payable on the Municipal Bonds may also be based on relative changes among
particular indices. Also, the Acquiring Fund may invest in so-called inverse floating rate bonds or residual interest bonds on which the interest rates vary inversely with a short-term
floating rate (which may be reset periodically by a Dutch auction, a remarketing agent, or by reference to a short-term tax-exempt interest rate index). The Acquiring Fund may purchase synthetically created
inverse floating rate bonds evidenced by custodial or trust receipts. Generally, income on inverse floating rate bonds will decrease when short-term interest rates increase, and will increase when short-term interest rates decrease. Such securities
have the effect of providing a degree of investment leverage, since they may increase or decrease in value in response to changes, as an illustration, in market interest rates at a rate which is a multiple (typically two) of the rate at which fixed
rate long-term tax-exempt securities increase or decrease in response to such changes. As a result, the market values of such securities will generally be more volatile than the market values of fixed rate tax-exempt securities. To seek to limit the volatility of these securities, the Acquiring Fund may purchase inverse floating rate bonds with shorter-term maturities or limitations on the extent to which the interest
rate may vary. Certain investments in such obligations may be illiquid. See The Acquiring Funds InvestmentsLeverageTender Option Bond Transactions.
When-Issued Securities, Delayed Delivery Securities and Forward Commitments. The Acquiring Fund may purchase or sell securities that it is entitled to
receive on a when-issued basis. The Acquiring Fund may also purchase or sell securities on a delayed delivery basis. The Acquiring Fund may also purchase or sell securities through a forward commitment. These transactions involve the purchase or
sale of securities by the Acquiring Fund at an established price with payment and delivery taking place in the future. The purchase will be recorded on the date the Acquiring
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Fund enters into the commitment and the value of the securities will thereafter be reflected in the Acquiring Funds NAV. The Acquiring Fund has not established any limit on the percentage
of its assets that may be committed in connection with these transactions. At the time the Acquiring Fund enters into a transaction on a when-issued basis, it will segregate or designate on its books and records cash or liquid assets with a value
not less than the value of the when-issued securities.
There can be no assurance that a security purchased on a when-issued basis will be issued or that
a security purchased or sold through a forward commitment will be delivered. A default by a counterparty may result in the Acquiring Fund missing the opportunity of obtaining a price considered to be advantageous. The value of securities in these
transactions on the delivery date may be more or less than the Acquiring Funds purchase price. The Acquiring Fund may bear the risk of a decline in the value of the security in these transactions and may not benefit from an appreciation in the
value of the security during the commitment period.
If deemed advisable as a matter of investment strategy, the Acquiring Fund may dispose of or
renegotiate a commitment after it has been entered into, and may sell securities it has committed to purchase before those securities are delivered to the Acquiring Fund on the settlement date. In these cases the Acquiring Fund may realize a taxable
capital gain or loss.
When the Acquiring Fund engages in when-issued, delayed delivery or forward commitment transactions, it relies on the other party
to consummate the trade. Failure of such party to do so may result in the Acquiring Funds incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase securities, and any subsequent fluctuations in their market value, is taken into
account when determining the market value of the Acquiring Fund starting on the day the Acquiring Fund agrees to purchase the securities. The Acquiring Fund does not earn interest on the securities it has committed to purchase until they are paid
for and delivered on the settlement date.
Yields. Yields on Municipal Bonds are dependent on a variety of factors, including the general condition
of the money market and of the Municipal Bond market, the size of a particular offering, the financial condition of the issuer, the maturity of the obligation and the rating of the issue. The ability of the Acquiring Fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the securities in which the Acquiring Fund invests to meet their obligations for the payment of interest and principal when due. There are variations in the risks involved in
holding Municipal Bonds, both within a particular classification and between classifications, depending on numerous factors. Furthermore, the rights of owners of Municipal Bonds and the obligations of the issuer of such Municipal Bonds may be
subject to applicable bankruptcy, insolvency and similar laws and court decisions affecting the rights of creditors generally and to general equitable principles, which may limit the enforcement of certain remedies.
High Yield or Junk Bonds. The Acquiring Fund may invest up to 25% of its total assets in Municipal Bonds that are rated below
Baa by Moodys or below BBB by S&P or Fitch or, if unrated, are considered by the Investment Advisor to possess similar credit characteristics. Information with respect to ratings assigned to
tax-exempt obligations that the Acquiring Fund may purchase is set forth in Appendix D. Municipal Bonds of below investment grade quality (Ba/BB or below) 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.
Temporary Investments
During temporary defensive periods (e.g., times when, in the Investment Advisors opinion, temporary imbalances of supply and demand or other
temporary dislocations in the tax-exempt bond market adversely affect the price at which long-term or intermediate-term Municipal Bonds are available), and in order to keep cash on hand fully invested, the
Acquiring Fund may invest up to 100% of its total assets in liquid, 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 Bonds of the type in which the Acquiring Fund may invest directly. The Acquiring Fund intends to invest in taxable short-term investments
only in the event that suitable tax-exempt
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temporary investments are not available at reasonable prices and yields. The Acquiring Funds stated expectation is that it will invest only in taxable temporary investments which are U.S.
government securities or securities rated within the highest grade by Moodys, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable or floating rate of interest (such short-term obligations being
referred to herein as Temporary Investments). Temporary Investments of the Acquiring Fund may include certificates of deposit issued by U.S. banks with assets of at least $1 billion, commercial paper or corporate notes, bonds or
debentures with a remaining maturity of one year or less, or repurchase agreements. See Repurchase Agreements. To the extent the Acquiring Fund invests in Temporary Investments, the Acquiring Fund will not at such times be in a position
to achieve its investment objective of tax-exempt income.
Short-term taxable fixed income investments 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 the 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 the 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 plus interest to the bearer of the certificate on the date
specified thereon. Certificates of deposit purchased by the Acquiring Fund may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time the Acquiring Fund 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 Acquiring Fund 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 Acquiring Fund to invest temporarily available
cash. The Acquiring Fund 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 Acquiring Fund may invest.
Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to the Acquiring Fund 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 Acquiring Fund 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 Acquiring Fund could incur a loss of both principal and interest. The Investment 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 Investment 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 Acquiring Fund. If
the seller were to be subject to a federal bankruptcy proceeding, the ability of the Acquiring Fund 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 Acquiring Fund and a corporation. There is no secondary market for such notes. However, they are redeemable by the
Acquiring Fund at any time. The Investment Advisor will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor
74
the corporations ability to meet all of its financial obligations, because the Acquiring Funds liquidity might be impaired if the corporation were unable to pay principal and interest
on demand. The Acquiring Funds stated expectation is that its 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.
Tax-exempt temporary investments include various obligations
issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such Municipal Bonds maturing in three years or
less from the date of issuance) and municipal commercial paper. Short-term tax-exempt fixed income securities 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.
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 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.
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued
interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily
to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments
typically are based upon SIFMA or some other appropriate interest rate adjustment index. The Acquiring Fund may invest in all types of tax exempt instruments currently outstanding or to be issued in the future which satisfy its short-term maturity
and quality standards. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities.
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Certain Municipal Bonds 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 Acquiring Fund 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.
The Acquiring Funds investment policies provide that the Temporary Investments and VRDOs
in which the Acquiring Fund may invest will be in the following rating categories at the time of purchase: MIG-1/VMIG-1 through
MIG- 3/VMIG-3 for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as
determined by Moodys), SP-1 through SP-2 for notes and A-1 through A-3 for VRDOs
and commercial paper (as determined by S&P), or F- 1 through F-3 for notes, VRDOs and commercial paper (as determined by Fitch). Temporary Investments, if not rated,
must be of comparable quality in the opinion of the Investment Advisor. In addition, the Acquiring Fund reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment
of the Investment Advisor, market conditions warrant.
Strategic Transactions and Other Management Techniques
The Acquiring Fund may use a variety of other investment management techniques and instruments. The Acquiring Fund may purchase and sell futures contracts,
enter into various interest rate transactions and may purchase and sell exchange-listed and over-the-counter put and call options on securities, financial indices and
futures contracts (collectively, Strategic Transactions). These Strategic Transactions may be used for duration management and other risk management to attempt to protect against possible changes in the market value of the Acquiring
Funds portfolio resulting from trends in the debt securities markets and changes in interest rates, to protect the Acquiring Funds unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to establish a position in the securities markets as a temporary substitute for purchasing particular securities and to enhance income or gain. There is no particular strategy that requires use of one technique rather than
another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The Strategic Transactions are described below. The ability of the Acquiring Fund to use them successfully
will depend on the Investment Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Inasmuch as any obligations of the Acquiring Fund that arise from the use of
Strategic Transactions will be covered by segregated liquid high grade assets or offsetting transactions, the Acquiring Fund and the Investment Advisor believes such obligations do not constitute senior securities and, accordingly, will not treat
them as being subject to its borrowing restrictions. Certain provisions of the Code may restrict or affect the ability of the Acquiring Fund to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to
taxable income and have certain other consequences.
Interest Rate Transactions. The Acquiring Fund may enter into interest rate swaps and the
purchase or sale of interest rate caps and floors. The Acquiring Fund expects to enter into these transactions 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 price of securities the Acquiring Fund anticipates purchasing at a later date. The Acquiring Fund 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. The Acquiring Fund may not sell interest rate caps or floors that it does not own. Interest rate swaps involve the exchange by the Acquiring Fund 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
Acquiring Fund may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with the Acquiring
Fund receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. The Acquiring Fund will accrue the net amount of the excess, if any, of the Acquiring Funds obligations over
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its entitlements with respect to each interest rate swap on a daily basis and will segregate 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. If there is a default by the other party to such a transaction, the Acquiring Fund 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.
Credit Default Swap Agreements. The Acquiring Fund may
enter into credit default swap agreements for hedging purposes or to seek to increase its return. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by the Acquiring Fund. The
protection buyer in a credit default contract may be obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on a reference obligation
has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the
swap, or the seller may be required to deliver the related net cash amount (the difference between the market value of the reference obligation and its par value), if the swap is cash settled. The Acquiring Fund may be either the buyer or seller in
the transaction. If the Acquiring Fund is a buyer and no credit event occurs, the Acquiring Fund may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the
full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, the Acquiring Fund generally receives an upfront payment or a fixed
rate of income throughout the term of the swap, which typically is between six (6) months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the
swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As the seller, the Acquiring Fund would effectively add leverage to its portfolio because, in addition to its
total net assets, the Acquiring Fund would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve
greater risks than if the Acquiring Fund had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. The Acquiring Fund
expects to enter into credit default swap agreements only with counterparties who are rated investment grade quality by at least one nationally recognized statistical rating organization at the time of entering into such transaction or whose
creditworthiness is believed by the Investment Advisor to be equivalent to such rating. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event
were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the
seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event occurs, the seller may be required to pay the buyer the full notional value of the contract net of any amounts
owed by the buyer related to its delivery of deliverable obligations. The Acquiring Funds obligations under a credit default swap agreement will be accrued daily (offset against any amounts owing to the Acquiring Fund). The Acquiring Fund will
at all times segregate with its custodian in connection with each such transaction liquid securities or cash with a value at least equal to the Acquiring Funds exposure (any accrued but unpaid net amounts owed by the Acquiring Fund to any
counterparty), on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation will ensure that the Acquiring Fund has assets available
to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of the Acquiring Funds portfolio. Such segregation will not limit the Acquiring Funds exposure to loss.
Futures Contracts and Options on Futures Contracts. The Acquiring Fund 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 Acquiring Fund will ordinarily engage in such
transactions only for bona fide hedging, risk management (including duration management) and other portfolio management purposes. However, the Acquiring Fund is also permitted to enter into such transactions for
non-hedging purposes to enhance income or gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of
77
the Acquiring Funds net assets would be posted as initial margin and premiums with respect to such non-hedging transactions.
Calls on Securities Indices and Futures Contracts. The Acquiring Fund may sell or purchase call options (calls) on Municipal Bonds and
indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A
call 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 Acquiring Fund must be covered as long as the call is outstanding (i.e., the Acquiring Fund must own the securities or futures contract subject to the call or other securities acceptable for applicable escrow requirements). A
call sold by the Acquiring Fund exposes the Acquiring Fund 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 Acquiring
Fund to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives the Acquiring Fund the right to buy a security, futures contract or index at a fixed price. Calls on futures on Municipal Bonds must also be
covered by deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy the Acquiring Funds obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. The Acquiring Fund may purchase put options (puts) that relate to Municipal Bonds
(whether or not it holds such securities in its portfolio), indices or futures contracts. The Acquiring Fund may also sell puts on Municipal Bonds, indices or futures contracts on such securities if the Acquiring Funds 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.
Municipal Market Data Rate Locks. The Acquiring Fund may purchase and sell Municipal Market Data Rate Locks (MMD Rate Locks). An MMD Rate
Lock permits the Acquiring Fund 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 Acquiring Fund 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 Acquiring Fund 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 Acquiring Fund 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 Acquiring Fund 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 Acquiring Fund 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 Acquiring Fund. The Acquiring Fund may 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.
Restricted and Illiquid Securities
Certain of the Acquiring Funds 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.
Repurchase Agreements
As
temporary investments, the Acquiring Fund 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 Acquiring Funds holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the
repurchase contract. The Acquiring Fund may only enter into repurchase agreements with
78
registered securities dealers or domestic banks that, in the opinion of the Investment Advisor, present minimal credit risk. The risk to the Acquiring Fund 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 Acquiring Fund 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 Acquiring Fund may be delayed or limited. The
Investment 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 Investment 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.
Reverse Repurchase Agreements
The Acquiring Fund may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth
herein. Reverse repurchase agreements involve the sale of securities held by the Acquiring Fund with an agreement by the Acquiring Fund to repurchase the securities at an agreed upon price, date and interest payment. At the time the Acquiring Fund
enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If the Acquiring Fund
establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by the Acquiring Fund; however, under certain circumstances in which the Acquiring Fund does not establish and maintain such a
segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of the Acquiring Funds limitation on borrowings. The use by the Acquiring Fund 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 Acquiring Fund 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 Acquiring Fund 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 Acquiring Funds obligation to repurchase the securities, and the
Acquiring Funds use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, the Acquiring Fund 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.
Borrowings
The Acquiring Fund is authorized to borrow money in amounts of up to 5% of the value of its total assets at the time of such borrowings; provided, however,
that the Acquiring Fund is authorized to borrow moneys in amounts of up to 33 1/3% of the value of its total assets at the time of such borrowings to finance the repurchase of its own common stock pursuant to tender offers or otherwise to redeem or
repurchase shares of preferred stock. Borrowings by the Acquiring Fund (commonly known, as with the issuance of preferred stock, as leveraging) create an opportunity for greater total return since, for example, the Acquiring Fund will
not be required to sell portfolio securities to repurchase or redeem shares but, at the same time, increase exposure to capital risk. In addition, borrowed funds are subject to interest costs that may offset or exceed the return earned on the
borrowed funds.
Lending of Securities
The Acquiring
Fund may lend portfolio securities to certain borrowers determined to be creditworthy by the Investment Advisor, including to borrowers affiliated with the Investment Advisor. The borrowers provide collateral that is maintained in an amount at least
equal to the current market value of the securities loaned. No securities loan
79
will be made on behalf of the Acquiring Fund if, as a result, the aggregate value of all securities loans of the Acquiring Fund
exceeds one-third of the value of the Acquiring Funds total assets (including the value of the collateral received). The Acquiring Fund may terminate a loan at any time and obtain the return of
the securities loaned. The Acquiring Fund receives the value of any interest or cash or non-cash distributions paid on the loaned securities.
With respect to loans that are collateralized by cash, the borrower may be entitled to receive a fee based on the amount of cash collateral. The Acquiring
Fund is compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to the borrower. In the case of collateral other than cash, the Acquiring Fund is compensated by a fee paid by the borrower equal
to a percentage of the market value of the loaned securities. Any cash collateral received by the Acquiring Fund for such loans, and uninvested cash, may be invested, among other things, in a private investment company managed by an affiliate of the
Investment Advisor or in registered money market funds advised by the Investment Advisor or its affiliates; such investments are subject to investment risk.
The Acquiring Fund conducts its securities lending pursuant to an exemptive order from the SEC permitting it to lend portfolio securities to borrowers
affiliated with the Acquiring Fund and to retain an affiliate of the Acquiring Fund as lending agent. To the extent that the Acquiring Fund engages in securities lending, BlackRock Investment Management, LLC (BIM), an affiliate of the
Investment Advisor, acts as securities lending agent for the Acquiring Fund, subject to the overall supervision of the Investment Advisor. BIM administers the lending program in accordance with guidelines approved by the Board. Pursuant to the
current securities lending agreement, BIM may lend securities only when the difference between the borrower rebate rate and the risk free rate exceeds a certain level (such securities, the specials only securities).
To the extent that the Acquiring Fund engages in securities lending, the Acquiring Fund retains a portion of securities lending income and remits a remaining
portion to BIM as compensation for its services as securities lending agent.
Securities lending income is equal to the total of income earned from the
reinvestment of cash collateral (and excludes collateral investment expenses as defined below), and any fees or other payments to and from borrowers of securities. As securities lending agent, BIM bears all operational costs directly related to
securities lending. The Acquiring Fund is responsible for expenses in connection with the investment of cash collateral received for securities on loan in a private investment company managed by an affiliate of the Investment Advisor (the
collateral investment expenses), however, BIM has agreed to cap the collateral investment expenses the Acquiring Fund bears to an annual rate of 0.04% of the daily net assets of such private investment company. In addition, in accordance
with the exemptive order, the investment adviser to the private investment company will not charge any advisory fees with respect to shares purchased by the Acquiring Fund. Such shares also will not be subject to a sales load, redemption fee,
distribution fee or service fee.
Pursuant to the current securities lending agreement, the Acquiring Fund retains 82% of securities lending income (which
excludes collateral investment expenses).
In addition, commencing the business day following the date that the aggregate securities lending income earned
across the BlackRock Fixed-Income Complex in a calendar year exceeds the breakpoint dollar threshold applicable in the given year set forth in the securities lending agreement, the Acquiring Fund, pursuant to the current securities lending
agreement, will receive for the remainder of that calendar year securities lending income in an amount equal to 85% of securities lending income (which excludes collateral investment expenses).
Leverage
The Acquiring Fund currently leverages its
assets through the use of VMTP Shares and tender option bonds. The Acquiring Fund currently does not intend to borrow money or issue debt securities. Although it has no present intention to do so, the Acquiring Fund reserves the right to borrow
money from banks or other financial institutions, or issue debt securities, in the future if it believes that market conditions would be conducive to the successful implementation of a leveraging strategy through borrowing money or issuing debt
securities or preferred shares. Any such leveraging will not be fully achieved until the proceeds resulting from the use of leverage have been invested in accordance with the Acquiring Funds investment objective and policies.
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The use of leverage can create risks. When leverage is employed, the NAV and market price of the common shares
and the yield to holders of common shares will be more volatile than if leverage were not used. Changes in the value of the Acquiring Funds 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 Acquiring Funds investment portfolio, leverage will decrease or increase, as the case may be, the NAV per common share to a greater extent than if the
Acquiring Fund did not utilize leverage. A reduction in the Acquiring Funds NAV may cause a reduction in the market price of its shares. During periods in which the Acquiring Fund is using leverage, the fee paid to the Investment Advisor for
advisory services will be higher than if the Acquiring Fund did not use leverage, because the fees paid will be calculated on the basis of the Acquiring Funds managed assets, which includes the proceeds from leverage. Any leveraging strategy
the Acquiring Fund employs may not be successful. See RisksLeverage Risk. See RisksTender Option Bond Risk for details about the risks associated with the Acquiring Funds use of TOB Residuals.
Certain types of leverage the Acquiring Fund may use may result in the Acquiring Fund being subject to covenants relating to asset coverage and portfolio
composition requirements. The Acquiring Fund 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 Acquiring Fund. The terms of any borrowings or rating agency guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940 Act. The Investment Advisor
does not believe that these covenants or guidelines will impede it from managing the Acquiring Funds portfolio in accordance with its investment objective and policies if the Acquiring Fund were to utilize leverage.
Under the 1940 Act, the Acquiring Fund is not permitted to issue senior securities if, immediately after the issuance of such senior securities, the Acquiring
Fund would have an asset coverage ratio (as defined in the 1940 Act) of less than 300% with respect to senior securities representing indebtedness (i.e., for every dollar of indebtedness outstanding, the Acquiring Fund is required to have at
least three dollars of assets) or less than 200% with respect to senior securities representing preferred shares (i.e., for every dollar of preferred shares outstanding, the Acquiring Fund is required to have at least two dollars of assets).
The 1940 Act also provides that the Acquiring Fund 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 1940 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) not in excess of 5% of the total assets
of the Acquiring Fund.
Effects of Leverage
Assuming
that leverage will represent approximately 38.6% of the Combined Funds total managed assets and that the Combined Fund will bear expenses relating to that leverage at an average annual rate of 1.18%, the income generated by the Combined
Funds portfolio (net of estimated expenses) must exceed 0.45% in order to cover the expenses specifically related to the Combined Funds estimated use of leverage. Of course, these numbers are merely estimates used for illustration.
Actual leverage expenses will vary frequently and may be significantly higher or lower than the rate estimated above.
The following table is furnished in
response to requirements of the SEC. 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 securities held in the Combined
Funds 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
Combined Fund. The table further reflects the use of leverage representing 38.6% of the Combined Funds total managed assets and the Combined Funds currently projected annual leverage expenses of 1.18%.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Portfolio Total Return (net of expenses)
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|
|
(10
|
)%
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|
|
(5
|
)%
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|
|
0
|
%
|
|
|
5
|
%
|
|
|
10
|
%
|
Common Share Total Return
|
|
|
(17.02
|
)%
|
|
|
(8.88
|
)%
|
|
|
(0.74
|
)%
|
|
|
7.40
|
%
|
|
|
15.53
|
%
|
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Common Share total return is composed of two elements: the Common Share dividends paid by the Combined Fund (the
amount of which is largely determined by the net investment income of the Combined Fund) and gains or losses on the value of the securities the Combined Fund owns. As required by SEC rules, the table assumes that the Combined Fund is more likely to
suffer capital losses than to enjoy capital appreciation. For example, a total return of 0% assumes that the tax-exempt interest the Combined Fund receives on its municipal bonds investments is entirely offset
by losses in the value of those securities.
Preferred Shares
The Acquiring Fund has leveraged its portfolio by issuing VMTP Shares. Under the 1940 Act, the Acquiring Fund is not permitted to issue preferred shares if,
immediately after such issuance, the liquidation value of the Acquiring Funds outstanding preferred shares exceeds 50% of its assets (including the proceeds from the issuance) less liabilities other than borrowings (i.e., the value of
the Acquiring Funds assets must be at least 200% of the liquidation value of its outstanding preferred shares). In addition, the Acquiring Fund would not be permitted to declare any cash dividend or other distribution on its common shares
unless, at the time of such declaration, the value of the Acquiring Funds assets less liabilities other than borrowings is at least 200% of such liquidation value. Please see Information about the Preferred Shares of the Funds for
a description of the Acquiring Funds VMTP Shares.
For tax purposes, the Acquiring Fund is currently required to allocate tax-exempt interest income, net capital gain and other taxable income, if any, between its common shares and preferred shares outstanding in proportion to total dividends paid to each class for the year in which or
with respect to which tax-exempt income, the net capital gain or other taxable income is paid. If net capital gain or other taxable income is allocated to preferred shares, instead of solely tax-exempt income, the Acquiring Fund will likely have to pay higher total dividends to preferred shareholders or make special payments to preferred shareholders to compensate them for the increased tax liability.
This would reduce the total amount of dividends paid to the common shareholders, but would increase the portion of the dividend that is tax-exempt. If the increase in dividend payments or the special payments
to preferred shareholders are not entirely offset by a reduction in the tax liability of, and an increase in the tax-exempt dividends received by, the common shareholders, the advantage of the Acquiring
Funds leveraged structure to common shareholders will be reduced.
Tender Option Bonds
The Acquiring Fund currently leverages its assets through the use of TOB Residuals, which are derivative interests in municipal bonds. The TOB Residuals in
which the Acquiring Fund will invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax. No independent investigation will be made to confirm the tax-exempt status of the interest or income paid by TOB Residuals held by the Acquiring Fund. Although volatile, TOB Residuals typically offer the potential for yields exceeding the yields available on fixed rate
municipal bonds with comparable credit quality.
TOB Residuals represent beneficial interests in a TOB Trust formed for the purpose of holding municipal
bonds contributed by one or more funds. A TOB Trust typically issues two classes of beneficial interests: TOB Floaters, which are sold to third-party investors, and TOB Residuals, which are generally issued to the fund(s) that transferred municipal
bonds to the TOB Trust. The Fund may invest in both TOB Floaters and TOB Residuals. TOB Floaters may have first priority on the cash flow from the municipal bonds held by the TOB Trust and are enhanced with a liquidity support arrangement from a
third-party TOBs Liquidity Provider (defined below) which allows holders to tender their position at par (plus accrued interest). The Acquiring Fund, as a holder of TOB Residuals, is paid the residual cash flow from the TOB Trust. The Acquiring Fund
contributes municipal bonds to the TOB Trust and is paid the cash received by the TOB Trust from the sale of the TOB Floaters, less certain transaction costs, and typically will invest the cash to purchase additional municipal bonds or other
investments permitted by its investment policies. If the Acquiring Fund ever purchases all or a portion of the TOB Floaters sold by the TOB Trust, it may surrender those TOB Floaters together with a proportionate amount of TOB Residuals to the TOB
Trust in exchange for a proportionate amount of the municipal bonds owned by the TOB Trust.
Other registered investment companies advised by the
Investment Advisor or its affiliates (the BlackRock-advised Funds) may contribute municipal bonds to a TOB Trust into which the Acquiring Fund has contributed municipal bonds. If multiple BlackRock-advised Funds participate in the same
TOB Trust, the economic rights and obligations
82
under the TOB Residual will generally be shared among the funds ratably in proportion to their participation in the TOB Trust.
The municipal bonds transferred to a TOB Trust typically are high grade municipal bonds. In certain cases, when municipal bonds transferred are lower grade
municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely payment of principal and interest on the bonds to the TOB Trust by a credit enhancement provider. The TOB Trust would be responsible for
the payment of the credit enhancement fee and the Acquiring Fund, as a TOB Residual holder, would be responsible for reimbursement of any payments of principal and interest made by the credit enhancement provider.
The TOB Residuals held by the Acquiring Fund generally provide the Acquiring Fund with the right to cause the holders of a proportional share of the TOB
Floaters to tender their notes to the TOB Trust at par plus accrued interest. Thereafter, the Acquiring Fund may withdraw a corresponding share of the municipal bonds from the TOB Trust. As a result, a tender option bond transaction, in effect,
creates exposure for the Acquiring Fund to the entire return of the municipal bonds in the TOB Trust, with a net cash investment by the Acquiring Fund that is less than the value of the municipal bonds in the TOB Trust. This multiplies the positive
or negative impact of the municipal bonds return within the Acquiring Fund (thereby creating leverage). The leverage within a TOB Trust depends on the value of the municipal bonds deposited in the TOB Trust relative to the value of the TOB
Floaters it issues.
The Acquiring Fund may invest in highly leveraged TOB Residuals. A TOB Residual generally is considered highly leveraged if the
principal amount of the TOB Floaters issued by the related TOB Trust exceeds 75% of the principal amount of the municipal bonds owned by the TOB Trust.
The leverage attributable to the Acquiring Funds use of TOB Residuals may be called away on relatively short notice and therefore may be
less permanent than more traditional forms of leverage. The TOB Trust may be collapsed without the consent of the Acquiring Fund upon the occurrence of termination events, as defined in the TOB Trust agreements. Upon the occurrence of a termination
event, a TOB Trust would be liquidated with the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and the TOBs Liquidity Provider. Upon certain termination events, the holders
of the TOB Floaters would be paid before the TOB Residual holders (i.e., the Acquiring Fund) whereas in other termination events, the holders of TOB Floaters and the TOB Residual holders would be paid pro rata.
TOB Trusts are typically supported by a liquidity facility provided by a TOBs Liquidity Provider that allows the holders of the TOB Floaters to tender their
TOB Floaters in exchange for payment of par plus accrued interest on any business day (subject to the non-occurrence of a termination event). The tendered TOB Floaters are remarketed by a remarketing agent. In
the event of a failed remarketing, the TOB Trust may draw upon a loan from the TOBs Liquidity Provider to purchase the tendered TOB Floaters. Any loans made by the TOBs Liquidity Provider will be secured by the purchased TOB Floaters held by the TOB
Trust and will be subject to an increased interest rate based on number of days the loan is outstanding.
The Acquiring Fund may invest in a TOB Trust on
either a non-recourse or recourse basis. When the Acquiring Fund invests in TOB Trusts on a non-recourse basis, and the TOBs Liquidity Provider is required to make a
payment under the liquidity facility, the TOBs Liquidity Provider will typically liquidate all or a portion of the municipal bonds held in the TOB Trust and then fund the balance, if any, of the Liquidation Shortfall. If the Acquiring Fund invests
in a TOB Trust on a recourse basis, it will typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to which the Acquiring Fund is required to reimburse the TOBs Liquidity Provider the amount of any Liquidation
Shortfall. As a result, if the Acquiring Fund invests in a recourse TOB Trust, the Acquiring Fund will bear the risk of loss with respect to any Liquidation Shortfall. If multiple BlackRock-advised Funds participate in any such TOB Trust, these
losses will be shared ratably, in proportion to their participation in the TOB Trust.
Under accounting rules, Municipal Bonds of the Acquiring Fund that
are deposited into a TOB Trust are investments of the Acquiring Fund and are presented on the Acquiring Funds Schedule of Investments and outstanding TOB Floaters issued by a TOB Trust are presented as liabilities in the Acquiring Funds
Statement of Assets and Liabilities. Interest income from the underlying Municipal Bonds is recorded by the Acquiring Fund on an accrual basis. Interest expense incurred on the TOB Floaters and other expenses related to remarketing, administration,
trustee and other services to a TOB Trust are reported as expenses of the Acquiring Fund. In addition, under accounting rules, loans
83
made to a TOB Trust sponsored by the Acquiring Fund may be presented as loans of the Acquiring Fund in the Acquiring Funds financial statements even if there is no recourse to the Acquiring
Funds assets.
For TOB Floaters, generally, the interest rate earned will be based upon the market rates for municipal bonds with maturities or
remarketing provisions that are comparable in duration to the periodic interval of the tender option. Since the tender option feature has a shorter term than the final maturity or first call date of the underlying municipal bonds deposited in the
TOB Trust, the holder of the TOB Floaters relies upon the terms of the agreement with the financial institution furnishing the liquidity facility as well as the credit strength of that institution. The perceived reliability and creditworthiness, of
many major financial institutions, some of which sponsor and/or provide liquidity support to TOB Trusts increases the risk associated with TOB Floaters. This in turn may reduce the desirability of TOB Floaters as investments, which could impair the
viability or availability of TOB Trusts.
The use of TOB Residuals will require the Acquiring Fund to earmark or segregate liquid assets in an amount
equal to any TOB Floaters, plus any accrued but unpaid interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, the Acquiring Fund that are not owned by the Acquiring Fund. The use of TOB Residuals may also require the
Acquiring Fund to earmark or segregate liquid assets in an amount equal to loans provided by the TOBs Liquidity Provider to the TOB Trust to purchase tendered TOB Floaters. The Acquiring Fund reserves the right to modify its asset segregation
policies in the future to the extent that such changes are in accordance with applicable regulations or interpretations. Future regulatory requirements or SEC guidance may necessitate more onerous contractual or regulatory requirements, which may
increase the costs or reduce the degree of potential economic benefits of TOB Trust transactions or limit the Acquiring Funds ability to enter into or manage TOB Trust transactions.
See Risk Factors and Special ConsiderationsGeneral Risks of Investing in the Acquiring FundTender Option Bond Risk for a description
of the risks involved with a TOB issuer.
Credit Facility
The Acquiring Fund is permitted to leverage its portfolio by entering into one or more credit facilities. If the Acquiring Fund enters into a credit facility,
the Acquiring Fund may be required to prepay outstanding amounts or incur a penalty rate of interest upon the occurrence of certain events of default. The Acquiring Fund would also likely have to indemnify the lenders under the credit facility
against liabilities they may incur in connection therewith. In addition, the Acquiring Fund expects that any credit facility would contain covenants that, among other things, likely would limit the Acquiring Funds 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 1940 Act. The
Acquiring Fund 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 Acquiring Fund expects that any credit facility would
have customary covenant, negative covenant and default provisions. There can be no assurance that the Acquiring Fund 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.
Derivatives
The Acquiring Fund may enter into derivative
transactions that have economic leverage embedded in them. Derivative transactions that the Acquiring Fund may enter into and the risks associated with them are described elsewhere in this Proxy Statement and are also referred to as Strategic
Transactions. The Acquiring Fund cannot assure you that investments in derivative transactions that have economic leverage embedded in them will result in a higher return on its common shares.
To the extent the terms of such transactions obligate the Acquiring Fund to make payments, the Acquiring Fund may earmark or segregate cash or liquid assets
in an amount at least equal to the current value of the amount then payable by the Acquiring Fund under the terms of such transactions or otherwise cover such transactions in accordance with applicable interpretations of the staff of the SEC. If the
current value of the amount then payable by the Acquiring Fund under the terms of such transactions is represented by the notional amounts of such investments, the Acquiring
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Fund would segregate or earmark cash or liquid assets having a market value at least equal to such notional amounts, and if the current value of the amount then payable by the Acquiring Fund
under the terms of such transactions is represented by the market value of the Acquiring Funds current obligations, the Acquiring Fund would segregate or earmark cash or liquid assets having a market value at least equal to such current
obligations. To the extent the terms of such transactions obligate the Acquiring Fund to deliver particular securities to extinguish the Acquiring Funds obligations under such transactions the Acquiring Fund may cover its
obligations under such transactions by either (i) owning the securities or collateral underlying such transactions or (ii) having an absolute and immediate right to acquire such securities or collateral without additional cash
consideration (or, if additional cash consideration is required, having earmarked or segregated an appropriate amount of cash or liquid assets). Such earmarking, segregation or cover is intended to provide the Acquiring Fund with available assets to
satisfy its obligations under such transactions. As a result of such earmarking, segregation or cover, the Acquiring Funds obligations under such transactions will not be considered senior securities representing indebtedness for purposes of
the 1940 Act, or considered borrowings subject to the Acquiring Funds limitations on borrowings discussed above, but may create leverage for the Acquiring Fund. To the extent that the Acquiring Funds obligations under such transactions
are not so earmarked, segregated or covered, such obligations may be considered senior securities representing indebtedness under the 1940 Act and therefore subject to the 300% asset coverage requirement.
These earmarking, segregation or cover requirements can result in the Acquiring Fund maintaining securities positions it would otherwise liquidate,
segregating or earmarking assets at a time when it might be disadvantageous to do so or otherwise restrict portfolio management.
Temporary Borrowings
The Acquiring Fund 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 Acquiring Fund securities.
Investment Restrictions
Each Fund has adopted certain investment restrictions that are fundamental, meaning such investment restrictions cannot be changed without
approval by holders of a majority of the Funds outstanding voting securities as defined in the 1940 Act. As defined in the 1940 Act, this phrase means the vote of (1) 67% or more of the voting securities present at a meeting, if
the holders of more than 50% of the outstanding voting securities are present or represented by proxy, or (2) more than 50% of the outstanding voting securities, whichever is less. Each Fund has also adopted certain non-fundamental investment restrictions. The investment restrictions of the Funds are similar, although there are some differences, and are set forth in Appendix B to this Proxy Statement.
Each Fund is currently classified as a diversified fund under the 1940 Act. This means that each Fund may not purchase securities of an issuer (other than
(i) obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities and (ii) securities of other investment companies) if, with respect to 75% of its total assets, (a) more than 5% of the Funds total
assets would be invested in securities of that issuer or (b) the Fund would hold more than 10% of the outstanding voting securities of that issuer. With respect to the remaining 25% of its total assets, each Fund can invest more than 5% of its
assets in one issuer. Under the 1940 Act, a fund cannot change its classification from diversified to non-diversified without shareholder approval.
To the extent that a Fund assumes large positions in the securities of a small number of issuers, its yield may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in the markets assessment of the issuers.
Each Funds VMTP Shares are
assigned long-term ratings by Moodys and Fitch. In order to maintain the required ratings, each Fund is required to comply with certain investment quality, diversification and other guidelines established by Moodys and Fitch. Such
guidelines may be more restrictive than the restrictions set forth above. Each Fund does not anticipate that such guidelines would have a material adverse effect on its ability to achieve its investment objective. Moodys and Fitch receive fees
in connection with their ratings issuances. Each Fund is also subject to certain requirements under the terms of the VMTP Shares. Such requirements may be more restrictive than the restrictions set forth above. Each Fund does not anticipate that
such requirements would have a material adverse
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effect on its ability to achieve its investment objective. Please see Information about the Preferred Shares of the Funds for additional information.
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THE TARGET FUNDS INVESTMENT OBJECTIVES AND POLICIES
BAFs Investment Objective and Policies
BAFs investment objective is to provide current income exempt from federal income taxes, including the alternative minimum tax, and Florida intangible
property tax. BAFs investment policies provide that, under normal circumstances, BAF as a fundamental policy will invest at least 80% of its managed assets in Municipal Bonds that pay interest that is exempt from federal income tax, including
the alternative minimum tax, and Florida intangible property tax. BAFs investment policies provide that BAF will not invest in any bond if the interest on that bond is subject to the alternative minimum tax. BAF cannot change its investment
objectives or its policy of investing 80% of its managed assets in bonds that pay interest that is exempt from federal income tax, including the alternative minimum tax, and Florida intangible property tax, without the approval of the holders of a
majority of the outstanding common shares and the outstanding preferred shares, including the VMTP Shares, voting together as a single class, and of the holders of a majority of the outstanding preferred shares, including the VMTP Shares, voting as
a separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding
shares, whichever is less. See Description of VMTP SharesVoting Rights for additional information with respect to the voting rights of holders of VMTP Shares.
BAF invests primarily in municipal bonds that are investment grade quality at the time of investment. Investment grade quality means that such bonds are
rated, at the time of investment, within the four highest grades (Baa or BBB or better by Moodys, S&P or Fitch) or are unrated but judged to be of comparable quality by the Investment Advisor. Municipal Bonds rated Baa by Moodys are
investment grade, but Moodys considers Municipal Bonds rated Baa to have speculative characteristics. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity for issuers of Municipal Bonds that are
rated BBB or Baa (or that have equivalent ratings) to make principal and interest payments than is the case for issues of higher grade Municipal Bonds. In the case of short-term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys and BBB and F-3 for Fitch), while considered investment grade, may have certain
speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the
foregoing requirements, the Investment Advisor takes into account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided
such credit enhancement.
BAF may invest up to 20% of its managed assets in securities that are rated below investment grade, or are considered by
BlackRock to be of comparable quality, at the time of purchase, subject to BAFs other investment policies. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as junk bonds. Bonds of below investment
grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities, sometimes referred to as high yield or junk
bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. Below
investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuers ability to pay interest and any required redemption or principal payments and are
susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing credit quality policies apply only at
the time a security is purchased, and BAF is not required to dispose of a security if a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating
agency has downgraded, the Investment Advisor may consider such factors as the Investment Advisors assessment of the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned
to the security by other rating agencies. Appendix D contains a general description of Moodys, S&Ps and Fitchs ratings of municipal bonds. In the event
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that BAF disposes of a portfolio security subsequent to its being downgraded, BAF may experience a greater risk of loss than if such security had been sold prior to such downgrade.
BAF may purchase Municipal Bonds 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 BAFs
income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. BAF may purchase insured bonds and may purchase insurance for bonds in its portfolio.
The average maturity of BAFs portfolio securities varies from time to time based upon an assessment of economic and market conditions by the Investment
Advisor. BAFs portfolio at any given time may include both long-term and intermediate-term Municipal Bonds.
BAFs stated expectation is that
it will invest in Municipal Bonds that, in the Investment Advisors opinion, are underrated or undervalued. Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Investment Advisor, reflect their true higher
creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Investment Advisor, are worth more than the value assigned to them in the marketplace. The Investment Advisor may at times believe that bonds associated with a
particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal issuer, are undervalued. The Investment Advisor may purchase those bonds for BAFs portfolio because they represent a
market sector or issuer that the Investment Advisor considers undervalued, even if the value of those particular bonds appears to be consistent with the value of similar bonds. Municipal Bonds of particular types (for example, but not limited to
hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of Municipal Bonds
of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered undervalued. BAFs investment in underrated or undervalued Municipal Bonds will be based on the Investment Advisors belief that their
yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Any capital
appreciation realized by BAF will generally result in capital gain distributions subject to federal capital gains taxation.
Federal tax legislation has
limited the types and volume of bonds the interest on which qualifies for a federal income tax exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment
by BAF.
The State of Florida repealed the Florida Intangible Tax as of January 2007. As a result, on September 12, 2008, the Board of Trustees of BAF
voted unanimously to approve BAF investing in Municipal Bonds regardless of geographic location. If Florida were to reinstate the Florida Intangible Tax or adopt a state income tax, however, BAF would be required to realign its portfolio such that
substantially all of its assets would be invested in Florida Municipal Bonds or obtain shareholder approval to amend BAFs fundamental investment objective to remove references to the Florida Intangible Tax. There can be no assurance that the
State of Florida will not reinstate the Florida Intangible Tax or adopt a state income tax in the future. There can also be no assurance that the reinstatement of the Florida Intangible Tax or the adoption of a state income tax will not have a
material adverse effect on BAF or will not impair the ability of BAF to achieve its investment objectives.
Description of Municipal Bonds
Please see The Acquiring Funds InvestmentsDescription of Municipal Bonds for additional information regarding the types of Municipal
Bonds in which BAF invests.
When-Issued, Delayed Delivery Securities and Forward Commitment Securities
BAF may purchase Municipal Bonds on a when-issued basis and may purchase or sell Municipal Bonds on a forward commitment basis or on a
delayed delivery basis. 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
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securities take place at a later date. When-issued and forward commitment securities may be sold prior to the settlement date, but BAF will enter into when-issued and forward commitment
securities only with the intention of actually receiving or delivering the securities, as the case may be. If BAF 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 can incur a gain or loss. At the time BAF entered into a transaction on a when-issued or forward commitment basis, it will segregate with its custodian cash or other liquid high grade debt securities with a value not less
than 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 BAF. There is always
a risk that the securities may not be delivered and that BAF may incur a loss. Settlements in the ordinary course are not treated by BAF as when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
Other Investment Companies
BAF may invest up to 10%
of its total assets in securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the types in which BAF may invest directly, subject to the Eligible Assets
requirements of the Statement of Preferences which limit BAFs investment in such securities to 5% of its managed assets at the time of investment. BAF generally expects to invest in other investment companies either during periods when it has
large amounts of uninvested cash or during periods when there is a shortage of attractive, high-yielding Municipal Bonds available in the market. As a shareholder in an investment company, BAF will bear its ratable share of that investment
companys expenses, and would remain subject to payment of BAFs advisory and other fees and expenses with respect to assets so invested. The Investment Advisor will take expenses into account when evaluating the investment merits of an
investment in an investment company relative to available Municipal Bond investments. In addition, the securities of other investment companies may be leveraged and will therefore be subject to leverage risks. 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 BAF. In addition, to the
extent that BAF invests in other investment companies, BAF will be dependent upon the investment and research abilities of persons other than the Investment Advisor. BAF treats its investments in such open- or
closed-end investment companies as investments in Municipal Bonds.
Tax-Exempt Preferred Shares
BAF may invest up to 15% of its total assets in preferred interests of other investment funds that pay dividends that are exempt from federal income tax,
including the alternative minimum tax and Florida intangible property tax, subject to the Eligible Assets requirements of the Statement of Preferences which limit BAFs investment in such securities to 5% of its managed assets at the time of
investment. A portion of such dividends may be capital gain distributions subject to federal capital gains tax. Such funds in turn invest in Municipal Bonds and other assets that pay interest or make distributions that are exempt from federal income
tax, including the alternative minimum tax, such as revenue bonds issued by state or local agencies to fund the development of low- income, multi-family housing. Investment 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.
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 associated with Municipal Bonds generally, including that the underlying properties may not
generate sufficient income to pay expenses and interest costs. Such bonds 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. BAF will treat investments in tax-exempt
preferred shares as investments in Municipal Bonds.
Temporary Investments
During temporary defensive periods (e.g., times when, in the Investment Advisors opinion, temporary imbalances of supply and demand or other temporary
dislocations in the tax-exempt bond market adversely affect the price at which long-term or intermediate-term Municipal Bonds are available), and in order to keep cash on hand fully invested, BAF
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may invest up to 100% of its total assets in liquid, 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 Bonds of the type in which BAF may invest directly. BAF intends to invest in taxable short-term
investments only in the event that suitable tax-exempt temporary investments are not available at reasonable prices and yields. BAFs stated expectation is that it will invest only in taxable temporary
investments which are U.S. government securities or securities rated within the highest grade by Moodys, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable or floating rate of interest (such
short-term obligations being referred to herein as Temporary Investments). Temporary Investments of BAF may include certificates of deposit issued by U.S. banks with assets of at least $1 billion, commercial paper or corporate
notes, bonds or debentures with a remaining maturity of one year or less, or repurchase agreements. See Repurchase Agreements. To the extent BAF invests in Temporary Investments, BAF will not at such times be in a position to achieve its
investment objective of tax-exempt income.
Short-term taxable fixed income investments 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 the 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 the 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 plus interest to the bearer of the certificate on the date
specified thereon. Certificates of deposit purchased by BAF may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time BAF 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 BAF 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 BAF to invest temporarily available cash. BAF 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 BAF may invest. Repurchase agreements may be considered loans to the seller, collateralized by the
underlying securities. The risk to BAF 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 BAF 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, BAF could incur a loss of both principal
and interest. The Investment 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 Investment 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 BAF. If the seller were to be subject to a federal bankruptcy proceeding, the ability of BAF 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 BAF and a corporation. There is no secondary market for such notes. However,
they
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are redeemable by BAF at any time. The Investment 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 BAFs liquidity might be impaired if the corporation were unable to pay principal and interest on demand. BAFs stated expectation is
that its 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.
Tax-exempt temporary investments include various obligations issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such Municipal Bonds maturing in three years or less from the date of issuance) and municipal commercial
paper. Short-term tax-exempt fixed income securities 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.
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 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 Bonds 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 BAF 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
BAF may use a variety of other investment management techniques and instruments. BAF may purchase and sell futures contracts, enter into
various interest rate transactions and may purchase and sell exchange-listed and over-the-
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counter put and call options on securities, financial indices and futures contracts (collectively, Strategic Transactions). These Strategic Transactions may be used for duration
management and other risk management to attempt to protect against possible changes in the market value of BAFs portfolio resulting from trends in the debt securities markets and changes in interest rates, to protect BAFs unrealized
gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a position in the securities markets as a temporary substitute for purchasing particular securities and to enhance income
or gain. There is no particular strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The Strategic
Transactions are described below. The ability of BAF to use them successfully will depend on the Investment Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be
assured. Inasmuch as any obligations of BAF that arise from the use of Strategic Transactions will be covered by segregated liquid high grade assets or offsetting transactions, BAF and the Investment Advisor believes such obligations do not
constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. Certain provisions of the Code may restrict or affect the ability of BAF to engage in Strategic Transactions. In addition, the use of
certain Strategic Transactions may give rise to taxable income and have certain other consequences.
Interest Rate Transactions. BAF may enter into
interest rate swaps and the purchase or sale of interest rate caps and floors. BAF expects to enter into these transactions 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 price of securities BAF anticipates purchasing at a later date. BAF 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. BAF may not sell interest rate caps or floors that it does not own. Interest rate swaps involve the exchange by BAF 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.
BAF may enter into interest rate swaps, caps
and floors on either an asset-based or liability-based basis, and will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with BAF receiving or paying, as the case may be, only the net amount of the
two payments on the payment dates. BAF will accrue the net amount of the excess, if any, of BAFs obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate 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. BAF may 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, BAF 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.
Credit Default Swap Agreements. BAF may enter into credit default swap agreements for hedging purposes or to seek to increase its return. The credit
default swap agreement may have as reference obligations one or more securities that are not currently held by BAF. The protection buyer in a credit default contract may be obligated to pay the protection seller an upfront or
a periodic stream of payments over the term of the contract, provided that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of
the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount (the difference between the market value of the reference
obligation and its par value), if the swap is cash settled. BAF may be either the buyer or seller in the transaction. If BAF is a buyer and no credit event occurs, BAF may recover nothing if the swap is held through its termination date. However, if
a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller,
BAF generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six (6) months and three years, provided that there is no
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credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the
reference entity whose value may have significantly decreased. As the seller, BAF would effectively add leverage to its portfolio because, in addition to its total net assets, BAF would be subject to investment exposure on the notional amount of the
swap.
Credit default swap agreements involve greater risks than if BAF had invested in the reference obligation directly since, in addition to general
market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. BAF expects to enter into credit default swap agreements only with counterparties who are rated investment grade quality by at least one
nationally recognized statistical rating organization at the time of entering into such transaction or whose creditworthiness is believed by the Investment Advisor to be equivalent to such rating. A buyer generally also will lose its investment and
recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously
received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event
occurs, the seller may be required to pay the buyer the full notional value of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations. BAFs obligations under a credit default swap agreement will be
accrued daily (offset against any amounts owing to BAF). BAF will at all times segregate with its custodian in connection with each such transaction liquid securities or cash with a value at least equal to BAFs exposure (any accrued but unpaid
net amounts owed by BAF to any counterparty), on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation will ensure that BAF has
assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of BAFs portfolio. Such segregation will not limit BAFs exposure to loss.
Futures Contracts and Options on Futures Contracts. BAF 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. BAF will ordinarily engage in such transactions only for bona fide
hedging, risk management (including duration management) and other portfolio management purposes. However, BAF is also permitted to enter into such transactions for non-hedging purposes to enhance income or
gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of BAFs net assets would be posted as initial margin and premiums with respect to
such non-hedging transactions.
Calls on Securities Indices and Futures Contracts. BAF may sell or purchase
call options (calls) on Municipal Bonds and indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A call 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 BAF must be covered as long as the call is outstanding (i.e., BAF must own the securities or futures contract subject to the call or other securities acceptable
for applicable escrow requirements). A call sold by BAF exposes BAF 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 BAF
to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives BAF the right to buy a security, futures contract or index at a fixed price. Calls on futures on Municipal Bonds must also be covered by
deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy BAFs obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. BAF may purchase put options (puts) that relate to Municipal Bonds (whether or not it
holds such securities in its portfolio), indices or futures contracts. BAF may also sell puts on Municipal Bonds, indices or futures contracts on such securities if BAFs 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. BAF may not sell puts if, as a result, more than 50% of BAFs assets would be required to cover its potential obligations under its hedging
and other investment transactions. In selling puts, there is a risk that BAF may be required to buy the underlying security at a price higher than the current market price.
Municipal Market Data Rate Locks. BAF may purchase and sell Municipal Market Data Rate Locks (MMD Rate Locks). An MMD Rate Lock permits BAF
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
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protect against any increase in the price of securities to be purchased at a later date. BAF 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 BAF 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 BAF 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 BAF 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, BAF 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 BAF. BAF may 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.
Short Sales
BAF may make short sales of Municipal Bonds. A short sale is a transaction in which BAF sells a security it does not own in anticipation that the market price
of that security will decline. BAF 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 BAF 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. BAF may have to pay a fee to borrow particular securities and is often obligated to pay over any payments received on such borrowed securities.
BAFs obligation to replace the borrowed security are required to be secured by collateral deposited with the broker-dealer, usually cash, U.S.
government securities or other liquid securities. BAF will also be required to segregate 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 BAF on such security, BAF 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 BAF replaces the borrowed security, BAF will incur a loss; conversely, if the price declines, BAF will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Although BAFs gain is
limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
BAF may 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 BAFs aggregate short sales of a particular class of securities exceeds 25% of the outstanding securities of that class. BAF 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, BAF owns or has the immediate and unconditional right to acquire at no additional cost the identical
security.
VRDOs
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued
interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily
to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments
typically are based upon SIFMA or some other appropriate interest rate adjustment index. BAF may invest in all types of tax exempt instruments currently outstanding or to be issued in the future which satisfy its short-term maturity and quality
standards. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities.
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Restricted and Illiquid Securities
Certain of BAFs investments may be illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or lack of 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.
Repurchase Agreements
As
temporary investments, BAF 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 BAFs holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. BAF may only
enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Investment Advisor, present minimal credit risk. The risk to BAF 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 BAF 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 BAF may be delayed or limited. The Investment 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 Investment 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.
Reverse Repurchase Agreements
BAF may enter into reverse
repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of securities held by BAF with an agreement by BAF to repurchase the securities
at an agreed upon price, date and interest payment. At the time BAF enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing liquid instruments having a value not less than the
repurchase price (including accrued interest). If BAF establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by BAF; however, under certain circumstances in which BAF does not establish
and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of BAFs limitation on borrowings. The use by BAF 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 BAF 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 BAF 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 BAFs obligation to repurchase the securities, and BAFs use of the proceeds of the reverse repurchase
agreement may effectively be restricted pending such decision. Also, BAF 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.
Borrowings
BAF reserves the right to borrow funds to the
extent permitted as described under the below caption Investment Restrictions. The proceeds of borrowings may be used for any valid purpose including, without limitation, liquidity,
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investments and repurchases of shares of BAF. Borrowing is a form of leverage and, in that respect, entails risks comparable to those associated with the issuance of Preferred Shares.
Lending of Securities
See The Acquiring
Funds InvestmentsLending of Securities for a discussion of the securities lending arrangements applicable to BAF.
BBKs Investment Objective and Policies
BBKs investment objective is to provide current income exempt from regular federal income
taxes. As a fundamental policy, under normal market conditions, BBK will invest at least 80% of its managed assets in Municipal Bonds, the interest of which is exempt from regular federal income tax. BBK cannot change its investment objective or the
foregoing fundamental policy without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the VMTP Shares, voting together as a single class, and of the holders of a majority of
the outstanding preferred shares, including the VMTP Shares, voting as a separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or
represented by proxy, or (2) more than 50% of the outstanding shares, whichever is less. See Description of VMTP SharesVoting Rights for additional information with respect to the voting rights of holders of VMTP Shares.
BBKs investment policies provide that, under normal market conditions, BBK will invest at least 80% of its managed assets in investment grade quality
Municipal Bonds. Investment grade quality means that such bonds are rated, at the time of investment, within the four highest grades (Baa or BBB or better by Moodys, S&P or Fitch) or are unrated but judged to be of comparable quality by
the Investment Advisor. Municipal Bonds rated Baa by Moodys are investment grade, but Moodys considers Municipal Bonds rated Baa to have speculative characteristics. Changes in economic conditions or other circumstances are more likely
to lead to a weakened capacity for issuers of Municipal Bonds that are rated BBB or Baa (or that have equivalent ratings) to make principal and interest payments than is the case for issues of higher grade Municipal Bonds. In the case of short-term
notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through
MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating
categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moodys and
F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys and BBB and F-3 for Fitch), while
considered investment grade, may have certain speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In
assessing the quality of Municipal Bonds with respect to the foregoing requirements, the Investment Advisor takes into account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the
creditworthiness of the financial institution that provided such credit enhancement.
BBK may invest up to 20% of its managed assets in Municipal Bonds
that are rated, at the time of investment, Ba/BB or B by Moodys, S&P or Fitch or that are unrated but judged to be of comparable quality by the Investment Advisor. Bonds of below investment grade quality are regarded as having
predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with
respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. Below investment grade securities and
comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuers ability to pay interest and any required redemption or principal payments and are susceptible to default or decline in
market value due to adverse economic and business developments.
The foregoing credit quality policies apply only at the time a security is purchased, and
BBK is not required to dispose of a security if a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Investment
Advisor may consider such factors as the Investment Advisors assessment of the credit quality of the issuer of the security, the
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price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. Appendix D contains a general description of Moodys,
S&Ps and Fitchs ratings of municipal bonds. In the event that BBK disposes of a portfolio security subsequent to its being downgraded, BBK may experience a greater risk of loss than if such security had been sold prior to such
downgrade.
BBK may also invest in securities of other open- or closed-end investment companies that invest
primarily in Municipal Bonds of the types in which BBK may invest directly and in tax-exempt preferred shares that pay dividends that are exempt from regular federal income tax. See Other
Investment Companies, and Tax-Exempt Preferred Shares. In addition, BBK may purchase Municipal Bonds 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 BBKs income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. BBK may purchase insured bonds and may purchase insurance for
bonds in its portfolio.
BBK may invest in certain tax exempt securities classified as private activity bonds (or industrial development
bonds, under pre-1986 law) (PABs) (in general, bonds that benefit non-governmental entities) that may subject certain investors in BBK to an alternative
minimum tax. The percentage of BBKs total assets invested in PABs will vary from time to time. BBK has not established any limit on the percentage of its portfolio that may be invested in Municipal Bonds subject to the federal alternative
minimum tax provisions of federal tax law, and BBK expects that a portion of the income it produces will be includable in alternative minimum taxable income. VMTP Shares therefore would not ordinarily be a suitable investment for investors who are
subject to the federal alternative minimum tax or who would become subject to such tax by purchasing VMTP Shares. The suitability of an investment in VMTP Shares will depend upon a comparison of the after-tax
yield likely to be provided from BBK with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such
investors tax position. Special considerations may apply to corporate investors.
The average maturity of BBKs portfolio securities varies
from time to time based upon an assessment of economic and market conditions by the Investment Advisor. BBKs portfolio at any given time may include both long-term and intermediate-term Municipal Bonds.
BBKs stated expectation is that it will invest in Municipal Bonds that, in the Investment Advisors opinion, are underrated or undervalued.
Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Investment Advisor, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Investment Advisor, are worth more
than the value assigned to them in the marketplace. The Investment Advisor may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal
issuer, are undervalued. The Investment Advisor may purchase those bonds for BBKs portfolio because they represent a market sector or issuer that the Investment Advisor considers undervalued, even if the value of those particular bonds appears
to be consistent with the value of similar bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a
temporary excess of supply in that market sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered undervalued. BBKs
investment in underrated or undervalued Municipal Bonds will be based on the Investment Advisors belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of
risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by BBK will generally result in capital gain distributions subject to federal capital gains taxation.
BBK ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, BBK may realize taxable capital
gains.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by BBK.
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Description of Municipal Bonds
See The Acquiring Funds InvestmentsDescription of Municipal Bonds for additional information regarding the types of Municipal Bonds in
which BBK invests.
When-Issued and Forward Commitment Securities
BBK may purchase Municipal Bonds on a when-issued basis and may purchase or sell Municipal Bonds on a forward commitment basis. 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 and forward commitment
securities may be sold prior to the settlement date, but BBK will enter into when-issued and forward commitment securities only with the intention of actually receiving or delivering the securities, as the case may be. If BBK 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 can incur a gain or loss. At the time BBK entered into a transaction on a when-issued or forward commitment
basis, it will segregate with its custodian cash or other liquid high grade debt securities with a value not less than 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 BBK. There is always a risk that the securities may not be delivered and that BBK may incur a loss. Settlements in the ordinary course are not treated by
BBK as when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
Other Investment Companies
BBK may invest up to 10% of its total assets in securities of other open- or closed-end investment companies
that invest primarily in Municipal Bonds of the types in which BBK may invest directly, subject to the Eligible Assets requirements of the Statement of Preferences which limit BBKs investment in such securities to 5% of its managed assets at
the time of investment. BBK generally expects to invest in other investment companies either during periods when it has large amounts of uninvested cash or during periods when there is a shortage of attractive, high-yielding Municipal Bonds
available in the market. As a shareholder in an investment company, BBK will bear its ratable share of that investment companys expenses, and would remain subject to payment of BBKs advisory and other fees and expenses with respect to
assets so invested. The Investment Advisor will take expenses into account when evaluating the investment merits of an investment in an investment company relative to available Municipal Bond investments. In addition, the securities of other
investment companies may be leveraged and will therefore be subject to leverage risks. 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 BBK. In addition, to the extent that BBK invests in other investment companies, BBK will be dependent upon the investment and research abilities of
persons other than the Investment Advisor. BBK treats its investments in such open- or closed-end investment companies as investments in Municipal Bonds.
Tax-Exempt Preferred Shares
BBK may invest up to 15% of its total assets in preferred interests of other investment funds that pay dividends that are exempt from regular federal income
tax, subject to the Eligible Assets requirements of the Statement of Preferences which limit BBKs investment in such securities to 5% of its managed assets at the time of investment. A portion of such dividends may be capital gain
distributions subject to federal capital gains tax. Such funds in turn invest in Municipal Bonds and other assets that 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. Investment 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. 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 associated with Municipal Bonds generally, including that the underlying properties may not generate sufficient income to pay
expenses and interest costs. Such bonds 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
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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. BBK will treat investments in tax-exempt preferred shares as investments in Municipal Bonds.
Temporary Investments
During temporary defensive periods
(e.g., times when, in Advisors opinion, temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt bond market adversely affect the price at which long-term or
intermediate-term Municipal Bonds are available), and in order to keep cash on hand fully invested, BBK may invest up to 100% of its total assets in liquid, 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 Bonds of the type in which BBK may invest directly.
BBK intends to invest in taxable short-term investments only in the event that suitable tax-exempt temporary investments are not available at reasonable prices and yields. BBKs stated expectation is that
it will invest only in taxable temporary investments which are U.S. government securities or securities rated within the highest grade by Moodys, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable
or floating rate of interest (such short-term obligations being referred to herein as Temporary Investments). Temporary Investments of BBK may include certificates of deposit issued by U.S. banks with assets of at least $1 billion,
commercial paper or corporate notes, bonds or debentures with a remaining maturity of one year or less, or repurchase agreements. See Repurchase Agreements. To the extent BBK invests in Temporary Investments, BBK will not at such times
be in a position to achieve its investment objective of tax-exempt income.
Short-term taxable fixed income
investments 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 the 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 the 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 plus interest to the bearer of the certificate on the date
specified thereon. Certificates of deposit purchased by BBK may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time BBK 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 BBK 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 BBK to invest temporarily available cash. BBK 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 BBK may invest. Repurchase agreements may be considered loans to the seller, collateralized by the
underlying securities. The risk to BBK 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 BBK 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
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collateral is less than the repurchase price, BBK could incur a loss of both principal and interest. The Investment 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 Investment 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 BBK. If the seller
were to be subject to a federal bankruptcy proceeding, the ability of BBK 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 BBK and a corporation. There is no secondary market for such notes. However, they are redeemable by BBK at any time. The
Investment 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 BBKs liquidity might be impaired if the corporation were unable to pay principal and interest on demand. BBKs stated expectation is that its 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.
Tax-exempt temporary investments include various obligations issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax
anticipation notes and revenue anticipation notes or other such Municipal Bonds maturing in three years or less from the date of issuance) and municipal commercial paper. Short-term tax-exempt fixed income
securities 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.
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 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 Bonds 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.
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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 BBK 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
BBK may use a variety of other investment management techniques and instruments. BBK may purchase and sell futures contracts, enter into
various interest rate transactions and may purchase and sell exchange-listed and over-the-counter put and call options on securities, financial indices and futures
contracts (collectively, Strategic Transactions). These Strategic Transactions may be used for duration management and other risk management to attempt to protect against possible changes in the market value of BBKs portfolio
resulting from trends in the debt securities markets and changes in interest rates, to protect BBKs unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a
position in the securities markets as a temporary substitute for purchasing particular securities and to enhance income or gain.
There is no particular
strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The Strategic Transactions are described below. The
ability of BBK to use them successfully will depend on the Investment Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Inasmuch as any obligations of BBK
that arise from the use of Strategic Transactions will be covered by segregated liquid high grade assets or offsetting transactions, BBK and the Investment Advisor believe such obligations do not constitute senior securities and, accordingly, will
not treat them as being subject to its borrowing restrictions. Certain provisions of the Code may restrict or affect the ability of BBK to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to
taxable income and have certain other consequences.
Interest Rate Transactions. BBK may enter into interest rate swaps and the purchase or sale of
interest rate caps and floors. BBK expects to enter into these transactions 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
price of securities BBK anticipates purchasing at a later date. BBK 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. BBK may not sell interest
rate caps or floors that it does not own. Interest rate swaps involve the exchange by BBK 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.
BBK may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, and
will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with BBK receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. BBK will accrue the net amount
of the excess, if any, of BBKs obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate 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. BBK may 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, BBK 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.
Credit Default Swap Agreements. BBK may enter into credit default swap agreements for hedging purposes or to seek to increase its return. The credit
default swap agreement may have as reference obligations one or more securities that
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are not currently held by BBK. The protection buyer in a credit default contract may be obligated to pay the protection seller an upfront or a periodic stream of payments
over the term of the contract, provided that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange for an
equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount (the difference between the market value of the reference obligation and its par value),
if the swap is cash settled. BBK may be either the buyer or seller in the transaction. If BBK is a buyer and no credit event occurs, BBK may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the
buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, BBK generally receives an
upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six (6) months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the
full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As the seller, BBK would effectively add leverage to its portfolio because, in
addition to its total net assets, BBK would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve
greater risks than if BBK had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. BBK expects to enter into credit
default swap agreements only with counterparties who are rated investment grade quality by at least one nationally recognized statistical rating organization at the time of entering into such transaction or whose creditworthiness is believed by the
Investment Advisor to be equivalent to such rating. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any
deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit default
swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event occurs, the seller may be required to pay the buyer the full notional value of the contract net of any amounts owed by the buyer related to its
delivery of deliverable obligations. BBKs obligations under a credit default swap agreement will be accrued daily (offset against any amounts owing to BBK). BBK will at all times segregate with its custodian in connection with each such
transaction liquid securities or cash with a value at least equal to BBKs exposure (any accrued but unpaid net amounts owed by BBK to any counterparty), on a
marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation will ensure that BBK has assets available to satisfy its obligations with
respect to the transaction and will avoid any potential leveraging of BBKs portfolio. Such segregation will not limit BBKs exposure to loss.
Futures Contracts and Options on Futures Contracts. BBK 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. BBK will ordinarily engage in such transactions only for bona fide
hedging, risk management (including duration management) and other portfolio management purposes. However, BBK is also permitted to enter into such transactions for non-hedging purposes to enhance income or
gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of BBKs net assets would be posted as initial margin and premiums with respect to
such non-hedging transactions.
Calls on Securities Indices and Futures Contracts. BBK may sell or purchase
call options (calls) on Municipal Bonds and indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A call 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 BBK must be covered as long as the call is outstanding (i.e., BBK must own the securities or futures contract subject to the call or other securities acceptable
for applicable escrow requirements). A call sold by BBK exposes BBK 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 BBK
to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives BBK the right to buy a security, futures contract or index at a fixed price. Calls on futures on Municipal Bonds must also be covered by
deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy BBKs obligations pursuant to such instruments.
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Puts on Securities, Indices and Futures Contracts. BBK may purchase put options (puts) that
relate to Municipal Bonds (whether or not it holds such securities in its portfolio), indices or futures contracts. BBK may also sell puts on Municipal Bonds, indices or futures contracts on such securities if BBKs 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. BBK may not sell puts if, as a result, more than 50% of BBKs assets would be required to cover
its potential obligations under its hedging and other investment transactions. In selling puts, there is a risk that BBK may be required to buy the underlying security at a price higher than the current market price.
Municipal Market Data Rate Locks. BBK may purchase and sell Municipal Market Data Rate Locks (MMD Rate Locks). An MMD Rate Lock permits BBK
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. BBK 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 BBK
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 BBK 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 BBK
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, BBK 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 BBK. BBK may 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.
Short Sales
BBK may make short sales of Municipal Bonds.
A short sale is a transaction in which BBK sells a security it does not own in anticipation that the market price of that security will decline. BBK 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 BBK 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. BBK may have to pay a fee to borrow particular securities and is often obligated to pay over any payments
received on such borrowed securities.
BBKs obligation to replace the borrowed security are required to be secured by collateral deposited with the
broker-dealer, usually cash, U.S. government securities or other liquid securities. BBK will also be required to segregate 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 BBK on such security, BBK 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 BBK replaces the borrowed security, BBK will incur a loss; conversely, if the price declines, BBK will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described
above. Although BBKs gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
BBK may 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 BBKs aggregate short sales of a particular class of securities exceeds 25% of the outstanding
securities of that class. BBK 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, BBK owns or has the immediate and unconditional right to acquire at no
additional cost the identical security.
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VRDOs
VRDOs
are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus
accrued interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The interest rates are adjustable at intervals (ranging
from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The
adjustments typically are based upon SIFMA or some other appropriate interest rate adjustment index. BBK may invest in all types of tax exempt instruments currently outstanding or to be issued in the future which satisfy its short-term maturity and
quality standards. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities.
Restricted and Illiquid Securities
Certain of BBKs
investments may be illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or lack of 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.
Repurchase Agreements
As temporary investments, BBK 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 BBKs holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. BBK may only enter into repurchase agreements
with registered securities dealers or domestic banks that, in the opinion of the Investment Advisor, present minimal credit risk. The risk to BBK 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 BBK 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 BBK may be delayed or limited. The Investment 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 Investment 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.
Reverse Repurchase Agreements
BBK may enter into reverse
repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse repurchase agreements involve the sale of securities held by BBK with an agreement by BBK to repurchase the securities
at an agreed upon price, date and interest payment. At the time BBK enters into a reverse repurchase agreement, it may establish and maintain a segregated account with the custodian containing liquid instruments having a value not less than the
repurchase price (including accrued interest). If BBK establishes and maintains such a segregated account, a reverse repurchase agreement will not be considered a borrowing by BBK; however, under certain circumstances in which BBK does not establish
and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of BBKs limitation on borrowings. The use by BBK 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 BBK has sold but is obligated to
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repurchase. Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by BBK 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 BBKs obligation to repurchase the securities, and BBKs use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision.
Also, BBK 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.
Borrowings
BBK reserves the right to borrow funds to the
extent permitted as described under the below caption Investment Restrictions. The proceeds of borrowings may be used for any valid purpose including, without limitation, liquidity, investments and repurchases of shares of BBK.
Borrowing is a form of leverage and, in that respect, entails risks comparable to those associated with the issuance of Preferred Shares.
Lending of
Securities
See The Acquiring Funds InvestmentsLending of Securities for a discussion of the securities lending arrangements
applicable to BBK.
MUHs Investment Objectives and Policies
MUHs investment objective is to provide stockholders with current income exempt from federal income taxes. There can be no assurance that MUHs
investment objective will be realized. MUHs investment objective may not be changed without the approval of the holders of a majority of the outstanding common shares and the outstanding preferred shares, including the VMTP Shares, voting
together as a single class, and of the holders of a majority of the outstanding preferred shares, including the VMTP Shares, voting as a separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding shares, whichever is less. See Description of VMTP SharesVoting Rights for additional information
with respect to the voting rights of holders of VMTP Shares.
MUHs investment policies provide that it will invest primarily in a portfolio of
long-term, investment grade municipal obligations, the interest on which, in the opinion of bond counsel to the issuer, is exempt from federal income taxes (except that the interest may be subject to the alternative minimum tax). MUHs
investment policies provide that, at all times, except during temporary defensive periods, it will invest at least 80% of its total assets in a portfolio of obligations issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies or instrumentalities, paying interest that, in the opinion of bond counsel to the issuer, is exempt from federal income taxes (Municipal Bonds).
MUHs investment policies provide that it will invest at least 75% of its total assets in a portfolio of Municipal Bonds that are commonly referred to as
investment grade securities, which are obligations rated at the time of purchase within the four highest quality ratings as determined by either Moodys Investors Service, Inc. (Moodys) (currently Aaa, Aa, A and
Baa), Standard & Poors (S&P) (currently AAA, AA, A and BBB) or Fitch Ratings (Fitch) (currently AAA, AA, A and BBB). In the case of short-term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys and BBB and F-3 for Fitch), while considered investment grade, may have certain
speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the
foregoing requirements, the Investment Advisor takes into account the nature of any letters of credit or similar credit enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided
such credit enhancement. If unrated, such securities will possess creditworthiness comparable, in the opinion of the Investment Advisor, to other obligations in which MUH may invest.
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MUH may invest up to 25% of its total assets in Municipal Bonds that are rated below Baa by Moodys or below
BBB by S&P or Fitch or, if unrated, are considered by the Investment Advisor to possess similar credit characteristics. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the
issuers capacity to pay interest and repay principal. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are
considered speculative with respect to the issuers ability to pay interest and any required redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The foregoing credit quality policies apply only at the time a security is purchased, and MUH is not required to dispose of a security if a rating agency
downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell a security that a rating agency has downgraded, the Investment Advisor may consider such factors as the Investment Advisors
assessment of the credit quality of the issuer of the security, the price at which the security could be sold and the rating, if any, assigned to the security by other rating agencies. Appendix D contains a general description of
Moodys, S&Ps and Fitchs ratings of municipal bonds. In the event that MUH disposes of a portfolio security subsequent to its being downgraded, MUH may experience a greater risk of loss than if such security had been sold prior
to such downgrade.
MUH may also purchase Municipal Bonds 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 MUHs income. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the common shares. MUH may purchase insured bonds and may purchase insurance for bonds in its
portfolio.
MUH may invest in certain tax exempt securities classified as private activity bonds (or industrial development bonds, under pre-1986 law) (in general, bonds that benefit non-governmental entities) that may subject certain investors in MUH to an alternative minimum tax. The percentage of MUHs
total assets invested in private activity bonds will vary from time to time. MUH has not established any limit on the percentage of its portfolio that may be invested in Municipal Bonds subject to the federal alternative minimum tax provisions of
federal tax law, and MUH expects that a portion of the income it produces will be includable in alternative minimum taxable income. VMTP Shares therefore would not ordinarily be a suitable investment for investors who are subject to the federal
alternative minimum tax or who would become subject to such tax by purchasing VMTP Shares. The suitability of an investment in VMTP Shares will depend upon a comparison of the after-tax yield likely to be
provided from MUH with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position.
Special considerations may apply to corporate investors.
MUH also may not invest more than 25% of its total assets (taken at market value at the time of
each investment) in Municipal Bonds whose issuers are located in the same state.
The average maturity of MUHs portfolio securities varies from time
to time based upon an assessment of economic and market conditions by the Investment Advisor. MUHs portfolio at any given time may include long-term, intermediate-term and short-term Municipal Bonds.
MUHs stated expectation is that it will invest in Municipal Bonds that, in the Investment Advisors opinion, are underrated or undervalued.
Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Investment Advisor, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Investment Advisor, are worth more
than the value assigned to them in the marketplace. The Investment Advisor may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal
issuer, are undervalued. The Investment Advisor may purchase those bonds for MUHs portfolio because they represent a market sector or issuer that the Investment Advisor considers undervalued, even if the value of those particular bonds appears
to be consistent with the value of similar bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a
temporary excess of supply in
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that market sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered
undervalued. MUHs investment in underrated or undervalued Municipal Bonds will be based on the Investment Advisors belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit
risk and other forms of risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by MUH will generally result in capital gain distributions subject to federal capital
gains taxation.
MUH ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, MUH may
realize taxable capital gains.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax
exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by MUH.
Description of Municipal Bonds
See The Acquiring
Funds InvestmentsDescription of Municipal Bonds for additional information regarding the types of Municipal Bonds in which MUH invests.
When-Issued, Delayed Delivery Securities and Forward Commitment Securities
MUH may purchase Municipal Bonds on a when-issued basis and may purchase or sell Municipal Bonds on a forward commitment basis or on a
delayed delivery basis. 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 and forward commitment securities may be sold prior to the settlement date, but MUH will enter into when-issued and forward commitment securities only with the intention of actually receiving or delivering the securities, as the case may
be. If MUH 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 can incur a gain or loss. At the time MUH entered into a transaction on a
when-issued or forward commitment basis, it will segregate with its custodian cash or other liquid high grade debt securities with a value not less than 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 MUH. There is always a risk that the securities may not be delivered and that MUH may incur a loss. Settlements in the
ordinary course are not treated by MUH as when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
Temporary Investments
For temporary periods or to
provide liquidity, MUH has the authority to invest as much as 20% of its total assets in tax-exempt and taxable money market obligations with a maturity of one year or less (such short-term obligations being
referred to herein as Temporary Investments). In addition, MUH reserves the right as a defensive measure to invest temporarily a greater portion of its assets in Temporary Investments, when, in the Investment Advisors opinion,
prevailing market or financial conditions warrant. Taxable money market obligations will yield taxable income. The tax exempt money market securities may include municipal notes, municipal commercial paper, municipal bonds with a remaining maturity
of less than one year, variable rate demand notes and participations therein. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes and grant anticipation notes. Anticipation notes are sold as interim
financing in anticipation of tax collection, bond sales, government grants or revenue receipts. Municipal commercial paper refers to short-term unsecured promissory notes generally issued to finance short-term credit needs. The taxable money market
securities in which MUH may invest as Temporary Investments consist of U.S. Government securities, U.S. Government agency securities, domestic bank or savings institution certificates of deposit and bankers acceptances, short-term corporate
debt securities such as commercial paper and repurchase agreements. These Temporary Investments must have a stated maturity not in excess of one year from the date of purchase. MUH may not invest in any security issued by a commercial bank or a
savings institution unless the bank or institution is organized and operating in the United States, has total assets of at least one billion dollars. To the extent MUH invests in Temporary Investments, MUH may not at such times be in a position to
achieve its investment objective of tax-exempt income.
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To the extent MUH invests in Temporary Investments, MUH will not at such times be in a position to achieve its
investment objective of tax-exempt income.
Short-term taxable fixed income investments 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 the 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 the 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 plus interest to the bearer of the certificate on the date
specified thereon. Certificates of deposit purchased by MUH may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time MUH 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 MUH 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 MUH to invest temporarily available cash. MUH 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 MUH may invest. Repurchase agreements may be considered loans to the seller, collateralized by the
underlying securities. The risk to MUH 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 MUH 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, MUH could incur a loss of both principal
and interest. The Investment 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 Investment 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 MUH. If the seller were to be subject to a federal bankruptcy proceeding, the ability of MUH 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 MUH and a corporation. There is no secondary market for such notes. However,
they are redeemable by MUH at any time. The Investment 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 MUHs liquidity might be impaired if the corporation were unable to pay principal and interest on demand. MUHs stated expectation is that its 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.
Tax-exempt temporary investments include various obligations issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such
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Municipal Bonds maturing in three years or less from the date of issuance) and municipal commercial paper. Short-term tax-exempt fixed income securities
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.
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 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.
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of
demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the
demand feature of VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market
value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments typically are based upon SIFMA or some other appropriate interest rate adjustment index. MUH may invest in all types of tax exempt instruments
currently outstanding or to be issued in the future which satisfy its short-term maturity and quality standards. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice
period exceeding seven days may be deemed to be illiquid securities.
Certain Municipal Bonds 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 MUH 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.
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MUHs investment policies provide that the Temporary Investments and VRDOs in which MUH may invest will be
in the following rating categories at the time of purchase: MIG-1/VMIG-1 through MIG-
3/VMIG-3 for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as determined by Moodys), SP-1 through SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as determined
by S&P), or F- 1 through F-3 for notes, VRDOs and commercial paper (as determined by Fitch). Temporary Investments, if not rated, must be of comparable quality in
the opinion of the Investment Advisor. In addition, MUH reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the Investment Advisor, market conditions
warrant.
Strategic Transactions and Other Management Techniques
MUH may use a variety of other investment management techniques and instruments. MUH may purchase and sell futures contracts, enter into various interest rate
transactions and may purchase and sell exchange-listed and over-the-counter put and call options on securities, financial indices and futures contracts (collectively,
Strategic Transactions). These Strategic Transactions may be used for duration management and other risk management to attempt to protect against possible changes in the market value of MUHs portfolio resulting from trends in the
debt securities markets and changes in interest rates, to protect MUHs unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a position in the securities
markets as a temporary substitute for purchasing particular securities and to enhance income or gain.
There is no particular strategy that requires use
of one technique rather than another as the decision to use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The Strategic Transactions are described below. The ability of MUH to use them
successfully will depend on the Investment Advisors ability to predict pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Inasmuch as any obligations of MUH that arise from the use of
Strategic Transactions will be covered by segregated liquid high grade assets or offsetting transactions, MUH and the Investment Advisor believe such obligations do not constitute senior securities and, accordingly, will not treat them as being
subject to its borrowing restrictions. Certain provisions of the Code may restrict or affect the ability of MUH to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to taxable income and have
certain other consequences.
Interest Rate Transactions. MUH may enter into interest rate swaps and the purchase or sale of interest rate caps and
floors. MUH expects to enter into these transactions 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 price of securities MUH
anticipates purchasing at a later date. MUH 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. MUH may not sell interest rate caps or floors
that it does not own. Interest rate swaps involve the exchange by MUH 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.
MUH may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, and will usually
enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with MUH receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. MUH will accrue the net amount of the
excess, if any, of MUHs obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate 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. If there is a default by the other party to such a transaction, MUH 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.
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Credit Default Swap Agreements. MUH may enter into credit default swap agreements for hedging purposes or
to seek to increase its return. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by MUH. The protection buyer in a credit default contract may be obligated to pay the
protection seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the
par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount (the
difference between the market value of the reference obligation and its par value), if the swap is cash settled. MUH may be either the buyer or seller in the transaction. If MUH is a buyer and no credit event occurs, MUH may recover nothing if the
swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose
value may have significantly decreased. As a seller, MUH generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six (6) months and three years, provided that there is no
credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased.
As the seller, MUH would effectively add leverage to its portfolio because, in addition to its total net assets, MUH would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if MUH had invested in the reference obligation directly since, in addition to general market risks,
credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. MUH expects to enter into credit default swap agreements only with counterparties who are rated investment grade quality by at least one nationally recognized
statistical rating organization at the time of entering into such transaction or whose creditworthiness is believed by the Investment Advisor to be equivalent to such rating. A buyer generally also will lose its investment and recover nothing should
no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than
the full notional value it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event occurs, the seller may be
required to pay the buyer the full notional value of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations. MUHs obligations under a credit default swap agreement will be accrued daily (offset
against any amounts owing to MUH). MUH will at all times segregate with its custodian in connection with each such transaction liquid securities or cash with a value at least equal to MUHs exposure (any accrued but unpaid net amounts owed by
MUH to any counterparty), on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation will ensure that MUH has assets available to
satisfy its obligations with respect to the transaction and will avoid any potential leveraging of MUHs portfolio. Such segregation will not limit MUHs exposure to loss.
Futures Contracts and Options on Futures Contracts. MUH 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. MUH will ordinarily engage in such transactions only for bona fide
hedging, risk management (including duration management) and other portfolio management purposes. However, MUH is also permitted to enter into such transactions for non-hedging purposes to enhance income or
gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of MUHs net assets would be posted as initial margin and premiums with respect to
such non-hedging transactions.
Calls on Securities Indices and Futures Contracts. MUH may sell or purchase
call options (calls) on Municipal Bonds and indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A call 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 MUH must be covered as long as the call is outstanding (i.e., MUH must own the securities or futures contract subject to the call or other securities acceptable
for applicable escrow requirements). A call sold by MUH exposes MUH 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 MUH
to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives MUH the right to buy a security, futures contract or index at a fixed price. Calls on futures on Municipal Bonds must also be covered
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by deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy MUHs obligations pursuant to such instruments.
MUH is authorized to write (i.e., sell) covered call options with respect to Municipal Bonds it owns, thereby giving the holder of the option the right
to buy the underlying security covered by the option from MUH at the stated exercise price until the option expires. MUH writes only covered call options, which means that so long as MUH is obligated as the writer of a call option, it will own the
underlying securities subject to the option. MUH may not write covered call options on underlying securities in an amount exceeding 15% of the market value of its total assets.
Puts on Securities, Indices and Futures Contracts. MUH may purchase put options (puts) that relate to Municipal Bonds (whether or not it
holds such securities in its portfolio), indices or futures contracts. MUH may also sell puts on Municipal Bonds, indices or futures contracts on such securities if MUHs 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. MUH may not purchase options on securities if, as a result of such purchase, the aggregate cost of all outstanding options on securities held by
MUH would exceed 5% of the market value of MUHs total assets.
Restrictions on OTC Options. MUH will engage in transactions in OTC options
only with banks or dealers that have capital of at least $50 million or whose obligations are guaranteed by an entity having capital of at least $50 million. Certain OTC options and assets used to cover OTC options written by MUH may be
considered to be illiquid. The illiquidity of such options or assets may prevent a successful sale of such options or assets, result in a delay of sale, or reduce the amount of proceeds that might otherwise be realized.
Municipal Market Data Rate Locks. MUH may purchase and sell Municipal Market Data Rate Locks (MMD Rate Locks). An MMD Rate Lock permits MUH
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. MUH 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 MUH
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 MUH 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 MUH
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, MUH 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 MUH. MUH may 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.
Restricted and Illiquid Securities
Certain of MUHs
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. MUH may invest without
limit in illiquid investments.
Repurchase Agreements
As temporary investments, MUH 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 MUHs holding period. Repurchase agreements are considered to be loans collateralized by
the underlying security that is the subject of the repurchase contract. MUH may only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Investment Advisor, present minimal credit risk.
The risk to MUH is limited to the
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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 MUH 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 MUH may be delayed or limited. The Investment 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 Investment 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.
Reverse Repurchase Agreements
MUH may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse
repurchase agreements involve the sale of securities held by MUH with an agreement by MUH to repurchase the securities at an agreed upon price, date and interest payment. At the time MUH enters into a reverse repurchase agreement, it may establish
and maintain a segregated account with the custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If MUH establishes and maintains such a segregated account, a reverse repurchase
agreement will not be considered a borrowing by MUH; however, under certain circumstances in which MUH does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a borrowing for the purpose of
MUHs limitation on borrowings. The use by MUH 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 MUH 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 MUH 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 MUHs obligation to repurchase the securities, and MUHs use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, MUH 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.
Borrowings
MUH is authorized to borrow money in amounts
of up to 5% of the value of its total assets at the time of such borrowings; provided, however, that MUH is authorized to borrow moneys in amounts of up to 33 1/3% of the value of its total assets at the time of such borrowings to finance the
repurchase of its own common stock pursuant to tender offers or otherwise to redeem or repurchase shares of preferred stock. Borrowings by MUH (commonly known, as with the issuance of preferred stock, as leveraging) create an opportunity
for greater total return since, for example, MUH will not be required to sell portfolio securities to repurchase or redeem shares but, at the same time, increase exposure to capital risk. In addition, borrowed funds are subject to interest costs
that may offset or exceed the return earned on the borrowed funds.
Lending of Securities
See The Acquiring Funds InvestmentsLending of Securities for a discussion of the securities lending arrangements applicable to MUH.
MUSs Investment Objectives and Policies
MUSs investment objective is to provide stockholders with current income exempt from federal income taxes. There can be no assurance that MUSs
investment objective will be realized. MUSs investment objective may not be changed without the approval of the holders of a majority of the outstanding common shares and the outstanding
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preferred shares, including the VMTP Shares, voting together as a single class, and of the holders of a majority of the outstanding preferred shares, including the VMTP Shares, voting as a
separate class. A majority of the outstanding means (1) 67% or more of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present or represented by proxy, or (2) more than 50% of the outstanding
shares, whichever is less. See Description of VMTP SharesVoting Rights for additional information with respect to the voting rights of holders of VMTP Shares.
MUSs investment policies provide that it will invest primarily in a portfolio of long-term, investment grade municipal obligations, the interest on
which, in the opinion of bond counsel to the issuer, is exempt from federal income taxes. MUSs investment policies provide that, at all times, except during temporary defensive periods, it will invest at least 80% of its total assets in a
portfolio of obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities, paying interest that, in the opinion of bond counsel to the issuer, is
exempt from federal income taxes (Municipal Bonds). MUSs investment policies provide that, under normal market conditions, MUS invests at least 80% of its assets in Municipal Bonds with remaining maturities of one year or more at
the time of investment.
The investment grade Municipal Bonds in which MUS will primarily invest are those Municipal Bonds that are rated at the date of
purchase in the four highest rating categories of S&P, Moodys or Fitch or, if unrated, are considered to be of comparable quality by the Investment Advisor. In the case of long-term debt, the investment grade rating categories are AAA
through BBB for S&P and Fitch and Aaa through Baa for Moodys. In the case of short-term notes, the investment grade rating categories are SP-1+ through SP-2
for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the
case of tax exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for S&P, Prime-1 through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys and BBB and F-3 for Fitch), while considered investment grade, may have certain speculative characteristics. There may be sub-categories or gradations indicating relative
standing within the rating categories set forth above. In assessing the quality of Municipal Bonds with respect to the foregoing requirements, the Investment Advisor takes into account the nature of any letters of credit or similar credit
enhancement to which particular Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancement. If unrated, such securities will possess creditworthiness comparable, in the opinion of the
Investment Advisor, to other obligations in which MUS may invest.
MUS may invest up to 20% of its managed assets in securities that are rated below
investment grade, or are considered by BlackRock to be of comparable quality, at the time of purchase, subject to MUSs other investment policies. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as junk
bonds. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities, sometimes referred to as
high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than
securities in higher rating categories. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuers ability to pay interest and any required
redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The
foregoing credit quality policies apply only at the time a security is purchased, and MUS is not required to dispose of a security if a rating agency downgrades its assessment of the credit characteristics of a particular issue. In determining
whether to retain or sell a security that a rating agency has downgraded, the Investment Advisor may consider such factors as the Investment Advisors assessment of the credit quality of the issuer of the security, the price at which the
security could be sold and the rating, if any, assigned to the security by other rating agencies. Appendix D contains a general description of Moodys, S&Ps and Fitchs ratings of municipal bonds. In the event that MUS
disposes of a portfolio security subsequent to its being downgraded, MUS may experience a greater risk of loss than if such security had been sold prior to such downgrade.
MUS may also purchase Municipal Bonds 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
MUSs income. The insurance feature does not guarantee the
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market value of the insured obligations or the net asset value of the common shares. MUS may purchase insured bonds and may purchase insurance for bonds in its portfolio.
MUS may invest in certain tax exempt securities classified as private activity bonds (or industrial development bonds, under pre-1986 law) (in general, bonds that benefit non-governmental entities) that may subject certain investors in MUS to an alternative minimum tax. The percentage of MUSs
total assets invested in private activity bonds will vary from time to time. MUS has not established any limit on the percentage of its portfolio that may be invested in Municipal Bonds subject to the federal alternative minimum tax provisions of
federal tax law, and MUS expects that a portion of the income it produces will be includable in alternative minimum taxable income. VMTP Shares therefore would not ordinarily be a suitable investment for investors who are subject to the federal
alternative minimum tax or who would become subject to such tax by purchasing VMTP Shares. The suitability of an investment in VMTP Shares will depend upon a comparison of the after-tax yield likely to be
provided from MUS with that from comparable tax-exempt investments not subject to the alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position.
Special considerations may apply to corporate investors.
MUS also may not invest more than 25% of its total assets (taken at market value at the time of
each investment) in Municipal Bonds whose issuers are located in the same state
The average maturity of MUSs portfolio securities varies from time
to time based upon an assessment of economic and market conditions by the Investment Advisor. MUSs portfolio at any given time may include both long-term, intermediate-term and short-term Municipal Bonds.
MUSs stated expectation is that it will invest in Municipal Bonds that, in the Investment Advisors opinion, are underrated or undervalued.
Underrated Municipal Bonds are those whose ratings do not, in the opinion of the Investment Advisor, reflect their true higher creditworthiness. Undervalued Municipal Bonds are bonds that, in the opinion of the Investment Advisor, are worth more
than the value assigned to them in the marketplace. The Investment Advisor may at times believe that bonds associated with a particular municipal market sector (for example, but not limited to electric utilities), or issued by a particular municipal
issuer, are undervalued. The Investment Advisor may purchase those bonds for MUSs portfolio because they represent a market sector or issuer that the Investment Advisor considers undervalued, even if the value of those particular bonds appears
to be consistent with the value of similar bonds. Municipal Bonds of particular types (for example, but not limited to hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a
temporary excess of supply in that market sector, or because of a general decline in the market price of Municipal Bonds of the market sector for reasons that do not apply to the particular Municipal Bonds that are considered undervalued. MUSs
investment in underrated or undervalued Municipal Bonds will be based on the Investment Advisors belief that their yield is higher than that available on bonds bearing equivalent levels of interest rate risk, credit risk and other forms of
risk, and that their prices will ultimately rise, relative to the market, to reflect their true value. Any capital appreciation realized by MUS will generally result in capital gain distributions subject to federal capital gains taxation.
MUS ordinarily does not intend to realize significant investment income not exempt from federal income tax. From time to time, MUS may realize taxable capital
gains.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax exemption. As a result,
this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by MUS.
Description
of Municipal Bonds
Please see The Acquiring Funds InvestmentsDescription of Municipal Bonds for additional information
regarding the types of Municipal Bonds in which MUS invests.
When-Issued, Delayed Delivery Securities and Forward Commitment Securities
MUS may purchase Municipal Bonds on a when-issued basis and may purchase or sell Municipal Bonds on a forward commitment basis or on a
delayed delivery basis. 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
115
securities take place at a later date. When-issued and forward commitment securities may be sold prior to the settlement date, but MUS will enter into when-issued and forward commitment
securities only with the intention of actually receiving or delivering the securities, as the case may be. If MUS 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 can incur a gain or loss. At the time MUS entered into a transaction on a when-issued or forward commitment basis, it will segregate with its custodian cash or other liquid high grade debt securities with a value not less
than 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 MUS. There is always
a risk that the securities may not be delivered and that MUS may incur a loss. Settlements in the ordinary course are not treated by MUS as when-issued or forward commitment transactions and accordingly are not subject to the foregoing restrictions.
Temporary Investments
For temporary periods or to
provide liquidity, MUS has the authority to invest as much as 20% of its total assets in tax-exempt and taxable money market obligations with a maturity of one year or less (such short-term obligations being
referred to herein as Temporary Investments). In addition, MUS reserves the right as a defensive measure to invest temporarily a greater portion of its assets in Temporary Investments, when, in the opinion of the Investment Advisor,
prevailing market or financial conditions warrant. Taxable money market obligations will yield taxable income. The tax exempt money market securities may include municipal notes, municipal commercial paper, municipal bonds with a remaining maturity
of less than one year, variable rate demand notes and participations therein. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes and grant anticipation notes. Anticipation notes are sold as interim
financing in anticipation of tax collection, bond sales, government grants or revenue receipts. Municipal commercial paper refers to short-term unsecured promissory notes generally issued to finance short-term credit needs. The taxable money market
securities in which MUS may invest as Temporary Investments consist of U.S. Government securities, U.S. Government agency securities, domestic bank or savings institution certificates of deposit and bankers acceptances, short-term corporate
debt securities such as commercial paper and repurchase agreements. These Temporary Investments must have a stated maturity not in excess of one year from the date of purchase. MUS may not invest in any security issued by a commercial bank or a
savings institution unless the bank or institution is organized and operating in the United States, has total assets of at least one billion dollars. To the extent MUS invests in Temporary Investments, MUS may not at such times be in a position to
achieve its investment objective of tax-exempt income. To the extent MUS invests in Temporary Investments, MUS will not at such times be in a position to achieve its investment objective of tax-exempt income.
Short-term taxable fixed income investments 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 the 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 the 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 plus interest to the bearer of the certificate on the date specified thereon. Certificates of deposit purchased by MUS may not be fully insured by the Federal Deposit Insurance Corporation.
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(3) Repurchase agreements, which involve purchases of debt securities. At
the time MUS 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 MUS 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 MUS to invest temporarily available cash. MUS 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 MUS may invest. Repurchase agreements may be considered loans
to the seller, collateralized by the underlying securities. The risk to MUS 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 MUS 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, MUS
could incur a loss of both principal and interest. The Investment 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 Investment 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 MUS. If the seller were to be subject to a federal bankruptcy proceeding, the ability of MUS 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 MUS and a corporation. There is no
secondary market for such notes. However, they are redeemable by MUS at any time. The Investment 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 MUSs liquidity might be impaired if the corporation were unable to pay principal and interest on demand. MUSs stated expectation is that its
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.
Tax-exempt temporary investments include various obligations issued by state and local governmental issuers, such as
tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such Municipal Bonds maturing in three years or less from the date of issuance) and municipal commercial paper. Short-term tax-exempt fixed income securities 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.
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.
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Bank Notes are notes issued by local government bodies and agencies 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.
VRDOs are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued
interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily
to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments
typically are based upon SIFMA or some other appropriate interest rate adjustment index. MUS may invest in all types of tax exempt instruments currently outstanding or to be issued in the future which satisfy its short-term maturity and quality
standards. VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities.
Certain Municipal Bonds 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 MUS 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.
MUSs investment policies provide that the Temporary Investments and VRDOs in which MUS may invest will be in the following rating categories at the time
of purchase: MIG-1/VMIG-1 through MIG- 3/VMIG-3 for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as determined by Moodys), SP-1 through SP-2
for notes and A-1 through A-3 for VRDOs and commercial paper (as determined by S&P), or F- 1 through F-3 for notes, VRDOs and commercial paper (as determined by Fitch). Temporary Investments, if not rated, must be of comparable quality in the opinion of the Investment Advisor. In addition, MUS reserves the right to
invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the Investment Advisor, market conditions warrant.
Strategic Transactions and Other Management Techniques
MUS may use a variety of other investment management techniques and instruments. MUS may purchase and sell futures contracts, enter into various interest rate
transactions and may purchase and sell exchange-listed and over-the-counter put and call options on securities, financial indices and futures contracts (collectively,
Strategic Transactions). These Strategic Transactions may be used for duration management and other risk management to attempt to protect against possible changes in the market value of MUSs portfolio resulting from trends in the
debt securities markets and changes in interest rates, to protect MUSs unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a position in the securities
markets as a temporary substitute for purchasing particular securities and to enhance income or gain. There is no particular strategy that requires use of one technique rather than another as the decision to use any particular strategy or instrument
is a function of market conditions and the composition of the portfolio. The Strategic Transactions are described below. The ability of MUS to use them successfully will depend on the Investment Advisors ability to predict pertinent market
movements as well as sufficient correlation among the instruments, which cannot be assured. Inasmuch as any obligations of MUS that arise from the use of Strategic Transactions
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will be covered by segregated liquid high grade assets or offsetting transactions, MUS and the Investment Advisor believes such obligations do not constitute senior securities and, accordingly,
will not treat them as being subject to its borrowing restrictions. Certain provisions of the Code may restrict or affect the ability of MUS to engage in Strategic Transactions. In addition, the use of certain Strategic Transactions may give rise to
taxable income and have certain other consequences.
Interest Rate Transactions. MUS may enter into interest rate swaps and the purchase or sale of
interest rate caps and floors. MUS expects to enter into these transactions 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
price of securities MUS anticipates purchasing at a later date. MUS 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. MUS may not sell interest
rate caps or floors that it does not own. Interest rate swaps involve the exchange by MUS 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.
MUS may enter into interest rate swaps, caps and floors on either an asset-based or liability-based basis, and
will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with MUS receiving or paying, as the case may be, only the net amount of the two payments on the payment dates. MUS will accrue the net amount
of the excess, if any, of MUSs obligations over its entitlements with respect to each interest rate swap on a daily basis and will segregate 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. If there is a default by the other party to such a transaction, MUS 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.
Credit Default Swap Agreements. MUS may enter into credit default swap
agreements for hedging purposes or to seek to increase its return. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by MUS. The protection buyer in a credit default
contract may be obligated to pay the protection seller an upfront or a periodic stream of payments over the term of the contract, provided that no credit event on a reference obligation has occurred. If a credit event occurs, the seller
generally must pay the buyer the par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the
related net cash amount (the difference between the market value of the reference obligation and its par value), if the swap is cash settled. MUS may be either the buyer or seller in the transaction. If MUS is a buyer and no credit event occurs, MUS
may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of
the reference entity whose value may have significantly decreased. As a seller, MUS generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six (6) months and three years,
provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may
have significantly decreased. As the seller, MUS would effectively add leverage to its portfolio because, in addition to its total net assets, MUS would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if MUS had invested in the reference obligation directly since, in addition to general market risks,
credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. MUS expects to enter into credit default swap agreements only with counterparties who are rated investment grade quality by at least one nationally recognized
statistical rating organization at the time of entering into such transaction or whose creditworthiness is believed by the Investment Advisor to be equivalent to such rating. A buyer generally also will lose its investment and recover nothing should
no credit event occur and the
119
swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously
received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar instrument is exposed to many of the same risks of leverage since, if a credit event
occurs, the seller may be required to pay the buyer the full notional value of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations. MUSs obligations under a credit default swap agreement will be
accrued daily (offset against any amounts owing to MUS). MUS will at all times segregate with its custodian in connection with each such transaction liquid securities or cash with a value at least equal to MUSs exposure (any accrued but unpaid
net amounts owed by MUS to any counterparty), on a marked-to-market basis (as calculated pursuant to requirements of the SEC). Such segregation will ensure that MUS has
assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of MUSs portfolio. Such segregation will not limit MUSs exposure to loss.
Futures Contracts and Options on Futures Contracts. MUS 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. MUS will ordinarily engage in such transactions only for bona fide
hedging, risk management (including duration management) and other portfolio management purposes. However, MUS is also permitted to enter into such transactions for non-hedging purposes to enhance income or
gain, in accordance with the rules and regulations of the CFTC, which currently provide that no such transaction may be entered into if at such time more than 5% of MUSs net assets would be posted as initial margin and premiums with respect to
such non-hedging transactions.
Calls on Securities Indices and Futures Contracts. MUS may sell or purchase
call options (calls) on Municipal Bonds and indices based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the-counter markets. A call 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 MUS must be covered as long as the call is outstanding (i.e., MUS must own the securities or futures contract subject to the call or other securities acceptable
for applicable escrow requirements). A call sold by MUS exposes MUS 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 MUS
to hold a security of futures contract which it might otherwise have sold. The purchase of a call gives MUS the right to buy a security, futures contract or index at a fixed price. Calls on futures on Municipal Bonds must also be covered by
deliverable securities or the futures contract or by liquid high grade debt securities segregated to satisfy MUSs obligations pursuant to such instruments.
MUS is authorized to write (i.e., sell) covered call options with respect to Municipal Bonds it owns, thereby giving the holder of the option the right
to buy the underlying security covered by the option from MUS at the stated exercise price until the option expires. MUS writes only covered call options, which means that so long as MUS is obligated as the writer of a call option, it will own the
underlying securities subject to the option. MUS may not write covered call options on underlying securities in an amount exceeding 15% of the market value of its total assets.
Puts on Securities, Indices and Futures Contracts. MUS may purchase put options (puts) that relate to Municipal Bonds (whether or not it
holds such securities in its portfolio), indices or futures contracts. MUS may also sell puts on Municipal Bonds, indices or futures contracts on such securities if MUSs 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. MUS may not purchase options on securities if, as a result of such purchase, the aggregate cost of all outstanding options on securities held by
MUS would exceed 5% of the market value of MUSs total assets.
Restrictions on OTC Options. MUS will engage in transactions in OTC options
only with banks or dealers that have capital of at least $50 million or whose obligations are guaranteed by an entity having capital of at least $50 million. Certain OTC options and assets used to cover OTC options written by MUS may be
considered to be illiquid. The illiquidity of such options or assets may prevent a successful sale of such options or assets, result in a delay of sale, or reduce the amount of proceeds that might otherwise be realized.
120
Municipal Market Data Rate Locks. MUS may purchase and sell Municipal Market Data Rate Locks (MMD
Rate Locks). An MMD Rate Lock permits MUS 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. MUS 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 MUS 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 MUS 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 MUS 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, MUS 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 MUS. MUS may 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.
Restricted and Illiquid Securities
Certain of MUSs investments may be illiquid. Illiquid securities are subject to legal or contractual restrictions on disposition or lack of 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. MUS may invest without limit in illiquid investments.
Repurchase Agreements
As temporary investments, MUS 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 MUSs holding period. Repurchase agreements are considered to be loans collateralized by
the underlying security that is the subject of the repurchase contract. MUS may only enter into repurchase agreements with registered securities dealers or domestic banks that, in the opinion of the Investment Advisor, present minimal credit risk.
The risk to MUS 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 MUS 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 MUS may be delayed
or limited. The Investment 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 Investment 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.
Reverse Repurchase Agreements
MUS may enter into reverse repurchase agreements with respect to its portfolio investments subject to the investment restrictions set forth herein. Reverse
repurchase agreements involve the sale of securities held by MUS with an agreement by MUS to repurchase the securities at an agreed upon price, date and interest payment. At the time MUS enters into a reverse repurchase agreement, it may establish
and maintain a segregated account with the custodian containing liquid instruments having a value not less than the repurchase price (including accrued interest). If MUS establishes and maintains such a segregated account, a reverse repurchase
agreement will not be
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considered a borrowing by MUS; however, under certain circumstances in which MUS does not establish and maintain such a segregated account, such reverse repurchase agreement will be considered a
borrowing for the purpose of MUSs limitation on borrowings. The use by MUS 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 MUS 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 MUS 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 MUSs obligation to repurchase the securities, and MUSs use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision. Also, MUS 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.
Borrowings
MUS is authorized to borrow money in amounts
of up to 5% of the value of its total assets at the time of such borrowings; provided, however, that MUS is authorized to borrow moneys in amounts of up to 33 1/3% of the value of its total assets at the time of such borrowings to finance the
repurchase of its own common stock pursuant to tender offers or otherwise to redeem or repurchase shares of preferred stock. Borrowings by MUS (commonly known, as with the issuance of preferred stock, as leveraging) create an opportunity
for greater total return since, for example, MUS will not be required to sell portfolio securities to repurchase or redeem shares but, at the same time, increase exposure to capital risk. In addition, borrowed funds are subject to interest costs
that may offset or exceed the return earned on the borrowed funds.
Lending of Securities
See The Acquiring Funds InvestmentsLending of Securities for a discussion of the securities lending arrangements applicable to MUS.
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INFORMATION ABOUT THE COMMON SHARES OF THE FUNDS
General
Common shareholders of
each Fund are entitled to share pro rata in dividends declared by such Funds Board as payable to holders of the Funds common shares and in the net assets of the Fund available for distribution to holders of the common shares. Common
shareholders do not have preemptive or conversion rights and each Funds common shares are not redeemable. Voting rights are identical for the common shareholders of each Fund. Common shareholders of each Fund are entitled to one vote for each
Share held by them and do not have any preemptive or preferential right to purchase or subscribe to any Shares of such Fund. Each Funds common shares do not have cumulative voting rights, which means that the holders of more than 50% of a
Funds common shares voting for the election of Board Members can elect all of the Board Members standing for election by such holders, and, in such event, the holders of the Funds remaining common shares will not be able to elect any
Board Members. The outstanding BAF, BBK, MUH, MUS and Acquiring Fund common shares are fully paid and non-assessable, except that the Board of each Fund has the power to cause common shareholders to pay
certain expenses of the applicable Fund by setting off charges due from common shareholders from declared but unpaid dividends or distributions owed the common shareholders and/or by reducing the number of common shares owned by each respective
common shareholder. Whenever preferred shares, including VMTP Shares, are outstanding, a Fund may not declare a dividend or distribution to common shareholders (other than a distribution in common shares of the Fund) or purchase its common shares
unless all accumulated dividends on preferred shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to preferred shares at the time of declaration of such dividend or distribution or at the time of such purchase
would be at least 200% after giving effect to the dividend or distribution or purchase price.
Purchase and Sale of Common
Shares
Purchase and sale procedures for the common shares of each of the Funds are identical. Each Fund has its common shares listed on the NYSE.
Investors typically purchase and sell common shares of the Funds through a registered broker-dealer on the NYSE, thereby incurring a brokerage commission set by the broker-dealer. Alternatively, investors may purchase or sell common shares of each
of the Funds through privately negotiated transactions with existing common shareholders. Set forth below is information about each Funds common shares as of October 16, 2020.
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|
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Fund
|
|
Title of Class
|
|
|
Amount
Authorized
|
|
|
Amount
Held by
Fund for its
Own
Account
|
|
|
Amount
Outstanding
Exclusive of
Amount
Shown in
Previous
Column
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BAF
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|
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Common Shares
|
|
|
|
[
|
●]
|
|
|
[
|
●]
|
|
|
8,749,418
|
|
BBK
|
|
|
Common Shares
|
|
|
|
[
|
●]
|
|
|
[
|
●]
|
|
|
10,522,957
|
|
MUH
|
|
|
Common Shares
|
|
|
|
[
|
●]
|
|
|
[
|
●]
|
|
|
11,336,282
|
|
MUS
|
|
|
Common Shares
|
|
|
|
[
|
●]
|
|
|
[
|
●]
|
|
|
13,018,276
|
|
Acquiring Fund (MHD)
|
|
|
Common Shares
|
|
|
|
[
|
●]
|
|
|
[
|
●]
|
|
|
14,209,722
|
|
Common Share Price Data
The following tables set forth the high and low market prices for common shares of each Fund on the NYSE for each full quarterly period within each Funds
two most recent fiscal years and each full quarter since the beginning of each Funds current fiscal year, along with the NAV and discount or premium to NAV for each quotation.
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BAF
|
|
Market Price
|
|
|
NAV
|
|
|
Premium/(Discount) to NAV
|
|
Period Ended
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
8/31/2020
|
|
$
|
14.98
|
|
|
$
|
13.59
|
|
|
$
|
15.38
|
|
|
$
|
15.05
|
|
|
|
(2.6
|
)%
|
|
|
(9.7
|
)%
|
5/31/2020
|
|
$
|
14.82
|
|
|
$
|
10.84
|
|
|
$
|
15.88
|
|
|
$
|
14.17
|
|
|
|
(6.7
|
)%
|
|
|
(23.5
|
)%
|
2/29/2020
|
|
$
|
15.36
|
|
|
$
|
14.14
|
|
|
$
|
15.93
|
|
|
$
|
15.40
|
|
|
|
(3.6
|
)%
|
|
|
(8.2
|
)%
|
11/30/2019
|
|
$
|
14.53
|
|
|
$
|
12.88
|
|
|
$
|
15.57
|
|
|
$
|
15.46
|
|
|
|
(6.7
|
)%
|
|
|
(16.7
|
)%
|
8/31/2019
|
|
$
|
14.70
|
|
|
$
|
14.04
|
|
|
$
|
15.28
|
|
|
$
|
15.34
|
|
|
|
(3.8
|
)%
|
|
|
(8.5
|
)%
|
5/31/2019
|
|
$
|
14.75
|
|
|
$
|
13.53
|
|
|
$
|
14.98
|
|
|
$
|
14.93
|
|
|
|
(1.5
|
)%
|
|
|
(9.4
|
)%
|
2/28/2019
|
|
$
|
13.63
|
|
|
$
|
12.53
|
|
|
$
|
14.75
|
|
|
$
|
14.65
|
|
|
|
(7.6
|
)%
|
|
|
(14.5
|
)%
|
11/30/2018
|
|
$
|
13.57
|
|
|
$
|
12.48
|
|
|
$
|
14.86
|
|
|
$
|
14.46
|
|
|
|
(8.7
|
)%
|
|
|
(13.7
|
)%
|
|
|
|
|
BBK
|
|
Market Price
|
|
|
NAV
|
|
|
Premium/(Discount) to NAV
|
|
Period Ended
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
8/31/2020
|
|
$
|
16.30
|
|
|
$
|
14.70
|
|
|
$
|
16.74
|
|
|
$
|
15.85
|
|
|
|
(2.6
|
)%
|
|
|
(7.3
|
)%
|
5/31/2020
|
|
$
|
16.76
|
|
|
$
|
11.61
|
|
|
$
|
17.14
|
|
|
$
|
15.16
|
|
|
|
(2.2
|
)%
|
|
|
(23.4
|
)%
|
2/29/2020
|
|
$
|
16.30
|
|
|
$
|
15.31
|
|
|
$
|
15.90
|
|
|
$
|
15.37
|
|
|
|
2.5
|
%
|
|
|
(0.4
|
)%
|
11/30/2019
|
|
$
|
15.98
|
|
|
$
|
13.96
|
|
|
$
|
15.67
|
|
|
$
|
15.46
|
|
|
|
2.0
|
%
|
|
|
(9.7
|
)%
|
8/31/2019
|
|
$
|
15.95
|
|
|
$
|
14.52
|
|
|
$
|
15.68
|
|
|
$
|
15.26
|
|
|
|
1.7
|
%
|
|
|
(4.9
|
)%
|
5/31/2019
|
|
$
|
14.88
|
|
|
$
|
13.97
|
|
|
$
|
14.93
|
|
|
$
|
14.98
|
|
|
|
(0.3
|
)%
|
|
|
(6.7
|
)%
|
2/28/2019
|
|
$
|
14.32
|
|
|
$
|
13.30
|
|
|
$
|
14.75
|
|
|
$
|
14.66
|
|
|
|
(2.9
|
)%
|
|
|
(9.3
|
)%
|
11/30/2018
|
|
$
|
14.36
|
|
|
$
|
13.11
|
|
|
$
|
14.81
|
|
|
$
|
14.48
|
|
|
|
(3.0
|
)%
|
|
|
(9.4
|
)%
|
|
|
|
|
MUH
|
|
Market Price
|
|
|
NAV
|
|
|
Premium/(Discount) to NAV
|
|
Period Ended
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
7/31/2020
|
|
$
|
15.19
|
|
|
$
|
13.33
|
|
|
$
|
15.86
|
|
|
$
|
14.68
|
|
|
|
(4.2
|
)%
|
|
|
(9.2
|
)%
|
4/30/2020
|
|
$
|
16.45
|
|
|
$
|
10.89
|
|
|
$
|
16.24
|
|
|
$
|
14.43
|
|
|
|
1.3
|
%
|
|
|
(24.5
|
)%
|
1/31/2020
|
|
$
|
15.60
|
|
|
$
|
14.67
|
|
|
$
|
15.98
|
|
|
$
|
15.74
|
|
|
|
(2.4
|
)%
|
|
|
(6.8
|
)%
|
10/31/2019
|
|
$
|
15.61
|
|
|
$
|
12.98
|
|
|
$
|
15.95
|
|
|
$
|
15.84
|
|
|
|
(2.2
|
)%
|
|
|
(18.1
|
)%
|
7/31/2019
|
|
$
|
15.56
|
|
|
$
|
14.46
|
|
|
$
|
15.67
|
|
|
$
|
15.47
|
|
|
|
(0.7
|
)%
|
|
|
(6.5
|
)%
|
4/30/2019
|
|
$
|
15.20
|
|
|
$
|
13.67
|
|
|
$
|
15.27
|
|
|
$
|
14.86
|
|
|
|
(0.5
|
)%
|
|
|
(8.0
|
)%
|
1/31/2019
|
|
$
|
13.68
|
|
|
$
|
12.67
|
|
|
$
|
14.89
|
|
|
$
|
14.64
|
|
|
|
(8.1
|
)%
|
|
|
(13.5
|
)%
|
10/31/2018
|
|
$
|
14.36
|
|
|
$
|
12.67
|
|
|
$
|
15.15
|
|
|
$
|
14.70
|
|
|
|
(5.2
|
)%
|
|
|
(13.8
|
)%
|
7/31/2018
|
|
$
|
13.94
|
|
|
$
|
13.63
|
|
|
$
|
15.24
|
|
|
$
|
15.11
|
|
|
|
(8.6
|
)%
|
|
|
(9.8
|
)%
|
|
|
|
|
MUS
|
|
Market Price
|
|
|
NAV
|
|
|
Premium/(Discount) to NAV
|
|
Period Ended
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
7/31/2020
|
|
$
|
13.05
|
|
|
$
|
11.49
|
|
|
$
|
14.08
|
|
|
$
|
12.81
|
|
|
|
(7.3
|
)%
|
|
|
(10.3
|
)%
|
4/30/2020
|
|
$
|
13.27
|
|
|
$
|
9.55
|
|
|
$
|
14.37
|
|
|
$
|
12.80
|
|
|
|
(7.7
|
)%
|
|
|
(25.4
|
)%
|
1/31/2020
|
|
$
|
13.02
|
|
|
$
|
12.42
|
|
|
$
|
14.19
|
|
|
$
|
13.73
|
|
|
|
(8.3
|
)%
|
|
|
(9.6
|
)%
|
10/31/2019
|
|
$
|
12.86
|
|
|
$
|
11.28
|
|
|
$
|
13.94
|
|
|
$
|
13.91
|
|
|
|
(7.8
|
)%
|
|
|
(18.9
|
)%
|
7/31/2019
|
|
$
|
12.56
|
|
|
$
|
12.02
|
|
|
$
|
13.81
|
|
|
$
|
13.53
|
|
|
|
(9.1
|
)%
|
|
|
(11.2
|
)%
|
4/30/2019
|
|
$
|
12.92
|
|
|
$
|
11.80
|
|
|
$
|
13.45
|
|
|
$
|
13.24
|
|
|
|
(3.9
|
)%
|
|
|
(10.9
|
)%
|
1/31/2019
|
|
$
|
12.03
|
|
|
$
|
11.12
|
|
|
$
|
13.18
|
|
|
$
|
13.13
|
|
|
|
(8.7
|
)%
|
|
|
(15.3
|
)%
|
10/31/2018
|
|
$
|
12.21
|
|
|
$
|
11.14
|
|
|
$
|
13.38
|
|
|
$
|
12.96
|
|
|
|
(8.8
|
)%
|
|
|
(14.0
|
)%
|
7/31/2018
|
|
$
|
12.53
|
|
|
$
|
11.95
|
|
|
$
|
13.47
|
|
|
$
|
13.46
|
|
|
|
(7.0
|
)%
|
|
|
(11.2
|
)%
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquiring
Fund (MHD)
|
|
Market Price
|
|
|
NAV
|
|
|
Premium/(Discount) to NAV
|
|
Period Ended
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
7/31/2020
|
|
$
|
15.85
|
|
|
$
|
13.93
|
|
|
$
|
17.01
|
|
|
$
|
15.31
|
|
|
|
(6.8
|
)%
|
|
|
(9.0
|
)%
|
4/30/2020
|
|
$
|
17.65
|
|
|
$
|
12.06
|
|
|
$
|
17.39
|
|
|
$
|
13.89
|
|
|
|
1.5
|
%
|
|
|
(13.2
|
)%
|
1/31/2020
|
|
$
|
17.50
|
|
|
$
|
16.22
|
|
|
$
|
16.93
|
|
|
$
|
16.91
|
|
|
|
3.4
|
%
|
|
|
(4.1
|
)%
|
10/31/2019
|
|
$
|
17.13
|
|
|
$
|
14.30
|
|
|
$
|
16.96
|
|
|
$
|
17.01
|
|
|
|
1.0
|
%
|
|
|
(15.9
|
)%
|
7/31/2019
|
|
$
|
17.70
|
|
|
$
|
15.95
|
|
|
$
|
16.80
|
|
|
$
|
16.60
|
|
|
|
5.4
|
%
|
|
|
(3.9
|
)%
|
4/30/2019
|
|
$
|
16.80
|
|
|
$
|
15.28
|
|
|
$
|
16.50
|
|
|
$
|
16.16
|
|
|
|
1.8
|
%
|
|
|
(5.4
|
)%
|
1/31/2019
|
|
$
|
16.06
|
|
|
$
|
13.90
|
|
|
$
|
16.17
|
|
|
$
|
15.96
|
|
|
|
(0.7
|
)%
|
|
|
(12.9
|
)%
|
10/31/2018
|
|
$
|
15.92
|
|
|
$
|
14.03
|
|
|
$
|
16.50
|
|
|
$
|
16.01
|
|
|
|
(3.5
|
)%
|
|
|
(12.3
|
)%
|
7/31/2018
|
|
$
|
16.15
|
|
|
$
|
14.98
|
|
|
$
|
16.55
|
|
|
$
|
16.42
|
|
|
|
(2.4
|
)%
|
|
|
(8.8
|
)%
|
[For the periods shown in the tables above, the common shares of each Fund other than BAF and MUS have traded at both a
premium and a discount.]
The table below sets forth the market price, NAV, and the premium/discount to NAV of each Fund as of August 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund
|
|
Market
Price
|
|
|
NAV
|
|
|
Premium/
(Discount)
to NAV
|
|
BAF
|
|
$
|
14.39
|
|
|
$
|
15.26
|
|
|
|
(5.70
|
)%
|
BBK
|
|
$
|
15.39
|
|
|
$
|
16.42
|
|
|
|
(6.27
|
)%
|
MUH
|
|
$
|
14.81
|
|
|
$
|
15.65
|
|
|
|
(5.37
|
)%
|
MUS
|
|
$
|
12.71
|
|
|
$
|
13.90
|
|
|
|
(8.56
|
)%
|
Acquiring Fund (MHD)
|
|
$
|
15.53
|
|
|
$
|
16.80
|
|
|
|
(7.56
|
)%
|
To the extent BAFs, BBKs, MUHs or MUSs common shares are trading at a wider discount (or a narrower
premium) than the Acquiring Fund at the time of its Reorganization, BAFs, BBKs, MUHs or MUSs common shareholders would have the potential for an economic benefit by the narrowing of the discount or widening of the premium. To
the extent BAFs, BBKs, MUHs or MUSs common shares are trading at a narrower discount (or wider premium) than the Acquiring Fund at the time of its Reorganization, BAFs, BBKs, MUHs or MUSs common
shareholders may be negatively impacted if its Reorganization is consummated. Acquiring Fund common shareholders would only benefit from a premium/discount perspective to the extent the post-Reorganization discount (or premium) of the Acquiring Fund
common shares improves.
There can be no assurance that, after the Reorganizations, common shares of the Combined Fund will trade at, above or below NAV.
Upon consummation of the Reorganizations, the Combined Fund common shares may trade at a price that is less than the current market price of Acquiring Fund common shares. In the Reorganizations, common shareholders of BAF, BBK, MUH and MUS will
receive Acquiring Fund common shares based on the relative NAVs (not the market values) of the respective Funds common shares. The market value of the common shares of the Combined Fund may be less than the market value of the common shares of
a Fund prior to the Reorganizations.
Common Share Dividend History
During the two most recent fiscal years, each Fund has made monthly cash distributions to holders of the Funds common shares and the aggregate amount of
distributions declared during this period by the Acquiring Fund, BAF, BBK, MUH and MUS was $[●], $[●], $[●], $[●] and $[●] per common share, respectively. Whenever preferred
125
shares, including VMTP Shares, are outstanding, a Fund may not declare a dividend or distribution to common shareholders (other than a distribution in common shares of the Fund) or purchase its
common shares unless all accumulated dividends on preferred shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to preferred shares at the time of declaration of such dividend or distribution or at the time of
such purchase would be at least 200% after giving effect to the dividend or distribution or purchase price.
Record Holders of
Common Shares
As of [●], 2020, each Fund had the following number of common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title of Class
|
|
Number of
BAF
Record Holder
|
|
|
Number of
BBK
Record Holder
|
|
|
Number of
MUH
Record Holder
|
|
|
Number of
MUS
Record Holder
|
|
|
Number of
MHD
Record Holder
|
|
Common Shares
|
|
|
[
|
●]
|
|
|
[
|
●]
|
|
|
[
|
●]
|
|
|
[
|
●]
|
|
|
[
|
●]
|
126
EXPENSE TABLE FOR COMMON SHAREHOLDERS
The purpose of the comparative fee table below is to assist shareholders of each Fund in understanding the various costs and expenses of investing in common
shares of each Fund and Combined Fund. The information in the table reflects (i) the fees and expenses incurred by BAF and BBK during the 12-month period ended August 31, 2020 (audited) and the fees
and expenses incurred by MUH, MUS and the Acquiring Fund during the 12-month period ended August 31, 2020 (unaudited); (ii) the pro forma expenses of the Combined Fund for the 12-month period ended August 31, 2020 assuming only the Reorganization of BAF into the Acquiring Fund had taken place on September 1, 2019, which represents the combination of completed Reorganizations
presented in this Proxy Statement that would result in the highest Total Expense Ratio for the Combined Fund; and (iii) the pro forma expenses of the Combined Fund for the 12-month period ended
August 31, 2020, for the Combined Fund, assuming all of the Reorganizations had taken place on September 1, 2019, which represents, in the Investment Advisors view, the most likely combination of the Reorganizations and the
combination of completed Reorganizations that would result in the lowest Total Expense Ratio for the Combined Fund.
The level of expense savings (or
increases) will vary depending upon the combination of the Funds in the Reorganizations and the resulting size of the Combined Fund, and furthermore, there can be no assurance that future expenses will not increase or that any expense savings for
any Fund will be realized. Because each of the Reorganizations may occur whether or not the other Reorganization is approved, several combinations are possible, and the pro forma effects on operating expenses for all possible combinations are
not illustrated in the table below. The scenarios presented below, however, capture the high and low range of possible pro forma outcomes for the Reorganizations presented in this Proxy Statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BAF
|
|
|
BBK
|
|
|
MUH
|
|
|
MUS
|
|
|
Acquiring
Fund (MHD)
|
|
|
Combined
Fund (BAF
into MHD)
|
|
|
Combined
Fund (BAF,
BBK, MUH
and MUS into
MHD)
|
|
Shareholder Transaction Expenses
|
|
Maximum Sales Load (as a percentage of the offering price) imposed on purchases of common shares(1)
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Dividend Reinvestment Plan Fees(2)
|
|
|
$0.02 per
share for
open market
purchases of
common
shares
|
|
|
|
$0.02 per
share for
open market
purchases of
common
shares
|
|
|
|
$0.02 per
share for
open market
purchases of
common
shares
|
|
|
|
$0.02 per
share for
open market
purchases of
common
shares
|
|
|
|
$0.02 per
share for
open market
purchases of
common
shares
|
|
|
|
$0.02 per
share for
open market
purchases of
common
shares
|
|
|
|
$0.02 per
share for
open market
purchases of
common
shares
|
|
Annual Total Expenses (as a percentage of average net assets attributable to
common shares)
|
|
Investment Management Fees(3)(4)
|
|
|
0.94
|
%
|
|
|
1.08
|
%
|
|
|
0.88
|
%
|
|
|
0.91
|
%
|
|
|
0.86
|
%
|
|
|
0.89
|
%(5)
|
|
|
0.90
|
%(5)
|
Other Expenses
|
|
|
0.23
|
%
|
|
|
0.19
|
%
|
|
|
0.19
|
%
|
|
|
0.18
|
%
|
|
|
0.14
|
%
|
|
|
0.10
|
%
|
|
|
0.05
|
%
|
Interest Expense(6)
|
|
|
1.17
|
%
|
|
|
1.07
|
%
|
|
|
0.82
|
%
|
|
|
0.98
|
%
|
|
|
0.80
|
%
|
|
|
0.80
|
%
|
|
|
0.80
|
%
|
Total Annual Fund Operating
Expenses(6)
|
|
|
2.34
|
%
|
|
|
2.34
|
%
|
|
|
1.89
|
%
|
|
|
2.07
|
%
|
|
|
1.80
|
%
|
|
|
1.79
|
%
|
|
|
1.75
|
%
|
Fee Waivers and/or Expense Reimbursements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)%(5)
|
|
|
(0.01
|
)%(5)
|
Total Annual Fund Operating Expenses after Fee Waivers and/or Expense
Reimbursements
|
|
|
2.34
|
%
|
|
|
2.34
|
%
|
|
|
1.89
|
%
|
|
|
2.07
|
%
|
|
|
1.80
|
%
|
|
|
1.78
|
%
|
|
|
1.74
|
%
|
127
(1)
|
No sales load will be charged in connection with the issuance of Acquiring Fund common shares as part of the
Reorganizations. Common shares are not available for purchase from the Funds but may be purchased on the NYSE through a broker-dealer subject to individually negotiated commission rates. Common shares purchased in the secondary market may be subject
to brokerage commissions or other charges.
|
(2)
|
The Reinvestment Plan Agents fees for the handling of the reinvestment of dividends will be paid by the
Fund. [However, you will pay a [$0.02 per share fee incurred in connection with open-market purchases, which will be deducted from the value of the dividend.] Participants in BBK and BAF that request a sale of shares are subject to a $2.50 sales fee
and a $0.15 per share sold brokerage commission fee. Participants in MHD, MUH and MUS that request a sale of shares are subject to a $0.02 per share sold brokerage commission. Per share fees include any applicable brokerage commissions the
Reinvestment Plan Agent is required to pay. See Automatic Dividend Reinvestment Plan for additional information.
|
(3)
|
BAF currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate
of 0.55% of its average weekly managed assets. BBK currently pays the Investment Advisor a monthly fee at an annual contractual investment management fee rate of 0.65% of its average weekly managed assets. For purposes of calculating these fees,
managed assets mean the total assets of the relevant Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of its accrued liabilities (other than money borrowed for investment purposes,
including liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares). Each of MUH, MUS and the Acquiring Fund currently pays the Investment Advisor a monthly fee at an annual contractual investment
management fee rate of 0.55% of its average daily net assets. For purposes of calculating these fees, net assets mean the Acquiring Funds total assets minus the sum of the Acquiring Funds accrued liabilities (which does not
include liabilities represented by TOB leverage and the liquidation preference of the Funds VMTP Shares). If the Reorganizations are consummated, the annual contractual investment management fee rate of the Acquiring Fund will be the annual
contractual investment management fee rate of the Combined Fund, which will be 0.55% of the average daily net assets of the Combined Fund. The annual contractual investment management fee rate of the Combined Fund represents a 10 basis point
reduction in the annual contractual investment management fee rate for BBK and no change in the annual contractual investment management fee rates for BAF, MUH and MUS.
|
(4)
|
Each Fund and the Investment Advisor have entered into a fee waiver agreement (the Fee Waiver
Agreement), pursuant to which the Investment Advisor has contractually agreed to waive the management fee with respect to any portion of each Funds assets attributable to investments in any equity and fixed-income mutual funds and
exchange-traded funds managed by the Investment Advisor or its affiliates that have a contractual fee, through June 30, 2022. In addition, pursuant to the Fee Waiver Agreement, the Investment Advisor has contractually agreed to waive its
management fees by the amount of investment advisory fees each Fund pays to the Investment Advisor indirectly through its investment in money market funds managed by the Investment Advisor or its affiliates, through June 30, 2022. The Fee
Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Funds (upon the vote of a majority of the Independent Board Members or a majority of the outstanding voting securities of each Fund), upon 90 days
written notice by each Fund to the Investment Advisor.
|
(5)
|
If any of the Reorganizations are consummated, the Investment Advisor has contractually agreed to waive a
portion of its investment management fee equal to an annual rate of 0.01% of the average daily net assets (as defined above) of the Combined Fund through June 30, 2022. The Combined Fund Contractual Waiver may be terminated prior to
June 30, 2022 only by action of a majority of the Independent Board Members or by a vote of the Combined Funds outstanding voting securities.
|
(6)
|
Includes Reorganization-related expenses accrued during the 12-month
period ended August 31, 2020. Excluding Reorganization-related expenses, the Total Annual Fund Operating Expenses (excluding interest expense) for the Funds are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BAF
|
|
BBK
|
|
|
MUH
|
|
|
MUS
|
|
|
Acquiring Fund
(MHD)
|
|
|
Pro forma
Combined Fund
(BAF into MHD)
|
|
|
Pro forma Combined
Fund (BAF, BBK,
MUH and MUS
into MHD)
|
|
1.11%
|
|
|
1.22
|
%
|
|
|
1.02
|
%
|
|
|
1.05
|
%
|
|
|
0.98
|
%
|
|
|
0.98
|
%
|
|
|
0.94
|
%
|
(7)
|
The total expense table includes interest expense associated with the Funds investments in TOBs (also
known as inverse floaters). Although such interest expense is actually paid by special purpose vehicles in which the Funds invest, they are recorded on the Funds financial statements for accounting purposes. The total expense table
also includes, in interest expense, dividends associated with the VMTP Shares because the VMTP Shares are considered debt of the Funds for financial reporting purposes.
|
Each Fund uses leverage to seek to enhance its returns to common shareholders. This leverage generally takes two forms: the issuance of
preferred shares and investment in TOBs. Both forms of leverage benefit common shareholders if the cost of the leverage is lower than the returns earned by a Fund when it invests the proceeds from the leverage. In order to help you better understand
the costs associated with the Funds leverage strategy, the Total Annual Fund Operating Expenses (excluding interest expense) for the Funds are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BAF
|
|
BBK
|
|
|
MUH
|
|
|
MUS
|
|
|
Acquiring Fund
(MHD)
|
|
|
Pro forma
Combined Fund
(BAF into MHD)
|
|
|
Pro forma Combined
Fund (BAF, BBK,
MUH and MUS
into MHD)
|
|
1.12%
|
|
|
1.21
|
%
|
|
|
1.03
|
%
|
|
|
1.04
|
%
|
|
|
0.97
|
%
|
|
|
0.97
|
%
|
|
|
0.94
|
%
|
The following example is intended to help you compare the costs of investing in the common shares of the Combined Fund pro
forma if (i) only the BAF Reorganization is completed and (ii) all of the Reorganizations are completed with
128
the costs of investing in BAF, BBK, MUH, MUS and the Acquiring Fund without the Reorganizations. An investor in common shares would pay the following expenses on a $1,000 investment, assuming
(1) the Total Annual Fund Operating Expenses for each Fund set forth in the total expenses table above and (2) a 5% annual return throughout the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
BAF
|
|
$
|
24
|
|
|
$
|
73
|
|
|
$
|
125
|
|
|
$
|
268
|
|
BBK
|
|
$
|
24
|
|
|
$
|
73
|
|
|
$
|
125
|
|
|
$
|
268
|
|
MUH
|
|
$
|
19
|
|
|
$
|
59
|
|
|
$
|
102
|
|
|
$
|
221
|
|
MUS
|
|
$
|
21
|
|
|
$
|
65
|
|
|
$
|
111
|
|
|
$
|
240
|
|
Acquiring Fund (MHD)
|
|
$
|
18
|
|
|
$
|
57
|
|
|
$
|
97
|
|
|
$
|
212
|
|
Pro forma Combined Fund (BAF into MHD)
|
|
$
|
18
|
|
|
$
|
56
|
|
|
$
|
97
|
|
|
$
|
210
|
|
Pro forma Combined Fund (BAF, BBK, MUH and MUS into MHD)
|
|
$
|
18
|
|
|
$
|
55
|
|
|
$
|
95
|
|
|
$
|
206
|
|
The examples set forth above assume common shares of each Fund were owned as of the completion of the Reorganizations and the
reinvestment of all dividends and distributions and uses a 5% annual rate of return as mandated by SEC regulations. The examples should not be considered a representation of past or future expenses or annual rates of return. Actual expenses or
annual rates of return may be more or less than those assumed for purposes of the examples.
Common shareholders of the Acquiring Fund, BAF, BBK, MUH and
MUS will indirectly bear all or a portion of the costs of the Reorganizations. Because of the expected expense savings and other anticipated benefits for each of BAF, BBK and MUH, the Investment Advisor recommended and the Board of each such Fund
has approved that its respective Fund be responsible for its own reorganization expenses. The expenses of the applicable Reorganizations are estimated to be approximately $223,500 for BAF, $242,000 for BBK and $229,900 for MUH. For MUS and the
Acquiring Fund, the expenses of the applicable Reorganization(s) are estimated to be approximately $228,000 and $253,400, of which the Investment Advisor will bear approximately $63,000 and $124,000, respectively. The actual costs associated with
the Reorganizations may be more or less than the estimated costs discussed herein.
VMTP Holders are not expected to bear any costs of the
Reorganizations.
129
CAPITALIZATION TABLE
The Board of each Fund may authorize separate classes of shares together with such designation of preferences, rights, voting powers, restrictions,
limitations, qualifications or terms as may be determined from time to time by the Board of such Fund. The tables below set forth (i) the capitalization of BAF and MHD as of August 31, 2020 and the pro forma capitalization of the
Combined Fund assuming only the BAF Reorganization was consummated as of August 31, 2020, which represents the combination of the completed Reorganizations presented in this Proxy Statement that would result in the lowest level of
capitalization of the Combined Fund; and (ii) the capitalization of the Funds as of August 31, 2020 and the pro forma capitalization of the Combined Fund assuming all of the Reorganizations were consummated as of August 31,
2020, which represents, in the Investment Advisors view, the most likely combination of the Reorganizations and the combination of the completed Reorganizations that would result in the highest level of capitalization of the Combined Fund.
Capitalization of BAF and MHD as of August 31, 2020 and pro forma capitalization of the Combined Fund
assuming only the BAF Reorganization is consummated (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Fund
(BAF)
|
|
|
Acquiring Fund
(MHD)
|
|
|
Adjustments
|
|
|
Pro forma
Combined
Fund (BAF
into MHD)
|
|
Net Assets Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares(2)
|
|
$
|
133,526,944
|
|
|
$
|
238,742,015
|
|
|
$
|
(797,491)
|
|
|
$
|
371,471,468
|
|
VMTP Shares
|
|
$
|
42,200,000
|
|
|
$
|
83,700,000
|
|
|
|
|
|
|
$
|
125,900,000
|
|
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
8,749,418
|
|
|
|
14,209,722
|
|
|
|
(837,074
|
)
|
|
|
22,122,066
|
|
VMTP Shares
|
|
|
422
|
|
|
|
837
|
|
|
|
|
|
|
|
1,259
|
(4)
|
NAV per Common Share
|
|
$
|
15.26
|
|
|
$
|
16.80
|
|
|
|
|
|
|
$
|
16.79
|
|
Liquidation Preference per VMTP Share
|
|
$
|
100,000.00
|
|
|
$
|
100,000.00
|
|
|
|
|
|
|
$
|
100,000.00
|
|
(1)
|
Based on the number of outstanding common shares as of August 31, 2020.
|
(2)
|
Reflects non-recurring aggregate estimated Reorganization expenses of
$352,900, of which $223,500 was attributable to BAF and $129,400 was attributable to the Acquiring Fund. The actual costs associated with the Reorganizations may be more or less than the estimated costs discussed herein. Reflects undistributed net
investment income (previously defined as UNII) of $444,591, of which $439,904 was attributable to BAF and $4,687 was attributable to the Acquiring Fund.
|
(3)
|
Reflects adjustments due to differences in per common share NAV.
|
(4)
|
Assumes no Target Fund VMTP Holders exercise their appraisal rights.
|
Capitalization of each Fund as of August 31, 2020 and pro forma capitalization of the Combined Fund assuming all
Reorganizations are consummated (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BAF
|
|
|
BBK
|
|
|
MUH
|
|
|
MUS
|
|
|
Acquiring Fund
(MHD)
|
|
|
Adjustments
|
|
|
Pro forma
Combined
Fund (BAF,
BBK, MUH
and MUS
into MHN)
|
|
Net Assets Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares(1)
|
|
$
|
133,526,944
|
|
|
$
|
172,839,136
|
|
|
$
|
177,415,211
|
|
|
$
|
181,008,386
|
|
|
$
|
238,742,015
|
|
|
$
|
(4,707,213)
|
(2)
|
|
$
|
898,824,479
|
|
VMTP Shares
|
|
$
|
42,200,000
|
|
|
$
|
79,900,000
|
|
|
$
|
55,000,000
|
|
|
$
|
87,000,000
|
|
|
$
|
83,700,000
|
|
|
|
|
|
|
$
|
347,800,000
|
|
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
8,749,418
|
|
|
|
10,522,957
|
|
|
|
11,336,282
|
|
|
|
13,018,276
|
|
|
|
14,209,722
|
|
|
|
(4,313,369
|
)
|
|
|
53,523,286
|
|
VMTP Shares
|
|
|
422
|
|
|
|
799
|
|
|
|
550
|
|
|
|
870
|
|
|
|
837
|
|
|
|
|
|
|
|
3,478
|
(4)
|
NAV per Common Share
|
|
$
|
15.26
|
|
|
$
|
16.42
|
|
|
$
|
15.65
|
|
|
$
|
13.90
|
|
|
$
|
16.80
|
|
|
|
|
|
|
$
|
16.79
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation Preference per VMTP Share
|
|
$
|
100,000.00
|
|
|
$
|
100,000.00
|
|
|
$
|
100,000.00
|
|
|
$
|
100,000.00
|
|
|
$
|
100,000.00
|
|
|
|
|
|
|
$
|
100,000
|
|
(1)
|
Based on the number of outstanding common shares as of August 31, 2020.
|
(2)
|
Reflects non-recurring aggregate estimated Reorganization expenses of
$989,800, of which $223,500 was attributable to BAF, $242,000 was attributable to BBK, $229,900 was attributable to MUH, $165,000 was attributable to MUS and $129,400 was attributable to the Acquiring Fund. The actual costs associated with the
Reorganizations may be more or less than the estimated costs discussed herein. Reflects UNII of $3,717,413, of which $439,904 was attributable to BAF, $1,200,925 was attributable to BBK, $1,081,190 was attributable to MUH, $990,707 was attributable
to MUS and $4,687 was attributable to the Acquiring Fund.
|
(3)
|
Reflects adjustments due to differences in per common share NAV.
|
(4)
|
Assumes no Target Fund VMTP Holders exercise their appraisal rights.
|
131
FINANCIAL HIGHLIGHTS
BlackRock Municipal Income Investment Quality Trust (BAF)
The Financial Highlights table is intended to help you understand BAFs financial performance for the periods shown. Certain information reflects the
financial results for a single common share of BAF. The total returns in the table represent the rate an investor would have earned or lost on an investment in BAF (assuming reinvestment of all dividends and/or distributions, if applicable). The
information shown has been audited by Deloitte & Touche LLP, BAFs independent registered public accounting firm. Financial statements for the fiscal year ended August 31, 2020 and the Report of the Independent Registered Public
Accounting Firm thereon appear in BAFs Annual Report for the fiscal year ended August 31, 2020, which is available upon request.
Please see next page for Financial Highlights Table
132
BAF Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
Six Months
Ended
02/29/20
(unaudited)
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net asset value, beginning of period
|
|
$
|
15.68
|
|
|
$
|
14.86
|
|
|
$
|
15.69
|
|
|
$
|
16.56
|
|
|
$
|
15.80
|
|
|
$
|
15.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(a)
|
|
|
0.32
|
|
|
|
0.65
|
|
|
|
0.74
|
|
|
|
0.79
|
|
|
|
0.83
|
|
|
|
0.83
|
|
Net realized and unrealized gain (loss)
|
|
|
0.30
|
|
|
|
0.86
|
|
|
|
(0.77
|
)
|
|
|
(0.84
|
)
|
|
|
0.75
|
|
|
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
0.62
|
|
|
|
1.51
|
|
|
|
(0.03
|
)
|
|
|
(0.05
|
)
|
|
|
1.58
|
|
|
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Shareholders from net investment income(b)
|
|
|
(0.31
|
)
|
|
|
(0.69
|
)
|
|
|
(0.80
|
)
|
|
|
(0.82
|
)
|
|
|
(0.82
|
)
|
|
|
(0.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
15.99
|
|
|
$
|
15.68
|
|
|
$
|
14.86
|
|
|
$
|
15.69
|
|
|
$
|
16.56
|
|
|
$
|
15.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of period
|
|
$
|
14.36
|
|
|
$
|
14.53
|
|
|
$
|
13.54
|
|
|
$
|
15.11
|
|
|
$
|
15.79
|
|
|
$
|
13.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Applicable to Common Shareholders(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
4.17
|
%(d)
|
|
|
10.96
|
%
|
|
|
0.18
|
%
|
|
|
0.14
|
%
|
|
|
10.57
|
%
|
|
|
4.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
0.95
|
%(d)
|
|
|
12.85
|
%
|
|
|
(5.22
|
)%
|
|
|
1.15
|
%
|
|
|
19.92
|
%
|
|
|
3.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2.50
|
%(e)
|
|
|
2.82
|
%
|
|
|
2.47
|
%
|
|
|
2.06
|
%
|
|
|
1.61
|
%
|
|
|
1.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and paid indirectly
|
|
|
2.50
|
%(e)
|
|
|
2.82
|
%
|
|
|
2.47
|
%
|
|
|
2.06
|
%
|
|
|
1.61
|
%
|
|
|
1.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and paid indirectly and excluding interest expense, fees, and
amortization of offering costs(f)
|
|
|
1.10
|
%(e)
|
|
|
1.11
|
%
|
|
|
1.08
|
%
|
|
|
1.06
|
%
|
|
|
1.01
|
%
|
|
|
1.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income to Common Shareholders
|
|
|
4.19
|
%(e)
|
|
|
4.38
|
%
|
|
|
4.84
|
%
|
|
|
5.06
|
%
|
|
|
5.09
|
%
|
|
|
5.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of period (000)
|
|
$
|
139,866
|
|
|
$
|
137,226
|
|
|
$
|
130,022
|
|
|
$
|
137,264
|
|
|
$
|
144,927
|
|
|
$
|
138,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMTP Shares outstanding at $100,000 liquidation value, end of period (000)
|
|
$
|
42,200
|
|
|
$
|
42,200
|
|
|
$
|
42,200
|
|
|
$
|
42,200
|
|
|
$
|
42,200
|
|
|
$
|
42,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage per VMTP Shares at $100,000 liquidation value, end of period
|
|
$
|
431,436
|
|
|
$
|
425,179
|
|
|
$
|
408,109
|
|
|
$
|
425,270
|
|
|
$
|
443,429
|
|
|
$
|
427,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of period (000)
|
|
$
|
56,449
|
|
|
$
|
54,030
|
|
|
$
|
49,192
|
|
|
$
|
44,937
|
|
|
$
|
42,089
|
|
|
$
|
33,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
9
|
%
|
|
|
36
|
%
|
|
|
28
|
%
|
|
|
31
|
%
|
|
|
29
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Based on average common shares outstanding.
|
(b)
|
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
(c)
|
Total returns based on market price, which can be significantly greater or less than the net asset value, may
result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices.
|
(d)
|
Aggregate total return.
|
133
(f)
|
Interest expense, fees and amortization of offering costs related to TOBs Trusts and/or VMTP Shares.
|
134
BlackRock Municipal Bond Trust (BBK)
The Financial Highlights table is intended to help you understand BBKs financial performance for the periods shown. Certain information reflects the
financial results for a single Common Share of BBK. The total returns in the table represent the rate an investor would have earned or lost on an investment in BBK (assuming reinvestment of all dividends and/or distributions, if applicable). The
information shown has been audited by Deloitte & Touche LLP, BBKs independent registered public accounting firm. Financial statements for the fiscal year ended August 31, 2020 and the Report of the Independent Registered Public
Accounting Firm thereon appear in BBKs Annual Report for the fiscal year ended August 31, 2020, which is available upon request.
Please see next page for Financial Highlights Table
135
BBK Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
Six Months
Ended
02/29/20
(unaudited)
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net asset value, beginning of period
|
|
$
|
16.82
|
|
|
$
|
15.78
|
|
|
$
|
16.32
|
|
|
$
|
17.89
|
|
|
$
|
16.49
|
|
|
$
|
16.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(a)
|
|
|
0.36
|
|
|
|
0.65
|
|
|
|
0.70
|
|
|
|
0.74
|
|
|
|
0.89
|
|
|
|
0.90
|
|
Net realized and unrealized gain (loss)
|
|
|
0.38
|
|
|
|
1.15
|
|
|
|
(0.47
|
)
|
|
|
(1.09
|
)
|
|
|
1.42
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
0.74
|
|
|
|
1.80
|
|
|
|
0.23
|
|
|
|
(0.35
|
)
|
|
|
2.31
|
|
|
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Shareholders(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.33
|
)
|
|
|
(0.70
|
)
|
|
|
(0.77
|
)
|
|
|
(0.83
|
)
|
|
|
(0.90
|
)
|
|
|
(0.98
|
)
|
From net realized gain
|
|
|
|
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
(0.39
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to Common Shareholders
|
|
|
(0.33
|
)
|
|
|
(0.76
|
)
|
|
|
(0.77
|
)
|
|
|
(1.22
|
)
|
|
|
(0.91
|
)
|
|
|
(0.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
17.23
|
|
|
$
|
16.82
|
|
|
$
|
15.78
|
|
|
$
|
16.32
|
|
|
$
|
17.89
|
|
|
$
|
16.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of period
|
|
$
|
15.94
|
|
|
$
|
15.95
|
|
|
$
|
14.35
|
|
|
$
|
15.99
|
|
|
$
|
18.22
|
|
|
$
|
15.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Applicable to Common Shareholders(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
4.58
|
%(d)
|
|
|
12.35
|
%
|
|
|
1.87
|
%
|
|
|
(1.44
|
)%
|
|
|
14.53
|
%
|
|
|
5.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
2.02
|
%(d)
|
|
|
17.16
|
%
|
|
|
(5.45
|
)%
|
|
|
(5.18
|
)%
|
|
|
26.29
|
%
|
|
|
3.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2.48
|
%(e)
|
|
|
2.79
|
%
|
|
|
2.49
|
%
|
|
|
2.31
|
%
|
|
|
1.78
|
%
|
|
|
1.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and paid indirectly
|
|
|
2.36
|
%(e)
|
|
|
2.77
|
%
|
|
|
2.49
|
%
|
|
|
2.31
|
%
|
|
|
1.77
|
%
|
|
|
1.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and paid indirectly and excluding interest expense, fees, and
amortization of offering costs(f)
|
|
|
1.07
|
%(e)
|
|
|
1.18
|
%
|
|
|
1.18
|
%
|
|
|
1.19
|
%
|
|
|
1.16
|
%
|
|
|
1.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income to Common Shareholders
|
|
|
4.40
|
%(e)
|
|
|
4.13
|
%
|
|
|
4.39
|
%
|
|
|
4.55
|
%
|
|
|
5.18
|
%
|
|
|
5.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of period (000)
|
|
$
|
181,260
|
|
|
$
|
177,030
|
|
|
$
|
166,079
|
|
|
$
|
171,705
|
|
|
$
|
188,107
|
|
|
$
|
173,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMTP Shares outstanding at $100,000 liquidation value, end of period (000)
|
|
$
|
79,900
|
|
|
$
|
79,900
|
|
|
$
|
79,900
|
|
|
$
|
79,900
|
|
|
$
|
79,900
|
|
|
$
|
79,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage per VMTP Shares at $100,000 liquidation value, end of period
|
|
$
|
326,858
|
|
|
$
|
321,564
|
|
|
$
|
307,858
|
|
|
$
|
314,899
|
|
|
$
|
335,428
|
|
|
$
|
316,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of period (000)
|
|
$
|
33,443
|
|
|
$
|
29,194
|
|
|
$
|
23,232
|
|
|
$
|
22,404
|
|
|
$
|
25,054
|
|
|
$
|
19,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
3
|
%
|
|
|
19
|
%
|
|
|
38
|
%
|
|
|
46
|
%
|
|
|
29
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Based on average common shares outstanding.
|
(b)
|
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
(c)
|
Total returns based on market price, which can be significantly greater or less than the net asset value, may
result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices.
|
(d)
|
Aggregate total return.
|
136
(f)
|
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares.
|
137
BlackRock MuniHoldings Fund II, Inc. (MUH)
The Financial Highlights table is intended to help you understand MUHs financial performance for the periods shown. Certain information reflects the
financial results for a single Common Share of MUH. The total returns in the table represent the rate an investor would have earned or lost on an investment in MUH (assuming reinvestment of all dividends and/or distributions, if applicable). The
information shown has been audited by Deloitte & Touche LLP, MUHs independent registered public accounting firm. Financial statements for the fiscal year ended April 30, 2020 and the Report of the Independent Registered Public
Accounting Firm thereon appear in MUHs Annual Report for the fiscal year ended April 30, 2020, which is available upon request.
Please see next page for Financial Highlights Table
138
MUH Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net asset value, beginning of year
|
|
$
|
15.32
|
|
|
$
|
15.11
|
|
|
$
|
15.52
|
|
|
$
|
16.51
|
|
|
$
|
16.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(a)
|
|
|
0.70
|
|
|
|
0.76
|
|
|
|
0.80
|
|
|
|
0.86
|
|
|
|
0.91
|
|
Net realized and unrealized gain (loss)
|
|
|
(1.13
|
)
|
|
|
0.25
|
|
|
|
(0.35
|
)
|
|
|
(0.95
|
)
|
|
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
(0.43
|
)
|
|
|
1.01
|
|
|
|
0.45
|
|
|
|
(0.09
|
)
|
|
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Shareholders(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.69
|
)
|
|
|
(0.75
|
)
|
|
|
(0.85
|
)
|
|
|
(0.90
|
)
|
|
|
(0.94
|
)
|
From net realized gain
|
|
|
|
|
|
|
(0.05
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to Common Shareholders
|
|
|
(0.69
|
)
|
|
|
(0.80
|
)
|
|
|
(0.86
|
)
|
|
|
(0.90
|
)
|
|
|
(0.94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
14.20
|
|
|
$
|
15.32
|
|
|
$
|
15.11
|
|
|
$
|
15.52
|
|
|
$
|
16.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of year
|
|
$
|
13.31
|
|
|
$
|
15.05
|
|
|
$
|
13.75
|
|
|
$
|
15.59
|
|
|
$
|
16.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Applicable to Common Shareholders(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
(2.93
|
)%
|
|
|
7.46
|
%
|
|
|
3.09
|
%
|
|
|
(0.52
|
)%
|
|
|
8.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
(7.38
|
)%
|
|
|
16.00
|
%
|
|
|
(6.61
|
)%
|
|
|
1.65
|
%
|
|
|
12.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2.31
|
%
|
|
|
2.58
|
%
|
|
|
2.12
|
%
|
|
|
1.83
|
%
|
|
|
1.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and paid indirectly
|
|
|
2.31
|
%
|
|
|
2.58
|
%
|
|
|
2.12
|
%
|
|
|
1.83
|
%
|
|
|
1.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and paid indirectly and excluding interest
expense, fees and amortization of offering costs(d)
|
|
|
1.03
|
%
|
|
|
1.05
|
%
|
|
|
1.02
|
%
|
|
|
1.00
|
%
|
|
|
1.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income to Common Shareholders
|
|
|
4.45
|
%
|
|
|
5.05
|
%
|
|
|
5.16
|
%
|
|
|
5.37
|
%
|
|
|
5.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of year (000)
|
|
$
|
160,923
|
|
|
$
|
173,628
|
|
|
$
|
171,346
|
|
|
$
|
175,637
|
|
|
$
|
186,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMTP Shares outstanding at $100,000 liquidation value, end of year (000)
|
|
$
|
55,000
|
|
|
$
|
55,000
|
|
|
$
|
55,000
|
|
|
$
|
55,000
|
|
|
$
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage per VMTP Shares at $100,000 liquidation value, end of year
|
|
$
|
392,588
|
|
|
$
|
415,686
|
|
|
$
|
411,538
|
|
|
$
|
419,340
|
|
|
$
|
439,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of year (000)
|
|
$
|
49,787
|
|
|
$
|
53,409
|
|
|
$
|
54,100
|
|
|
$
|
47,507
|
|
|
$
|
46,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
22
|
%
|
|
|
30
|
%
|
|
|
16
|
%
|
|
|
10
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Based on average common shares outstanding.
|
(b)
|
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
(c)
|
Total returns based on market price, which can be significantly greater or less than the net asset value, may
result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices.
|
(d)
|
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares.
|
139
BlackRock MuniHoldings Quality Fund, Inc. (MUS)
The Financial Highlights table is intended to help you understand MUSs financial performance for the periods shown. Certain information reflects the
financial results for a single Common Share of MUS. The total returns in the table represent the rate an investor would have earned or lost on an investment in MUS (assuming reinvestment of all dividends and/or distributions, if applicable). The
information shown has been audited by Deloitte & Touche LLP, MUSs independent registered public accounting firm. Financial statements for the fiscal year ended April 30, 2020 and the Report of the Independent Registered Public
Accounting Firm thereon appear in MUSs Annual Report for the fiscal year ended April 30, 2020, which is available upon request.
Please see next page for Financial Highlights Table
140
MUS Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net asset value, beginning of year
|
|
$
|
13.51
|
|
|
$
|
13.35
|
|
|
$
|
13.95
|
|
|
$
|
14.84
|
|
|
$
|
14.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(a)
|
|
|
0.56
|
|
|
|
0.59
|
|
|
|
0.70
|
|
|
|
0.75
|
|
|
|
0.80
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.85
|
)
|
|
|
0.19
|
|
|
|
(0.54
|
)
|
|
|
(0.84
|
)
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
(0.29
|
)
|
|
|
0.78
|
|
|
|
0.16
|
|
|
|
(0.09
|
)
|
|
|
1.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Shareholders from net investment income(b)
|
|
|
(0.53
|
)
|
|
|
(0.62
|
)
|
|
|
(0.76
|
)
|
|
|
(0.80
|
)
|
|
|
(0.81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
12.69
|
|
|
$
|
13.51
|
|
|
$
|
13.35
|
|
|
$
|
13.95
|
|
|
$
|
14.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of year
|
|
$
|
11.44
|
|
|
$
|
12.01
|
|
|
$
|
12.40
|
|
|
$
|
13.38
|
|
|
$
|
14.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Applicable to Common Shareholders(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
(1.97
|
)%
|
|
|
6.59
|
%
|
|
|
1.33
|
%
|
|
|
(0.47
|
)%
|
|
|
8.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
(0.59
|
)%
|
|
|
2.02
|
%
|
|
|
(1.88
|
)%
|
|
|
(1.00
|
)%
|
|
|
14.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2.42
|
%
|
|
|
2.60
|
%
|
|
|
2.30
|
%
|
|
|
1.95
|
%
|
|
|
1.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and paid indirectly
|
|
|
2.36
|
%
|
|
|
2.54
|
%
|
|
|
2.24
|
%
|
|
|
1.91
|
%
|
|
|
1.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and paid indirectly and excluding interest
expense, fees and amortization of offering costs(d)
|
|
|
0.99
|
%
|
|
|
0.98
|
%
|
|
|
0.99
|
%
|
|
|
0.98
|
%
|
|
|
0.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income to Common Shareholders
|
|
|
4.04
|
%
|
|
|
4.43
|
%
|
|
|
5.08
|
%
|
|
|
5.22
|
%
|
|
|
5.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of year (000)
|
|
$
|
165,213
|
|
|
$
|
175,910
|
|
|
$
|
173,818
|
|
|
$
|
181,614
|
|
|
$
|
193,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMTP Shares outstanding at $100,000 liquidation value, end of year (000)
|
|
$
|
87,000
|
|
|
$
|
87,000
|
|
|
$
|
87,000
|
|
|
$
|
87,000
|
|
|
$
|
87,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage per VMTP Shares at $100,000 liquidation value, end of year
|
|
$
|
289,900
|
|
|
$
|
302,196
|
|
|
$
|
299,791
|
|
|
$
|
308,751
|
|
|
$
|
321,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of year (000)
|
|
$
|
29,368
|
|
|
$
|
23,918
|
|
|
$
|
26,238
|
|
|
$
|
29,150
|
|
|
$
|
24,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
22
|
%
|
|
|
27
|
%
|
|
|
21
|
%
|
|
|
18
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Based on average common shares outstanding.
|
(b)
|
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
(c)
|
Total returns based on market price, which can be significantly greater or less than the net asset value, may
result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices.
|
(d)
|
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares.
|
141
BlackRock MuniHoldings Fund, Inc. (MHD)
The Financial Highlights table is intended to help you understand the Acquiring Funds financial performance for the periods shown. Certain information
reflects the financial results for a single Common Share of the Acquiring Fund. The total returns in the table represent the rate an investor would have earned or lost on an investment in the Acquiring Fund (assuming reinvestment of all dividends
and/or distributions, if applicable). The information shown has been audited by Deloitte & Touche LLP, the Acquiring Funds independent registered public accounting firm. Financial statements for the fiscal year ended April 30,
2020 and the Report of the Independent Registered Public Accounting Firm thereon appear in the Acquiring Funds Annual Report for the fiscal year ended April 30, 2020, which is available upon request.
Please see next page for Financial Highlights Table
142
The Acquiring Fund (MHD) Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net asset value, beginning of year
|
|
$
|
16.56
|
|
|
$
|
16.41
|
|
|
$
|
16.85
|
|
|
$
|
17.95
|
|
|
$
|
17.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(a)
|
|
|
0.74
|
|
|
|
0.81
|
|
|
|
0.88
|
|
|
|
0.95
|
|
|
|
1.00
|
|
Net realized and unrealized gain (loss)
|
|
|
(1.36
|
)
|
|
|
0.22
|
|
|
|
(0.39
|
)
|
|
|
(1.07
|
)
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
(0.62
|
)
|
|
|
1.03
|
|
|
|
0.49
|
|
|
|
(0.12
|
)
|
|
|
1.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Shareholders(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.76
|
)
|
|
|
(0.83
|
)
|
|
|
(0.92
|
)
|
|
|
(0.98
|
)
|
|
|
(1.06
|
)
|
From net realized gain
|
|
|
|
|
|
|
(0.05
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to Common Shareholders
|
|
|
(0.76
|
)
|
|
|
(0.88
|
)
|
|
|
(0.93
|
)
|
|
|
(0.98
|
)
|
|
|
(1.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
15.18
|
|
|
$
|
16.56
|
|
|
$
|
16.41
|
|
|
$
|
16.85
|
|
|
$
|
17.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of year
|
|
$
|
13.91
|
|
|
$
|
15.92
|
|
|
$
|
14.98
|
|
|
$
|
16.65
|
|
|
$
|
18.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Applicable to Common Shareholders(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
(4.02
|
)%
|
|
|
6.84
|
%
|
|
|
3.07
|
%
|
|
|
(0.67
|
)%
|
|
|
8.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
(8.52
|
)%
|
|
|
12.51
|
%
|
|
|
(4.79
|
)%
|
|
|
(2.87
|
)%
|
|
|
11.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2.16
|
%(d)
|
|
|
2.47
|
%
|
|
|
2.16
|
%
|
|
|
1.87
|
%
|
|
|
1.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and paid indirectly
|
|
|
2.15
|
%(d)
|
|
|
2.47
|
%
|
|
|
2.16
|
%
|
|
|
1.87
|
%
|
|
|
1.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and paid indirectly and excluding interest
expense, fees and amortization of offering costs(e)
|
|
|
0.97
|
%(d)
|
|
|
1.00
|
%
|
|
|
1.01
|
%
|
|
|
0.99
|
%
|
|
|
0.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income to Common Shareholders
|
|
|
4.40
|
%(d)
|
|
|
4.98
|
%
|
|
|
5.19
|
%
|
|
|
5.42
|
%
|
|
|
5.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of year (000)
|
|
$
|
215,764
|
|
|
$
|
235,029
|
|
|
$
|
232,921
|
|
|
$
|
238,684
|
|
|
$
|
253,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VMTP Shares outstanding at $100,000 liquidation value, end of year (000)
|
|
$
|
83,700
|
|
|
$
|
83,700
|
|
|
$
|
83,700
|
|
|
$
|
83,700
|
|
|
$
|
83,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage per VMTP Shares at $100,000 liquidation value, end of year
|
|
$
|
357,782
|
|
|
$
|
380,799
|
|
|
$
|
378,281
|
|
|
$
|
385,166
|
|
|
$
|
403,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of year (000)
|
|
$
|
53,130
|
|
|
$
|
52,674
|
|
|
$
|
63,166
|
|
|
$
|
62,233
|
|
|
$
|
60,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
21
|
%
|
|
|
17
|
%
|
|
|
12
|
%
|
|
|
9
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Based on average common shares outstanding.
|
(b)
|
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
(c)
|
Total returns based on market price, which can be significantly greater or less than the net asset value, may
result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions at actual reinvestment prices.
|
(d)
|
Excludes 0.01% of expenses incurred indirectly as a result of investments in underlying funds.
|
(e)
|
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares.
|
143
Submission of Shareholder Proposals
To be considered for presentation at a shareholders meeting, rules promulgated by the SEC generally require that, among other things, a
shareholders proposal must be received at the offices of the relevant Fund a reasonable time before solicitation is made. In addition, each Funds bylaws provide for advance notice provisions, which require
159
shareholders to give timely notice in proper written form to the Secretary of the Fund. Shareholders should review each Funds bylaws for additional information regarding the Funds
advance notice provisions. The bylaws of BAF and MUH were filed with the SEC on October 7, 2008 on Form 8-K, the bylaws of BBK were filed with the SEC on October 29, 2010 on Form 8-K and the bylaws of MUS and the Acquiring Fund were filed with the SEC on September 21, 2010 on Form 8-K. Shareholders may obtain copies of such documents as described
on [pages v-vi] of this Proxy Statement.
The timely submission of a proposal does not necessarily mean that such
proposal will be included. Any shareholder who wishes to submit a proposal for consideration at a meeting of such shareholders Fund should send such proposal to the relevant Fund at 40 East 52nd Street, New York, New York 10022.
Shareholder Communications
Shareholders who want to communicate with the Board or any individual Board Member should write to the attention of the Secretary of their Fund, 40 East 52nd
Street, New York, NY 10022. Shareholders may communicate with the Boards electronically by sending an e-mail to closedendfundsbod@blackrock.com. The communication should indicate that you are a
Fund shareholder. If the communication is intended for a specific Board Member and so indicates, it will be sent only to that Board Member. If a communication does not indicate a specific Board Member, it will be sent to the Chair of the Governance
Committee and the outside counsel to the Independent Board Members for further distribution as deemed appropriate by such persons.
Additionally,
shareholders with complaints or concerns regarding accounting matters may address letters to the CCO of their respective Fund 40 East 52nd Street, New York, NY 10022. Shareholders who are uncomfortable submitting complaints to the CCO may address
letters directly to the Chair of the Audit Committee of the Board that oversees the Fund. Such letters may be submitted on an anonymous basis.
Expense of Proxy Solicitation
The cost of preparing, printing and mailing the enclosed proxy, accompanying notice and this Proxy Statement, and
costs in connection with the solicitation of proxies will be borne by the Funds. Additional out-of-pocket costs, such as legal expenses and auditor fees, incurred in
connection with the preparation of this Proxy Statement, also will be borne by the Funds. Costs that are borne by the Funds collectively will be allocated among the Funds on the basis of a combination of their respective net assets and number of
shareholder accounts, except when direct costs can reasonably be attributed to one or more specific Fund(s).
Solicitation is being made primarily by the
mailing of this Notice and Proxy Statement with its enclosures on or about [●], 2020, but may also be made by mail, telephone, fax, e-mail or the Internet by officers or employees of the Investment
Advisor, or by dealers and their representatives. Brokerage houses, banks and other fiduciaries may be requested to forward proxy solicitation material to their principals to obtain authorization for the execution of proxies. Shareholders of the
Funds whose shares are held by nominees such as brokers can vote their proxies by contacting their respective nominee. The Funds will reimburse brokerage firms, custodians, banks and fiduciaries for their expenses in forwarding this Proxy Statement
and proxy materials to the beneficial owners of each Funds Shares. The Funds and the Investment Advisor have retained Georgeson LLC to assist with the distribution of proxy materials and the solicitation and tabulation of proxies. It is
anticipated that Georgeson, LLC will be paid approximately $[●], $[●], $[●], $[●] and $[●] by BAF, BBK, MUH, MUS and the Acquiring Fund, respectively, for such services (including reimbursements of out-of-pocket expenses) with respect to the solicitation of proxies from the common shares and the VMTP Shares. Georgeson, LLC may solicit proxies personally and by mail,
telephone, fax, e-mail or the Internet. Each Funds portion of the foregoing expenses is not subject to any cap or voluntary agreement to waive fees and/or reimburse expenses that may otherwise apply to
that Fund.
If You Plan to Attend the Special Meeting
Attendance at the Special Meeting will be limited to each Funds shareholders as of the Record Date and valid proxyholders. Each shareholder will be asked
to present valid photographic identification, such as a valid drivers license or passport. Shareholders holding Shares in brokerage accounts or by a bank or other nominee will be required
160
to show satisfactory proof of ownership of Shares in a Fund, such as a voting instruction form (or a copy thereof) or a letter from the shareholders bank, broker or other nominee or a
brokerage statement or account statement reflecting share ownership as of the Record Date. Cameras, recording devices and other electronic devices will not be permitted at the Special Meeting.
If you are a registered shareholder, you may vote your Shares in person by ballot at the Special Meeting. If you hold your Shares in a brokerage account or
through a broker, bank or other nominee, you will not be able to vote in person at the Special Meeting, unless you have previously requested and obtained a legal proxy from your broker, bank or other nominee and present it at the Special
Meeting.
Privacy Principles of the Funds
The Funds are committed to maintaining the privacy of shareholders and to safeguarding their non-public personal
information. The following information is provided to help you understand what personal information the Funds collect, how we protect that information, and why in certain cases we may share such information with select other parties.
The Funds do not receive any non-public personal information relating to their shareholders who purchase shares
through their broker-dealers. In the case of shareholders who are record holders of a Fund, the Fund receives personal non-public information on account applications or other forms. With respect to these
shareholders, the Funds also have access to specific information regarding their transactions in each Fund.
The Funds do not disclose any non-public personal information about their shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders accounts (for example, to a
transfer agent).
The Funds restrict access to non-public personal information about their shareholders to
BlackRock employees with a legitimate business need for the information. The Funds maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our
shareholders.
Incorporation by Reference
The financial statements of the Acquiring Fund for the fiscal year ended April
30, 2020 are incorporated by reference herein to the Acquiring Funds annual report filed on Form N-CSR on
July 2, 2020.
The financial statements of BAF for the fiscal year ended August
31, 2019 are incorporated by reference herein to BAFs annual report filed on Form N-CSR on November 5,
2019. The financial statements of BAF for the semi-annual period ended February
29, 2020 are incorporated by reference herein to BAFs semi-annual report filed on Form N-CSR on May 4,
2020.
The financial statements of BBK for the fiscal year ended August
31, 2019 are incorporated by reference herein to BBKs annual report filed on Form N-CSR on November 5,
2019. The financial statements of BAF for the semi-annual period ended February
29, 2020 are incorporated by reference herein to BAFs semi-annual report filed on Form N-CSR on May 4,
2020.
The financial statements of MUH for the fiscal year ended April
30, 2020 are incorporated by reference herein to MUHs annual report filed on Form N-CSR on July 2,
2020.
The financial statements of MUS for the fiscal year ended April
30, 2020 are incorporated by reference herein to MUSs annual report filed on Form N-CSR on July 2,
2020.
See Financial Statements. The financial statements have been audited by [●], independent registered public accounting firm, as
set forth in their report thereon and incorporated herein by reference. Such financial statements are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
161
Adjournments and Postponements
Failure of a quorum to be present at the Special Meeting may necessitate adjournment. The Board of each Fund, prior to the Special Meeting being convened, may
postpone such meeting from time to time to a date not more than 120 days after the original record date. The chair of the Special Meeting may also adjourn the Special Meeting from time to time to reconvene at the same or some other place, and notice
need not be given of any such adjourned meeting if the time and place by which shareholders may be deemed to be present at such adjourned meeting and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. The
chair of the Special Meeting may adjourn the Special Meeting to permit further solicitation of proxies with respect to a proposal if they determine that adjournment and further solicitation is reasonable and in the best interests of shareholders. At
the adjourned meeting, the Fund may transact any business which might have been transacted at the original meeting. Any adjourned meeting may be held as adjourned one or more times without further notice not later than 120 days after the record
date.
Please vote promptly by signing and dating each enclosed proxy card, and if received by mail, returning it (them) in the accompanying postage paid
return envelope OR by following the enclosed instructions to provide voting instructions by telephone or via the Internet.
BlackRock is independent in
ownership and governance, with no single majority stockholder and a majority of independent directors.
By Order of the Boards,
Janey Ahn
Secretary of the Funds
[●], 2020
162
APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
In order to consummate the reorganization contemplated herein (the Reorganization) and in consideration of the promises and
the covenants and agreements hereinafter set forth, and intending to be legally bound, [Target Fund], a registered diversified closed-end investment company, File
No. 811-[●] (the Target Fund) and BlackRock MuniHoldings Fund, Inc., a registered diversified closed-end investment company, File No. 811-08081 (the Acquiring Fund and together with the Target Fund, the Funds), each hereby agree as follows:
1.
|
REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING FUND.
|
The Acquiring Fund represents and warrants to, and agrees with, the Target Fund that:
(a) The Acquiring Fund is a corporation duly organized, validly existing and in good standing in conformity with the
laws of the State of Maryland and has the power to own all of its assets and to carry out this Agreement. The Acquiring Fund has all necessary federal, state and local authorizations to carry on its business as it is now being conducted and to carry
out this Agreement.
(b) The Acquiring Fund is duly registered under the Investment Company Act of 1940, as amended
(the 1940 Act) as a diversified, closed-end management investment company and such registration has not been revoked or rescinded and is in full force and effect.
(c) The Acquiring Fund has full power and authority to enter into and perform its obligations under this Agreement
subject, in the case of the consummation of the Reorganization to the approval and adoption of this Agreement, and
(i) amendments to the Articles Supplementary (as defined below) in connection with the issuance of
additional Acquiring Fund VMTP Shares (as defined in Section 1(o) herein) in the Reorganization by the holders of the Acquiring Fund VMTP Shares (Acquiring Fund VMTP Holders) voting as a separate class, and
(ii) in the case of the issuance of additional Acquiring Fund Common Shares (as defined in
Section 1(o) herein) in connection with the Reorganization to the approval of such issuance of additional Acquiring Fund Common Shares by the common shareholders of the Acquiring Fund (Acquiring Fund Common Shareholders and
together with the Acquiring Fund VMTP Holders, the Acquiring Fund Shareholders) and the Acquiring Fund VMTP Holders voting as a single class, in each case as described in Sections 9(a) and (b) hereof.
(d) The execution, delivery and performance of this Agreement have been duly authorized by all necessary action of the
Acquiring Funds Board of Directors, and this Agreement constitutes a valid and binding contract of the Acquiring Fund enforceable against the Acquiring Fund in accordance with its terms, subject to the effects of bankruptcy, insolvency,
moratorium, fraudulent conveyance and similar laws relating to or affecting creditors rights generally and court decisions with respect thereto.
(e) The Acquiring Fund has provided or made available (including by electronic format) to the Target Fund the most
recent audited annual financial statements of the Acquiring Fund, which have been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP) consistently applied and have been
audited by [Auditor], each Funds independent registered public accounting firm, and such statements fairly present the financial condition and the results of operations of the Acquiring Fund as of the respective dates indicated and the
results of operations and changes in net assets for the periods indicated, and there are no liabilities of the Acquiring Fund whether actual or contingent and whether or not determined or determinable as of such date that are required to be
disclosed but are not disclosed in such statements.
A-1
(f) An unaudited statement of assets, capital and liabilities of the
Acquiring Fund and an unaudited schedule of investments of the Acquiring Fund, each as of the Valuation Time (as defined in Section 3(e) herein) (together, the Acquiring Fund Closing Financial Statements), will be provided or
made available (including by electronic format) to the Target Fund, at or prior to the Closing Date (as defined in Section 7(a) herein), for the purpose of determining the number of Acquiring Fund Shares (as defined in Section 1(o) herein)
to be issued to the Target Fund shareholders (the Target Fund Shareholders) pursuant to Section 3 of this Agreement; the Acquiring Fund Closing Financial Statements will fairly present the financial position of the Acquiring
Fund as of the Valuation Time in conformity US GAAP consistently applied.
(g) There are no material legal,
administrative or other proceedings pending or, to the knowledge of the Acquiring Fund, threatened against it which assert liability on the part of the Acquiring Fund or which materially affect its financial condition or its ability to consummate
the Reorganization other than as have been disclosed to the Target Fund. The Acquiring Fund is not charged with or, to the best of its knowledge, threatened with any violation or investigation of any possible violation of any provisions of any
federal, state or local law or regulation or administrative ruling relating to any aspect of its business.
(h) There are no material contracts outstanding to which the Acquiring Fund is a party that have not been disclosed in
the N-14 Registration Statement (as defined in Section 1(l) herein) or that will not otherwise be disclosed to the Target Fund prior to the Valuation Time.
(i) The Acquiring Fund is not obligated under any provision of its charter or
By-laws, each as amended to the date hereof, and is not a party to any contract or other commitment or obligation, and is not subject to any order or decree, which would be violated by its execution of or
performance under this Agreement, except insofar as the Funds have mutually agreed to amend such contract or other commitment or obligation to cure any potential violation as a condition precedent to the Reorganization.
(j) The Acquiring Fund has no known liabilities of a material amount, contingent or otherwise, other than those shown
on the Acquiring Funds Annual Report for the fiscal year ended April 30, 2020, those incurred since the date thereof in the ordinary course of its business as an investment company, and those incurred in connection with the
Reorganization. As of the Valuation Time, the Acquiring Fund will advise the Target Fund of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of such time, except to
the extent disclosed in the Acquiring Fund Closing Financial Statements or to the extent already known by the Target Fund.
(k) No consent, approval, authorization or order of any court or government authority is required for the consummation
by the Acquiring Fund of the Reorganization, except such as may be required under the Securities Act of 1933, as amended (the 1933 Act), the Securities Exchange Act of 1934, as amended (the 1934 Act) and the
1940 Act or state securities laws (which term as used herein shall include the laws of the District of Columbia and Puerto Rico) or the rules of the New York Stock Exchange, each of which will have been obtained on or prior to the Closing Date.
(l) The registration statement filed by the Acquiring Fund on Form N-14, which
includes the proxy statement for the common shareholders of the Target Fund and the Acquiring Fund with respect to the transactions contemplated herein (the Joint Proxy Statement/Prospectus), and any supplement or amendment
thereto or to the documents included or incorporated by reference therein (collectively, as so amended or supplemented, the N-14 Registration Statement), on its effective date, at the time
of the shareholder meeting called to vote on this Agreement and on the Closing Date, insofar as it relates to the Acquiring Fund, (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the
1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, not
misleading; and the Joint Proxy Statement/Prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the representations and warranties in this subsection only shall apply to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with information furnished by the Acquiring Fund for use in the N-14 Registration Statement.
A-2
(m) The proxy statement for the Acquiring Fund VMTP Holders and holders of
the Target Fund VMTP Shares (as defined in section 2(o) herein) (the Target Fund VMTP Holders) with respect to the transactions contemplated herein, and any supplement or amendment thereto (the Preferred Shares Proxy
Statement) or to the documents included or incorporated by reference therein, at the time of the shareholder meeting called to vote on this Agreement and on the Closing Date, insofar as it relates to the Acquiring Fund, (i) complied
or will comply in all material respects with the provisions of the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection only
shall apply to statements in or omissions from the Preferred Shares Proxy Statement made in reliance upon and in conformity with information furnished by the Acquiring Fund for use in the Preferred Shares Proxy Statement.
(n) The Acquiring Fund has filed, or intends to file, or has obtained extensions to file, all federal, state and local
tax returns which are required to be filed by it, and has paid or has obtained extensions to pay, all federal, state and local taxes shown on said returns to be due and owing and all assessments received by it, up to and including the taxable year
in which the Closing Date occurs. All tax liabilities of the Acquiring Fund have been adequately provided for on its books, and no tax deficiency or liability of the Acquiring Fund has been asserted and no question with respect thereto has been
raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Closing Date occurs.
(o) The Acquiring Fund is authorized to issue 199,994,763 shares of common stock, par value $0.10 per share, 4,400
shares of preferred stock of Auction Market Preferred Stock, par value $0.10 per share, with such shares classified as two separate series consisting of 2,200 shares and each with a liquidation preference of $25,000 per share, and 837 shares of
preferred stock of Series W-7 Variable Rate Muni Term Preferred Shares or any other series of Variable Rate Muni Term Preferred Shares, par value $0.10 per share and liquidation preference $100,000 per share
(Acquiring Fund VMTP Shares and together with Acquiring Fund Common Shares, the Acquiring Fund Shares). Each outstanding Acquiring Fund Share is fully paid and nonassessable, and has the voting rights provided
by the Acquiring Funds charter, By-laws and applicable law.
(p) The
books and records of the Acquiring Fund made available to the Target Fund and/or its counsel are substantially true and correct and contain no material misstatements or omissions with respect to the operations of the Acquiring Fund.
(q) The Acquiring Fund Shares to be issued to the Target Fund Shareholders pursuant to this Agreement will have been
duly authorized and, when issued and delivered pursuant to this Agreement, will be legally and validly issued and will be fully paid and nonassessable and will have full voting rights, except as provided by the Acquiring Funds charter or
applicable law, and no Acquiring Fund Shareholder will have any preemptive right of subscription or purchase in respect thereof.
(r) At or prior to the Closing Date, the Acquiring Fund Common Shares to be transferred to the Target Fund for
distribution to the Target Fund Shareholders on the Closing Date will be duly qualified for offering to the public in all states of the United States in which the sale of shares of the Funds presently are qualified, and there will be a sufficient
number of such Acquiring Fund Common Shares registered under the 1933 Act and, as may be necessary, with each pertinent state securities commission to permit the transfers contemplated by this Agreement to be consummated.
(s) At or prior to the Closing Date, the Acquiring Fund will have obtained any and all regulatory, board and
shareholder approvals necessary to issue the Acquiring Fund Shares to the Target Fund Shareholders.
(t) The
Acquiring Fund has elected to qualify and has qualified as a regulated investment company (RIC) within the meaning of Section 851 of the Internal Revenue Code of 1986, as amended (the Code) for each of its
taxable years since its inception, and the Acquiring Fund has satisfied the distribution requirements imposed by Section 852 of the Code to maintain RIC status for each of its taxable years.
A-3
2.
|
REPRESENTATIONS AND WARRANTIES OF THE TARGET FUND.
|
The Target Fund represents and warrants to, and agrees with, the Acquiring Fund that:
(a) The Target Fund is a [corporation duly organized, validly existing and in good standing in conformity with the laws
of the State of Maryland]3[statutory trust duly formed, validly existing and in good standing in conformity with the Delaware Statutory Trust Act (the DSTA)]4 and has the power to own all of its assets and to carry out this Agreement. The Target Fund has all necessary federal, state and local authorizations to carry on its business as it is now being
conducted and to carry out this Agreement.
(b) The Target Fund is duly registered under the 1940 Act as a
diversified, closed-end management investment company, and such registration has not been revoked or rescinded and is in full force and effect.
(c) The Target Fund has full power and authority to enter into and perform its obligations under this Agreement
subject, in the case of consummation of the Reorganization, to the approval and adoption of this Agreement by the Target Fund Shareholders as described in Section 8(a) hereof. The execution, delivery and performance of this Agreement have been
duly authorized by all necessary action of the Target Funds [Board of Directors]5[Board of Trustees]6 and this Agreement constitutes a
valid and binding contract of the Target Fund enforceable against the Target Fund in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting
creditors rights generally and court decisions with respect thereto.
(d) The Target Fund has provided or
made available (including by electronic format) to the Acquiring Fund the most recent audited annual financial statements of the Target Fund which have been prepared in accordance with US GAAP consistently applied and have been audited by
[Auditor], and such statements fairly present the financial condition and the results of operations of the Target Fund as of the respective dates indicated and the results of operations and changes in net assets for the periods indicated, and
there are no liabilities of the Target Fund whether actual or contingent and whether or not determined or determinable as of such date that are required to be disclosed but are not disclosed in such statements.
(e) An unaudited statement of assets, capital and liabilities of the Target Fund and an unaudited schedule of
investments of the Target Fund, each as of the Valuation Time (together, the Target Fund Closing Financial Statements), will be provided or made available (including by electronic format) to the Acquiring Fund at or prior to the
Closing Date, for the purpose of determining the number of Acquiring Fund Shares to be issued to the Target Fund Shareholders pursuant to Section 3 of this Agreement; the Target Fund Closing Financial Statements will fairly present the
financial position of the Target Fund as of the Valuation Time in conformity with US GAAP consistently applied.
(f) There are no material legal, administrative or other proceedings pending or, to the knowledge of the Target Fund,
threatened against it which assert liability on the part of the Target Fund or which materially affect its financial condition or its ability to consummate the Reorganization other than as have been disclosed to the Acquiring Fund. The Target Fund
is not charged with or, to the best of its knowledge, threatened with any violation or investigation of any possible violation of any provisions of any federal, state or local law or regulation or administrative ruling relating to any aspect of its
business.
(g) There are no material contracts outstanding to which the Target Fund is a party that have not been
disclosed in the N-14 Registration Statement or will not otherwise be disclosed to the Acquiring Fund prior to the Valuation Time.
3
|
[Applies to MUH and MUS.]
|
4
|
[Applies to BAF and BBK.]
|
5
|
[Applies to MUH and MUS.]
|
6
|
[Applies to BAF and BBK.]
|
A-4
(h) The Target Fund is not obligated under any provision of its [charter]7[Agreement and Declaration of Trust]8 or By-laws, each as amended to the date hereof, or a party to any
contract or other commitment or obligation, and is not subject to any order or decree, which would be violated by its execution of or performance under this Agreement, except insofar as the Funds have mutually agreed to amend such contract or other
commitment or obligation to cure any potential violation as a condition precedent to the Reorganization.
(i) The
Target Fund has no known liabilities of a material amount, contingent or otherwise, other than those shown on the Target Funds Annual Report for the fiscal year ended [April 30,
2020]9[August 31, 2020]10, those incurred since the date thereof in the ordinary course of its business as an investment company and those
incurred in connection with the Reorganization. As of the Valuation Time, the Target Fund will advise the Acquiring Fund of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or
accrued as of such time, except to the extent disclosed in the Target Fund Closing Financial Statements or to the extent already known by the Acquiring Fund.
(j) At both the Valuation Time and the Closing Date, the Target Fund will have full right, power and authority to sell,
assign, transfer and deliver the Target Fund Investments. As used in this Agreement, the term Target Fund Investments shall mean (i) the investments of the Target Fund shown on the schedule of its investments as of the
Valuation Time furnished to the Acquiring Fund; and (ii) all other assets owned by the Target Fund or liabilities incurred as of the Valuation Time. At the Closing Date, subject only to the obligation to deliver the Target Fund Investments as
contemplated by this Agreement, the Target Fund will have good and marketable title to all of the Target Fund Investments, and the Acquiring Fund will acquire all of the Target Fund Investments free and clear of any encumbrances, liens or security
interests and without any restrictions upon the transfer thereof (except those imposed by the federal or state securities laws and those imperfections of title or encumbrances as do not materially detract from the value or use of the Target Fund
Investments or materially affect title thereto).
(k) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Target Fund of the Reorganization, except such as may be required under the 1933 Act, the 1934 Act and the 1940 Act or state securities laws (which term as used herein shall include the
laws of the District of Columbia and Puerto Rico) or the rules of the New York Stock Exchange, each of which will have been obtained on or prior to the Closing Date.
(l) The N-14 Registration Statement, on its effective date, at the time of the
Target Fund Shareholders meeting called to vote on this Agreement and on the Closing Date, insofar as it relates to the Target Fund (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the
1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light
of the circumstances under which they were made, not misleading; and the Joint Proxy Statement/Prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the
statements therein, not misleading; provided, however, that the representations and warranties in this subsection shall apply only to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with information furnished by the Target Fund for use in the N-14 Registration Statement.
(m) The Preferred Shares Proxy Statement for the Target Fund VMTP Holders with respect to the transactions contemplated
herein, and any supplement or amendment thereto or to the documents included or incorporated by reference therein, at the time of the shareholder meeting called to vote on this Agreement and on the Closing Date, insofar as it relates to the Target
Fund, (i) complied or will comply in all material respects with the provisions of the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties
in this subsection shall apply only to statements in or omissions from
7
|
[Applies to MUH and MUS.]
|
8
|
[Applies to BAF and BBK.]
|
9
|
[Applies to, MUS and BSD.]
|
10
|
[Applies to, BAF and BBK.]
|
A-5
the Preferred Shares Proxy Statement made in reliance upon and in conformity with information furnished by the Target Fund for use in the Preferred Shares Proxy Statement.
(n) The Target Fund has filed, or intends to file, or has obtained extensions to file, all federal, state and local tax
returns which are required to be filed by it, and has paid or has obtained extensions to pay, all federal, state and local taxes shown on said returns to be due and owing and all assessments received by it, up to and including the taxable year in
which the Closing Date occurs. All tax liabilities of the Target Fund have been adequately provided for on its books, and no tax deficiency or liability of the Target Fund has been asserted and no question with respect thereto has been raised by the
Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Closing Date occurs.
(o) The Target Fund is authorized to issue [[●] shares of common stock, par value $0.10 per share]11[an unlimited number of common shares of beneficial interest, par value $0.001 per share]12 (the Target Fund Common Shares)
[,[●] shares of preferred stock of Auction Market Preferred Stock, par value $0.10 per share, with [●] and each with a liquidation preference of $25,000 per share, and [●] shares of preferred stock of Series W-7 Variable Rate Muni Term Preferred Shares or any other series of Variable Rate Muni Term Preferred Shares, par value $[0.10] per share and liquidation preference $100,000 per share (Target Fund VMTP
Shares and together with Target Fund Common Shares, the Target Fund Shares)]13 [and [●] preferred shares of beneficial interest of Series W-7 Variable Rate Muni Term Preferred Shares or any other series of Variable Rate Muni Term Preferred Shares, par value $[0.001] per share and liquidation preference $100,000 per share (Target Fund VMTP
Shares and together with Target Fund Common Shares, the Target Fund Shares)]14. Each outstanding Target Fund Share is duly and validly issued and is fully paid and
nonassessable, except as provided by the Target Funds [charter]15[Agreement and Declaration of Trust]16, and has the voting rights
provided by the Target Funds [charter, By-laws]17[Agreement and Declaration of Trust]18 and
applicable law. The Target Fund has no outstanding preferred shares other than [●] VMTP Shares; no outstanding options, warrants or other rights to subscribe for or purchase any shares of the Target Fund; and no outstanding securities
convertible into shares of the Target Fund. All of the issued and outstanding Target Fund Shares will, at the time of the Closing, be held by the persons and in the amounts set forth in the records of the Target Funds transfer agent as
provided in Section 7(d).
(p) All of the issued and outstanding Target Fund Shares were offered for sale and
sold in conformity with all applicable federal and state securities laws.
(q) The Target Fund will not sell or
otherwise dispose of any of the Acquiring Fund Shares to be received in the Reorganization, except in distribution to the Target Fund Shareholders as provided in Section 3 of this Agreement.
(r) The books and records of the Target Fund made available to the Acquiring Fund and/or its counsel are substantially
true and correct and contain no material misstatements or omissions with respect to the operations of the Target Fund.
(s) The Target Fund has elected to qualify and has qualified as a RIC within the meaning of Section 851 of the
Code for each of its taxable years since its inception, and the Target Fund has satisfied the distribution requirements imposed by Section 852 of the Code to maintain RIC status for each of its taxable years.
11
|
[Applies to MUH and MUS.]
|
12
|
[Applies to BAF and BBK.]
|
13
|
[Applies to MUH and MUS.]
|
14
|
[Applies to BAF and BBK.]
|
15
|
[Applies to MUH and MUS.]
|
16
|
[Applies to BAF and BBK.]
|
17
|
[Applies to MUH and MUS.]
|
18
|
[Applies to BAF and BBK.]
|
A-6
(a) Subject to receiving the requisite approvals of the Target Fund Shareholders and the Acquiring Fund Shareholders,
and to the other terms and conditions contained herein, and in accordance with the applicable law, the Target Fund agrees to convey, transfer and deliver to the Acquiring Fund and the Acquiring Fund agrees to acquire from the Target Fund, on the
Closing Date, all of the Target Fund Investments (including interest accrued as of the Valuation Time on debt instruments), and assume substantially all of the liabilities of the Target Fund, in exchange for that number of Acquiring Fund Shares
provided in Section 4 of this Agreement. The existence of the Acquiring Fund shall continue unaffected and unimpaired by the Reorganization and it shall be governed by the laws of Maryland.
(b) If the investment adviser determines that the portfolios of the Target Fund and the Acquiring Fund, when
aggregated, would contain investments exceeding certain percentage limitations imposed upon the Acquiring Fund with respect to such investments or that the disposition of certain assets is necessary to ensure that the resulting portfolio will meet
the Acquiring Funds investment objective, policies and restrictions, as set forth in the Joint Proxy Statement/Prospectus, a copy of which has been delivered (including by electronic format) to the Target Fund, the Target Fund, if requested by
the Acquiring Fund, will dispose of a sufficient amount of such investments as may be necessary to avoid violating such limitations as of the Closing Date. Notwithstanding the foregoing, nothing herein will require the Target Fund to dispose of any
portion of its assets if, in the reasonable judgment of the Target Funds [Board of Directors]19[Board of Trustees]20 or investment
adviser, such disposition would create more than an insignificant risk that the Reorganization would not be treated as a reorganization described in Section 368(a) of the Code or would otherwise not be in the best interests
of the Target Fund.
(c) Prior to the Closing Date, the Target Fund shall declare a dividend or dividends which,
together with all such previous dividends, shall have the effect of distributing to its shareholders entitled to such dividends (i) all of its investment company taxable income to and including the Closing Date, if any (computed without regard
to any deduction for dividends paid), (ii) all of its net capital gain, if any, recognized to and including the Closing Date and (iii) the excess of its interest income excludable from gross income under Section 103(a) of the Code, if any,
over its deductions disallowed under Sections 265 and 171(a)(2) of the Code for the period to and including the Closing Date. The Acquiring Fund may pay amounts in respect of such distributions (UNII Distributions) on behalf of
the Target Fund to the Target Fund Shareholders entitled to receive such UNII Distributions after the Closing Date as an agent out of cash or other short-term liquid assets maturing prior to the payment date of the UNII Distributions acquired from
the Target Fund in the Reorganization, segregated for this purpose and maintained in an amount at least equal to the remaining payment obligations in respect of the UNII Distributions.
(d) Pursuant to this Agreement, as soon as practicable, and in no event more than 48 hours, exclusive of Sundays and
holidays, after the Closing Date, the Target Fund will distribute all Acquiring Fund Common Shares and Acquiring Fund VMTP Shares received by it to its shareholders in exchange for their Target Fund Common Shares and Target Fund VMTP Shares,
respectively. Such distributions shall be accomplished by the opening of shareholder accounts on the share ledger records of the Acquiring Fund in the names of and in the amounts due to the Target Fund Shareholders based on their respective holdings
in the Target Fund as of the Valuation Time.
(e) The Valuation Time shall be at the close of business of the New
York Stock Exchange on the business day immediately preceding the Closing Date, or such earlier or later day and time as may be mutually agreed upon in writing by the Funds (the Valuation Time).
(f) The Target Fund will pay or cause to be paid to the Acquiring Fund any interest the Target Fund receives on or
after the Closing Date with respect to any of the Target Fund Investments transferred to the Acquiring Fund hereunder.
19
|
[Applies to MUH and MUS.]
|
20
|
[Applies to BAF and BBK.]
|
A-7
(g) Recourse for liabilities assumed from the Target Fund by the Acquiring
Fund in the Reorganization will be limited to the net assets acquired by the Acquiring Fund. The known liabilities of the Target Fund, as of the Valuation Time, shall be confirmed to the Acquiring Fund pursuant to Section 2(i) of this
Agreement.
(h) The Target Fund will be terminated as soon as practicable following the Closing Date by terminating
its registration under the 1940 Act and dissolving and terminating [under the laws of the State of Maryland]21[under the DSTA]22 and will
withdraw its authority to do business in any state where it is registered.
(i) For U.S. federal income tax
purposes, the parties to this Agreement intend that (i) the Reorganization qualify as a reorganization within the meaning of Section 368(a) of the Code, (ii) this Agreement constitutes a plan of reorganization within the meaning of
U.S. Treasury Regulations Section 1.368-2(g), and (iii) the parties to this Agreement will each be a party to such reorganization within the meaning of Section 368(b) of the Code.
4.
|
ISSUANCE AND VALUATION OF ACQUIRING FUND SHARES IN THE REORGANIZATION.
|
(a) A number of Acquiring Fund Common Shares with an aggregate net asset value equal to the value of the assets of the
Target Fund acquired in the Reorganization determined as hereinafter provided, reduced by the amount of liabilities of the Target Fund assumed by the Acquiring Fund in the Reorganization, shall be issued by the Acquiring Fund to the Target Fund in
exchange for such assets of the Target Fund, which shall be determined as set forth below. The value of each Funds net assets shall be calculated net of the liquidation preference (including accumulated and unpaid dividends) of all outstanding
preferred shares of such Fund.
(b) A number of Acquiring Fund VMTP Shares equal to the number of Target Fund VMTP
Shares outstanding immediately prior to the Closing Date, with the terms described in the Preferred Shares Proxy Statement, shall be issued by the Acquiring Fund to the Target Fund. No fractional Acquiring Fund VMTP Shares will be issued. Each
Acquiring Fund VMTP Share issued to the Target Fund in exchange for a Target Fund VMTP Share will have a liquidation preference of $100,000 plus any accumulated and unpaid dividends that have accrued on such Target Fund VMTP] Share up to and
including the day immediately preceding the Closing Date. The Target Fund may pay any such accumulated and unpaid dividends prior to the Closing Date.
(c) The net asset value of the Acquiring Fund and the Target Fund, the values of their assets, the amounts of their
liabilities, and the liquidation preference (including accumulated and unpaid dividends) of the Target Fund VMTP Shares and the Acquiring Fund VMTP Shares shall be determined as of the Valuation Time in accordance with the regular procedures of the
Acquiring Fund or such other valuation procedures as shall be mutually agreed by the parties, and no adjustment will be made to the net asset value or liquidation preference so determined of any Fund to take into account differences in realized and
unrealized gains and losses.
Such valuation and determination shall be made by the Acquiring Fund in cooperation with the Target Fund and
shall be confirmed by the Acquiring Fund to the Target Fund. The net asset value per share of the Acquiring Fund Common Shares and the liquidation preference (including accumulated and unpaid dividends) per share of the Acquiring Fund VMTP Shares
shall be determined in accordance with such procedures.
For purposes of determining the net asset value per share of Target Fund Common
Shares and the Acquiring Fund Common Shares, the value of the securities held by the applicable Fund plus any cash or other assets (including interest accrued but not yet received) minus all liabilities (including accrued expenses) and the aggregate
liquidation value of the outstanding Target Fund VMTP Shares or Acquiring Fund VMTP Shares, as the case may be, shall be divided by the total number of Target Fund Common Shares or Acquiring Fund Common Shares, as the case may be, outstanding at
such time.
(d) The Acquiring Fund shall issue to the Target Fund certificates, share deposit receipts or book
entry interests for the Acquiring Fund Common Shares registered in the name of the Target Fund. The Target Fund shall then distribute the Acquiring Fund Common Shares to the holders of Target Fund Common Shares by redelivering
21
|
[Applies to MUH and MUS.]
|
22
|
[Applies to BAF and BBK.]
|
A-8
the certificates, share deposit receipts or book entry interests evidencing ownership of the Acquiring Fund Common Shares to the transfer agent and registrar for the Acquiring Fund Common Shares,
for distribution to the holders of Target Fund Common Shares on the basis of each such holders proportionate interest in the aggregate net asset value of the Target Fund Common Shares.
(e) The Acquiring Fund shall issue to the Target Fund book entry interests for the Acquiring Fund VMTP Shares
registered in the name of the Target Fund. The Target Fund shall then distribute the Acquiring Fund VMTP Shares to the Target Fund VMTP Holders by redelivering the book entry interests evidencing ownership of the Acquiring Fund VMTP Shares to the
transfer agent and registrar for the Acquiring Fund VMTP Shares for distribution to the Target Fund VMTP Holders on the basis of each holders proportionate holdings of the Target Fund VMTP Shares. The Target Fund VMTP Holders shall not
receive, or be entitled to, any payment or other consideration in connection with or as a result of the Reorganization other than as provided in this Agreement. In connection with such issuance, the Acquiring Fund shall amend the Acquiring Fund VMTP
Shares Articles Supplementary Establishing and Fixing the Rights and Preferences of Variable Rate Muni Term Preferred Shares (the Articles Supplementary), share certificates representing such Acquiring Fund VMTP Shares, and
such other agreements, instruments or documents relating to the Acquiring Fund VMTP Shares, in each case as of the Closing Date and only to the extent necessary or applicable to such agreement, instrument or document, to reflect the authorization
and issuance of additional Acquiring Fund VMTP Shares in connection with the Reorganization.
(f) No fractional
shares of Acquiring Fund Common Shares will be issued to holders of Target Fund Common Shares unless such shares are held in a Dividend Reinvestment Plan account. In lieu thereof, the Acquiring Funds transfer agent will aggregate all
fractional Acquiring Fund Common Shares to be issued in connection with the Reorganization (other than those issued to a Dividend Reinvestment Plan account) and sell the resulting full shares on the New York Stock Exchange at the current market
price for Acquiring Fund Common Shares for the account of all holders of such fractional interests, and each such holder will receive such holders pro rata share of the proceeds of such sale upon surrender of such holders certificates
representing Acquiring Fund Common Shares.
(a) The Target Fund and the Acquiring Fund will bear expenses incurred in connection with the Reorganization, including
but not limited to, costs related to the preparation and distribution of materials distributed to each Funds Board of [Directors]23 or
[Trustees]24 (the Board), expenses incurred in connection with the preparation of this Agreement, the preparation and filing of any documents required by such Funds state
of organization, the preparation and filing of the N-14 Registration Statement and the Preferred Shares Proxy Statement with the U.S. Securities and Exchange Commission (SEC), the printing
and distribution of the Joint Proxy Statement/Prospectus, the Preferred Shares Proxy Statement and any other materials required to be distributed to shareholders, the SEC, state securities commission and secretary of state filing fees and legal and
audit fees in connection with the Reorganization, fees incurred in obtaining the requisite consents of rating agencies, counterparties or service providers to the preferred shares, legal fees incurred in connection with amending the transaction
documents for the preferred shares, which may include the legal fees of counterparties and service providers to the extent applicable, legal fees incurred preparing each Funds board materials, attending each Funds board meetings and
preparing the minutes, rating agency fees associated with the ratings of the preferred shares in connection with the Reorganization, audit fees associated with each Funds financial statements, stock exchange fees, transfer agency fees, rating
agency fees, portfolio transfer taxes (if any) and any similar expenses incurred in connection with the Reorganization, which will be borne directly by the respective Fund incurring the expense or allocated among the Funds based upon any reasonable
methodology approved by the Boards of the Funds, provided, that the Acquiring Funds investment adviser may bear all or a portion of the reorganization expenses of each Fund. Neither the Funds nor the investment adviser will pay any expenses of
shareholders arising out of or in connection with the Reorganization.
23
|
[Applies to MUH and MUS.]
|
24
|
[Applies to BAF and BBK.]
|
A-9
(b) If for any reason the Reorganization is not consummated, no party
shall be liable to any other party for any damages resulting therefrom, including, without limitation, consequential damages, and each Fund shall be responsible, on a proportionate total assets basis, for all expenses incurred in connection with the
Reorganization.
6.
|
COVENANTS OF THE FUNDS.
|
(a) COVENANTS OF EACH FUND.
(i) Each Fund covenants to operate its business as presently conducted between the date hereof and the
Closing Date.
(ii) Each of the Funds agrees that by the Closing Date all of its U.S. federal and
other tax returns and reports required to be filed on or before such date shall have been filed and all taxes shown as due on said returns either have been paid or adequate liability reserves have been provided for the payment of such taxes.
(iii) The intention of the parties is that the transaction contemplated by this Agreement will qualify
as a reorganization within the meaning of Section 368(a) of the Code. Neither the Acquiring Fund nor the Target Fund shall take any action or cause any action to be taken (including, without limitation, the filing of any tax
return) that is inconsistent with such treatment or results in the failure of the transaction to qualify as a reorganization within the meaning of Section 368(a) of the Code. At or prior to the Closing Date, the Acquiring Fund and the Target
Fund will take such action, or cause such action to be taken, as is reasonably necessary to enable Willkie Farr & Gallagher LLP (Willkie), counsel to the Funds, to render the tax opinion required herein (including,
without limitation, each partys execution of representations reasonably requested by and addressed to Willkie).
(iv) In connection with this covenant, the Funds agree to cooperate with each other in filing any tax
return, amended return or claim for refund, determining a liability for taxes or a right to a refund of taxes or participating in or conducting any audit or other proceeding in respect of taxes. The Acquiring Fund agrees to retain for a period of
ten (10) years following the Closing Date all returns, schedules and work papers and all material records or other documents relating to tax matters of the Target Fund for each of such Funds taxable periods ending on or before the Closing
Date.
(v) The Acquiring Fund VMTP Shares to be transferred to the Target Fund for
distribution to the Target Fund VMTP Holders on the Closing Date shall only be distributed to the Target Fund VMTP Holders in accordance with an available exemption from registration under the 1933 Act, in a manner not involving any public offering
within the meaning of Section 4(a)(2) of the 1933 Act.
(vi) Each Fund shall use reasonable
efforts to obtain all requisite consents and approvals necessary to consummate the Reorganization.
(b) COVENANTS
OF THE ACQUIRING FUND.
(i) The Acquiring Fund will file the
N-14 Registration Statement and the Preferred Shares Proxy Statement with the SEC and will use its best efforts to provide that the N-14 Registration Statement becomes
effective as promptly as practicable. Each Fund agrees to cooperate fully with the other, and each will furnish to the other the information relating to itself to be set forth in the N-14 Registration
Statement and the Preferred Shares Proxy Statement as required by the 1933 Act, the 1934 Act and the 1940 Act, and the rules and regulations thereunder and the state securities laws.
(ii) The Acquiring Fund has no plan or intention to sell or otherwise dispose of the Target Fund
Investments, except for dispositions made in the ordinary course of business.
(iii) Following the
consummation of the Reorganization, the Acquiring Fund will continue its business as a diversified, closed-end management investment company registered under the 1940 Act.
A-10
(iv) The Acquiring Fund shall use reasonable efforts to
cause the Acquiring Fund Common Shares to be issued in the Reorganization to be approved for listing on the New York Stock Exchange prior to the Closing Date.
(v) The Acquiring Fund agrees to mail to its shareholders of record entitled to vote at the special
meeting of shareholders at which action is to be considered regarding this Agreement, in sufficient time to comply with requirements as to notice thereof, the Joint Proxy Statement/Prospectus (but only to the Acquiring Fund Common Shareholders) and
the Preferred Shares Proxy Statement (but only to the Acquiring Fund VMTP Holders), each of which complies in all material respects with the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the
rules and regulations, respectively, thereunder.
(vi) The Acquiring Fund shall use reasonable
efforts to cause the Acquiring Fund VMTP Shares to be issued in connection with the Reorganization to be rated no lower than the rating assigned to the Acquiring Fund VMTP Shares immediately prior to the Closing Date by the rating agencies then
rating the Acquiring Fund VMTP Shares.
(vii) The Acquiring Fund shall use reasonable efforts to
amend the following documents to reflect the authorization and issuance of additional Acquiring Fund VMTP Shares in connection with the Reorganization: (1) the Articles Supplementary; (2) share certificates representing Acquiring Fund VMTP
Shares; (3) the VMTP Shares Purchase Agreement for the Acquiring Fund VMTP Shares; (4) the Redemption and Paying Agent Agreement for the Acquiring Fund VMTP Shares; and (5) such other agreements, instruments or documents relating to
the Acquiring Fund VMTP Shares, in each case by the Closing Date and only to the extent necessary or applicable to such agreement, instrument or document.
(c) COVENANTS OF THE TARGET FUND.
(i) The Target Fund agrees that following the consummation of the Reorganization, it will dissolve in
accordance with the [DTSA]25[laws of State of Maryland]26 and any other applicable law, it will not make any distributions of any Acquiring
Fund Common Shares other than to its shareholders and without first paying or adequately providing for the payment of all of its respective liabilities not assumed by the Acquiring Fund, if any, and on and after the Closing Date it shall not conduct
any business except in connection with its termination.
(ii) The Target Fund undertakes that if the
Reorganization is consummated, it will file an application pursuant to Section 8(f) of the 1940 Act for an order declaring that the Target Fund has ceased to be a registered investment company.
(iii) The Target Fund agrees to mail to its shareholders of record entitled to vote at the special
meeting of shareholders at which action is to be considered regarding this Agreement, in sufficient time to comply with requirements as to notice thereof, the Joint Proxy Statement/Prospectus (but only to the Target Fund Common Shareholders) and the
Preferred Shares Proxy Statement (but only to the Target Fund VMTP Holders), each of which complies in all material respects with the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules
and regulations, respectively, thereunder.
(iv) After the Closing Date, the Target Fund shall
prepare, or cause its agents to prepare, any U.S. federal, state or local tax returns required to be filed by such Target Fund with respect to its final taxable year ending with its complete liquidation and dissolution and for any prior periods or
taxable years and further shall cause such tax returns to be duly filed with the appropriate taxing authorities. Notwithstanding the aforementioned provisions of this subsection, any expenses incurred by the Target Fund (other than for payment of
taxes) in connection with the preparation and filing of said tax returns after the Closing Date shall be borne by such Target Fund to the extent such expenses have been accrued by such Target Fund in the
25
|
[Applies to BAF, and BBK.]
|
26
|
[Applies to MUH and MUS.]
|
A-11
ordinary course without regard to the Reorganization; any excess expenses shall be paid from a liability reserve established to provide for the payment of such expenses.
(v) Upon the request of the Acquiring Fund, the Target Fund shall use reasonable efforts to perform the
following actions by the Closing Date or such later time as may be agreed to by the Acquiring Fund: (a) terminate VMTP Shares Purchase Agreement, Redemption and Paying Agent Agreement and such other agreements, instruments or documents related
to the Target Fund VMTP Shares, (b) withdraw the ratings assigned to the Target Fund VMTP Shares, (c) cancel the share certificates representing Target Fund VMTP Shares, and (d) withdraw or deregister the Target Fund VMTP Shares from
The Depository Trust Company.
(a) The closing of the Reorganization (the Closing) shall occur prior to the opening of the NYSE at
the offices of Willkie, 787 Seventh Avenue, New York, New York 10019, or at such other time or location as may be mutually agreed to by the Funds, on the next full business day following the Valuation Time to occur after the satisfaction or waiver
of all of the conditions set forth in Sections 8 and 9 of this Agreement (other than the conditions that relate to actions to be taken, or documents to be delivered at the Closing, it being understood that the occurrence of the Closing shall remain
subject to the satisfaction or waiver of such conditions at Closing), or at such other time and date as may be mutually agreed to by the Funds (such date, the Closing Date).
(b) On the Closing Date, the Target Fund shall deliver its assets that are to be transferred, together with any other
Target Fund Investments, to the Acquiring Fund, and the Acquiring Fund shall issue the Acquiring Fund Shares as provided in this Agreement. To the extent that any Target Fund Investments, for any reason, are not transferable on the Closing Date, the
Target Fund shall cause such Target Fund Investments to be transferred to the Acquiring Funds account with its custodian at the earliest practicable date thereafter.
(c) The Target Fund will deliver to the Acquiring Fund on the Closing Date confirmation or other adequate evidence as
to the tax basis of the Target Fund Investments delivered to the Acquiring Fund hereunder.
(d) As soon as
practicable after the close of business on the Closing Date, the Target Fund shall deliver or make available to (including by electronic format) the Acquiring Fund a list of the names and addresses of all of the Target Fund Shareholders of record on
the Closing Date and the number of Target Fund Common Shares and Target Fund VMTP Shares owned by each such Target Fund Shareholder, certified to the best of its knowledge and belief by the transfer agent for the Target Fund Common Shares and Target
Fund VMTP Shares or by the Target Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, or Secretary or any Assistant Secretary.
8.
|
CONDITIONS OF THE TARGET FUND.
|
The obligations of the Target Fund hereunder shall be subject to the following conditions:
(a) That this Agreement shall have been approved by at least [eighty percent]27[two-thirds]28 of the members of the Board of the Target Fund and by the affirmative vote of the Target
Fund Common Shareholders and the Target Fund VMTP Holders, voting as a single class, representing a [1940 Act Majority (as defined
below)]29[majority]30 of the outstanding shares entitled to vote on this Agreement, and by the affirmative vote of the Target Fund VMTP
Holders, voting as a separate class, representing a 1940 Act Majority [(as defined below)] of the outstanding VMTP Shares entitled to vote on this Agreement. A 1940 Act Majority means the affirmative vote of either (i) 67% or more
of the class or classes of Target Fund Shares entitled to vote on such proposal present at the Target Funds shareholder meeting where this Agreement shall be approved, if the holders of more than 50% of the outstanding class or classes of
Target Fund Shares entitled to vote on such proposal are present or represented by
27
|
[Applies to BAF and BBK.]
|
28
|
[Applies to MUH and MUS.]
|
29
|
[Applies to BAF and BBK.]
|
30
|
[Applies to MUH and MUS.]
|
A-12
proxy or (ii) more than 50% of the outstanding class or classes of Target Fund Shares entitled to vote on such proposal, whichever is less.
(b) That the Acquiring Fund shall have delivered (including in electronic format) to the Target Fund (i) a copy of
the resolutions approving this Agreement and the issuance of additional Acquiring Fund Shares in connection with the Reorganization adopted by the Board of the Acquiring Fund, (ii) a certificate setting forth the vote of the Acquiring Fund VMTP
Holders, voting as a separate class, approving this Agreement and amendments to the Articles Supplementary in connection with the issuance of additional Acquiring Fund VMTP Shares in the Reorganization, and the vote of the Acquiring Fund Common
Shareholders and the Acquiring Fund VMTP Holders, voting as a single class, approving the issuance of additional Acquiring Fund Common Shares in connection with the Reorganization, and (iii) a certificate certifying that the Acquiring Fund has
received all requisite consents and approvals necessary to consummate the Reorganization, each certified by the Acquiring Funds Secretary or any Assistant Secretary.
(c) That the Acquiring Fund shall have provided or made available (including by electronic format) to the Target Fund
the Acquiring Fund Closing Financial Statements, together with a schedule of the Acquiring Funds investments, all as of the Valuation Time, certified on the Acquiring Funds behalf by its Chief Executive Officer, President, any Vice
President, Chief Financial Officer, Treasurer or any Assistant Treasurer, and a certificate signed by the Acquiring Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer,
dated as of the Closing Date, certifying that as of the Valuation Time and as of the Closing Date there has been no material adverse change in the financial position of the Acquiring Fund since the date of the Acquiring Funds most recent
Annual or Semi-Annual Report, as applicable, other than changes in its portfolio securities since that date or changes in the market value of its portfolio securities.
(d) That the Acquiring Fund shall have furnished to the Target Fund a certificate signed by the Acquiring Funds
Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, dated as of the Closing Date, certifying that, as of the Valuation Time and as of the Closing Date, all representations and
warranties of the Acquiring Fund made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates, and that the Acquiring Fund has complied with all of the agreements and satisfied all of
the conditions on its part to be performed or satisfied at or prior to each of such dates.
(e) That there shall
not be any material litigation pending with respect to the matters contemplated by this Agreement.
(f) That the
Target Fund shall have received the opinion of Miles & Stockbridge P.C., special Maryland counsel to the Acquiring Fund, dated as of the Closing Date, addressed to the Target Fund, that substantively provides the following:
(i) The Acquiring Fund is validly existing as a corporation under the laws of the State of Maryland and
in good standing under the laws of the State of Maryland and has the power as a corporation to conduct its business as described in the definitive Joint Proxy Statement/Prospectus filed with the SEC pursuant to Rule 497 under the 1933 Act.
(ii) The Acquiring Fund has the corporate power and authority to execute, deliver and perform all of the
obligations under the Agreement under the applicable laws of the State of Maryland. The execution and delivery of the Agreement and the consummation by the Acquiring Fund of the transactions contemplated hereby have been duly authorized by all
requisite corporate action on the part of the Acquiring Fund under the laws of the State of Maryland and the Acquiring Funds charter.
(iii) The execution and delivery by the Acquiring Fund of this Agreement and the performance of the
Acquiring Funds obligations under the Agreement do not violate the Acquiring Funds charter or By-laws.
A-13
(iv) Neither the execution, delivery or performance by the
Acquiring Fund of the Agreement nor the compliance by the Acquiring Fund with the terms and provisions thereof will violate any provision of law of the State of Maryland applicable to the Acquiring Fund.
(v) Assuming that the Acquiring Fund Shares will be issued in accordance with the terms of this
Agreement, the Acquiring Fund Shares to be issued and delivered to the Target Fund Shareholders as provided by this Agreement are duly authorized and upon such delivery will be validly issued and fully paid and
non-assessable by the Acquiring Fund, and no shareholder of the Acquiring Fund has, as such holder, any preemptive rights to acquire, purchase or subscribe for any securities of the Acquiring Fund under the
Acquiring Funds charter, By-laws or the laws of the State of Maryland.
(g) That the Target Fund shall have received the opinion of Willkie, counsel to the Acquiring Fund, dated as of the
Closing Date, addressed to the Target Fund, that substantively provides the following:
(i) The
Acquiring Fund is registered with the SEC as a closed-end management investment company under the 1940 Act;
(ii) To the best of such counsels knowledge, no governmental approval, which has not been obtained
and is not in full force and effect, is required to authorize, or is required in connection with, the execution or delivery of the Agreement by the Acquiring Fund, or the enforceability of the Agreement against the Acquiring Fund.
(iii) Neither the execution, delivery or performance by the Acquiring Fund of the Agreement nor the
compliance by the Acquiring Fund with the terms and provisions thereof will contravene any provision of applicable federal securities law of the United States of America.
(h) That the Target Fund shall have obtained an opinion from counsel for the Acquiring Fund, dated as of the Closing
Date, addressed to the Target Fund, that the consummation of the transactions set forth in this Agreement complies with the requirements of a reorganization as described in Section 368(a) of the Code.
(i) That all proceedings taken by the Acquiring Fund and its counsel in connection with the Reorganization and all
documents incidental thereto shall be satisfactory in form and substance to the Target Fund.
(j) That the N-14 Registration Statement shall have become effective under the 1933 Act, and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of the Acquiring Fund, be contemplated by
the SEC.
9.
|
CONDITIONS OF THE ACQUIRING FUND.
|
The obligations of the Acquiring Fund hereunder shall be subject to the following conditions:
(a) That this Agreement and amendments to the Articles Supplementary in connection with the issuance of additional
Acquiring Fund VMTP Shares in the Reorganization, shall have been approved by the Board of the Acquiring Fund and by the affirmative vote of the Acquiring Fund VMTP Holders, voting as a separate class, of a 1940 Act Majority of the outstanding
Acquiring Fund VMTP Shares.
(b) That the issuance of additional Acquiring Fund Common Shares in connection with
the Reorganization shall have been approved by the Board of the Acquiring Fund and by the affirmative vote of the Acquiring Fund Common Shareholders and the Acquiring Fund VMTP Holders, voting as a single class, of a majority of votes entitled to be
cast by the Acquiring Fund Common Shareholders and the Acquiring Fund VMTP Holders present or represented by proxy at the Acquiring Funds shareholder meeting where such issuance of additional Acquiring Fund Common Shares shall be approved.
(c) The Target Fund shall have delivered (including in electronic format) to the Acquiring Fund (i) a copy of
the resolutions approving this Agreement adopted by the Board of the Target Fund, (ii) a certificate setting
A-14
forth the vote of the Target Fund Common Shareholders and the Target Fund VMTP Holders, voting as a single class, approving this Agreement, and the vote of the Target Fund VMTP Holders, voting as
a separate class, approving this Agreement, and (iii) a certificate certifying that the Target Fund has received all requisite consents and approvals necessary to consummate the Reorganization, each certified by the Target Funds Secretary
or any Assistant Secretary.
(d) That the Target Fund shall have provided or made available (including by
electronic format) to the Acquiring Fund the Target Fund Closing Financial Statements, together with a schedule of the Target Funds investments with their respective dates of acquisition and tax costs, all as of the Valuation Time, certified
on the Target Funds behalf by its Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, and a certificate signed the Target Funds Chief Executive Officer, President, any
Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, dated as of the Closing Date, certifying that as of the Valuation Time and as of the Closing Date there has been no material adverse change in the financial position of
the Target Fund since the date of the Target Funds most recent Annual Report or Semi-Annual Report, as applicable, other than changes in the Target Fund Investments since that date or changes in the market value of the Target Fund Investments.
(e) That the Target Fund shall have furnished to the Acquiring Fund a certificate signed by the Target Funds
Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, dated as of the Closing Date, certifying that as of the Valuation Time and as of the Closing Date all representations and
warranties of the Target Fund made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates and the Target Fund has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied at or prior to such dates.
(f) That there shall not be any
material litigation pending with respect to the matters contemplated by this Agreement.
(g) That the Acquiring
Fund shall have received the opinion of [Miles & Stockbridge P.C., special Maryland counsel]31[Morris, Nichols, Arsht & Tunnell LLP, special Delaware counsel]32 to the Target Fund, dated as of the Closing Date, addressed to the Acquiring Fund, that substantively provides the following:
(i) The Target Fund is validly existing and in good standing [under the laws of the
State of Maryland]33[under the DSTA]34.
(ii) The Target Fund has the [corporate][statutory trust] power and authority to execute, deliver and
perform all of the obligations under the Agreement under the [laws of the State of Maryland]35[DSTA]36. The execution and delivery of the
Agreement and the consummation by the Target Fund of the transactions contemplated thereby have been duly authorized by all necessary [corporate] action on the part of the Target Fund under the [laws of the State of Maryland]37[DSTA]38 and the Target Funds [charter]39[Agreement and Declaration of Trust]40.
(iii) The Agreement has been duly executed and
delivered by the Target Fund.
31
|
[Applies to MUH and MUS.]
|
32
|
[Applies to BAF and BBK.]
|
33
|
[Applies to MUH and MUS.]
|
34
|
[Applies to BAF and BBK.]
|
35
|
[Applies to MUH and MUS.]
|
36
|
[Applies to BAF and BBK.]
|
37
|
[Applies to MUH and MUS.]
|
38
|
[Applies to BAF and BBK.]
|
39
|
[Applies to MUH and MUS.]
|
40
|
[Applies to BAF and BBK.]
|
A-15
(iv) The execution and delivery by the Target Fund of the
Agreement, and the performance of the Target Funds obligations under the Agreement, do not violate the [charter]41[Agreement and Declaration of Trust]42 or the By-laws of the Target Fund.
(v) Neither the execution, delivery or performance by the Target Fund of the Agreement nor the
compliance by the Target Fund with the terms and provisions thereof will violate any provision of any applicable law of the [State of Maryland]43[State of Delaware]44.
(h) That the Target Fund shall have received the opinion of
Willkie, counsel to the Acquiring Fund, dated as of the Closing Date, addressed to the Target Fund, that substantively provides the following:
(i) The Target Fund is registered with the SEC as a closed-end
management investment company under the 1940 Act;
(ii) To the best of such counsels
knowledge, no governmental approval, which has not been obtained and is not in full force and effect, is required to authorize, or is required in connection with, the execution or delivery of the Agreement by the Target Fund, or the enforceability
of the Agreement against the Target Fund.
(iii) Neither the execution, delivery or performance by
the Target Fund of the Agreement nor the compliance by the Target Fund with the terms and provisions thereof will contravene any provision of applicable federal securities law of the United States of America.
(i) That the Acquiring Fund shall have obtained an opinion from counsel for the Target Fund, dated as of the Closing
Date, addressed to the Acquiring Fund, that the consummation of the transactions set forth in this Agreement complies with the requirements of a reorganization as described in Section 368(a) of the Code.
(j) That all proceedings taken by the Target Fund and its counsel in connection with the Reorganization and all
documents incidental thereto shall be satisfactory in form and substance to the Acquiring Fund.
(k) That the N-14 Registration Statement shall have become effective under the 1933 Act and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of the Target Fund, be contemplated by the
SEC.
(l) That prior to the Closing Date, the Target Fund shall have declared a dividend or dividends which,
together with all such previous dividends, shall have the effect of distributing to its common shareholders entitled to such dividends (i) all of its investment company taxable income to and including the Closing Date, if any (computed without
regard to any deduction for dividends paid), (ii) all of its net capital gain, if any, recognized to and including the Closing Date and (iii) the excess of its interest income excludable from gross income under Section 103(a) of the Code,
if any, over its deductions disallowed under Sections 265 and 171(a)(2) of the Code for the period to and including the Closing Date. The Acquiring Fund may pay amounts in respect of such UNII Distributions on behalf of the Target Fund to the Target
Fund Shareholders entitled to receive such UNII Distributions after the Closing Date as an agent out of cash or other short-term liquid assets maturing prior to the payment date of the UNII Distributions acquired from the Target Fund in the
Reorganization, segregated for this purpose and maintained in an amount at least equal to the remaining payment obligations in respect of the UNII Distributions.
(m) That the redemption and paying agent and the rating agencies for the Acquiring Fund VMTP Shares shall have
consented to any amendments to the Articles Supplementary, share certificates representing Acquiring Fund VMTP Shares and such other agreements, instruments or documents relating to the Acquiring Fund VMTP Shares that are necessary to reflect the
issuance of additional Acquiring Fund VMTP Shares in connection with the
41
|
[Applies to MUH and MUS.]
|
42
|
[Applies to BAF and BBK.]
|
43
|
[Applies to MUH and MUS.]
|
44
|
[Applies to BAF and BBK.]
|
A-16
Reorganization, but only to the extent such consent is required under the Related Documents (as defined in the Articles Supplementary).
10.
|
TERMINATION, POSTPONEMENT AND WAIVERS.
|
(a) Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and the
Reorganization abandoned at any time (whether before or after adoption thereof by the shareholders of the Target Fund and the Acquiring Fund) prior to the Closing Date, or the Closing Date may be postponed, (i) by mutual consent of the Boards
of the Acquiring Fund and the Target Fund; (ii) by the Board of the Target Fund if any condition of the Target Funds obligations set forth in Section 8 of this Agreement has not been fulfilled or waived by such Board; and
(iii) by the Board the Acquiring Fund if any condition of the Acquiring Funds obligations set forth in Section 9 of this Agreement has not been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not been consummated by [●], 2021, this Agreement
automatically shall terminate on that date, unless a later date is mutually agreed to by the Boards of the Acquiring Fund and the Target Fund.
(c) In the event of termination of this Agreement pursuant to the provisions hereof, the same shall become void and
have no further effect, and there shall not be any liability on the part of any Fund or its respective directors, trustees, officers, agents or shareholders in respect of this Agreement other than with respect to Section 11 and payment by each
Fund of its respective expenses incurred in connection with the Reorganization.
(d) At any time prior to the
Closing Date, any of the terms or conditions of this Agreement may be waived by the Board of the Acquiring Fund or the Target Fund (whichever is entitled to the benefit thereof), if, in the judgment of such Board after consultation with its counsel,
such action or waiver will not have a material adverse effect on the benefits intended under this Agreement to the shareholders of their respective Fund, on behalf of which such action is taken.
(e) The respective representations and warranties contained in Sections 1 and 2 of this Agreement shall expire with,
and be terminated by, the consummation of the Reorganization, and neither the Funds, nor any of their respective officers, directors, trustees, agents or shareholders shall have any liability with respect to such representations or warranties after
the Closing Date. This provision shall not protect any officer, director, trustee, agent or shareholder of either of the Funds against any liability to the entity for which that officer, director, trustee, agent or shareholder so acts or to its
shareholders, to which that officer, director, trustee, agent or shareholder otherwise would be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of his or her duties in the conduct of such office.
(f) If any order or orders of the SEC with respect to this Agreement shall be issued prior to the Closing Date and
shall impose any terms or conditions which are determined by action of the Boards of the Acquiring Fund and the Target Fund to be acceptable, such terms and conditions shall be binding as if a part of this Agreement without further vote or approval
of the Target Fund Shareholders and the Acquiring Fund Shareholders unless such terms and conditions shall result in a change in the method of computing the number of Acquiring Fund Shares to be issued to the Target Fund Shareholders, in which
event, unless such terms and conditions shall have been included in the proxy solicitation materials furnished to the Target Fund Shareholders prior to the meeting at which the Reorganization shall have been approved, this Agreement shall not be
consummated and shall terminate unless the Target Fund promptly shall call a special meeting of the Target Fund Shareholders at which such conditions so imposed shall be submitted for approval.
(a) Each party (an Indemnitor) shall indemnify and hold the other and its officers, directors,
trustees, agents and persons controlled by or controlling any of them (each an Indemnified Party) harmless from and against any and all losses, damages, liabilities, claims, demands, judgments, settlements, deficiencies, taxes,
assessments, charges, costs and expenses of any nature whatsoever (including reasonable attorneys fees) including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees reasonably incurred by such
A-17
Indemnified Party in connection with the defense or disposition of any claim, action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body
in which such Indemnified Party may be or may have been involved as a party or otherwise or with which such Indemnified Party may be or may have been threatened (collectively, the Losses) arising out of or related to any claim of
a breach of any representation, warranty or covenant made herein by the Indemnitor; provided, however, that no Indemnified Party shall be indemnified hereunder against any Losses arising directly from such Indemnified Partys
(i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless disregard of the duties involved in the conduct of such Indemnified Partys position.
(b) The Indemnified Party shall use its best efforts to minimize any liabilities, damages, deficiencies, claims,
judgments, assessments, costs and expenses in respect of which indemnity may be sought hereunder. The Indemnified Party shall give written notice to Indemnitor within the earlier of ten (10) days of receipt of written notice to the Indemnified
Party or thirty (30) days from discovery by the Indemnified Party of any matters which may give rise to a claim for indemnification or reimbursement under this Agreement. The failure to give such notice shall not affect the right of the
Indemnified Party to indemnity hereunder unless such failure has materially and adversely affected the rights of the Indemnitor. At any time after ten (10) days from the giving of such notice, the Indemnified Party may, at its option, resist,
settle or otherwise compromise, or pay such claim unless it shall have received notice from the Indemnitor that the Indemnitor intends, at the Indemnitors sole cost and expense, to assume the defense of any such matter, in which case the
Indemnified Party shall have the right, at no cost or expense to the Indemnitor, to participate in such defense. If the Indemnitor does not assume the defense of such matter, and in any event until the Indemnitor states in writing that it will
assume the defense, the Indemnitor shall pay all costs of the Indemnified Party arising out of the defense until the defense is assumed; provided, however, that the Indemnified Party shall consult with the Indemnitor and obtain
indemnitors prior written consent to any payment or settlement of any such claim. The Indemnitor shall keep the Indemnified Party fully apprised at all times as to the status of the defense. If the Indemnitor does not assume the defense, the
Indemnified Party shall keep the Indemnitor apprised at all times as to the status of the defense. Following indemnification as provided for hereunder, the Indemnitor shall be subrogated to all rights of the Indemnified Party with respect to all
third parties, firms or corporations relating to the matter for which indemnification has been made.
(a) All covenants, agreements, representations and warranties made under this Agreement and any certificates delivered
pursuant to this Agreement shall be deemed to have been material and relied upon by each of the parties, notwithstanding any investigation made by them or on their behalf.
(b) All notices hereunder shall be sufficiently given for all purposes hereunder if in writing and delivered
personally or sent by registered mail or certified mail, postage prepaid. Notice to the Target Fund shall be addressed to [Target Fund] c/o BlackRock Advisors, LLC, 40 East 52nd Street, New York, New York 10022, Attention: Janey Ahn,
Secretary of the Target Fund or at such other address as the Target Fund may designate by written notice to the Acquiring Fund. Notice to the Acquiring Fund shall be addressed to BlackRock MuniHoldings Fund, Inc. c/o BlackRock Advisors, LLC, 40 East
52nd Street New York, New York 10022, Attention: Janey Ahn, Secretary of the Acquiring Fund, or at such other address and to the attention of such other person as the Acquiring Fund may designate by written notice to the Target Fund. Any notice
shall be deemed to have been served or given as of the date such notice is delivered personally or mailed.
(c) This Agreement supersedes all previous correspondence and oral communications between the Funds regarding the
Reorganization, constitutes the only understanding with respect to the Reorganization, may not be changed except by a letter of agreement signed by each Fund and shall be governed by and construed in accordance with the laws of the State of New York
applicable to agreements made and to be performed in said state.
(d) This Agreement may be amended or modified by
the parties hereto prior to the Closing Date, by action taken or authorized by their respective Boards at any time before or after adoption of this Agreement and approval of the Reorganization by the Target Fund Shareholders or the Acquiring Fund
Shareholders, but, after any such adoption and approval, no amendment or modification shall be made which by law requires further approval by shareholders without such further approval. This Agreement may not be amended or modified except by an
instrument in writing signed on behalf of each of the Funds.
A-18
(e) This Agreement is not intended to confer upon any person other than
the parties hereto (or their respective successors and assigns) any rights, remedies, obligations or liabilities hereunder. If any provision of this Agreement shall be held or made invalid by statute rule, regulation, decision of a tribunal or
otherwise, the remainder of this Agreement shall not be affected thereby and, to such extent, the provisions of this Agreement shall be deemed severable provided that this Agreement shall be deemed modified to give effect to the fullest extent
permitted under applicable law to the intentions of the party as reflected by this Agreement prior to the invalidity of such provision.
(f) It is expressly agreed that the obligations of the Funds hereunder shall not be binding upon any of their
respective directors, trustees, shareholders, nominees, officers, agents, or employees personally, but shall bind only the property of the respective Fund. The execution and delivery of this Agreement has been authorized by the Boards of the
Acquiring Fund and the Target Fund and signed by an authorized officer of each of the Acquiring Fund and the Target Fund, acting as such, and neither such authorization by such Board nor such execution and delivery by such officer shall be deemed to
have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the trust property of each Fund.
(g) This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be
deemed to be an original but all such counterparts together shall constitute but one instrument.
[Remainder of Page Intentionally Left
Blank]
A-19
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be executed and delivered
by their duly authorized officers as of the day and year first written above.
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BLACKROCK MUNIHOLDINGS FUND, INC.
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By:
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Name:
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Title:
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[TARGET FUND]
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By:
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Name:
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Title
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APPENDIX B
FUNDAMENTAL AND NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
Acquiring Fund, MUH and MUS
The following are
fundamental investment restrictions of the Acquiring Fund, MUH and MUS and may not be changed without the approval of the holders of a majority of the Funds outstanding common shares and outstanding shares of VMTP Shares and any other
preferred stock, voting together as a single class, and a majority of the outstanding shares of VMTP Shares and any other preferred stock, voting as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the
shares of each class of capital stock represented at a meeting at which more than 50% of the outstanding shares of each class of capital stock are represented or (ii) more than 50% of the outstanding shares of each class of capital stock). Each
of the Acquiring Fund, MUH and MUS may not:
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1.
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Make investments for the purpose of exercising control or management.
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2.
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Purchase or sell real estate, commodities or commodity contracts; provided, that the Fund may invest in
securities secured by real estate or interests therein or issued by entities that invest in real estate or interests therein, and the Acquiring Fund may purchase and sell financial futures contracts and options thereon.
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3.
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Issue senior securities or borrow money except as permitted by Section 18 of the 1940 Act.
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4.
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Underwrite securities of other issuers except insofar as the Fund may be deemed an underwriter under the
Securities Act of 1933, as amended, in selling portfolio securities.
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5.
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Make loans to other persons, except that the Fund may purchase Municipal Bonds, Municipal Bonds and other debt
securities and enter into repurchase agreements in accordance with its investment objective, policies and limitations.
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6.
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Invest more than 25% of its total assets (taken at market value at the time of each investment) in securities
of issuers in a single industry; provided, that for purposes of this restriction, states, municipalities and their political subdivisions are not considered to be part of any industry.
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For purposes of restriction (6), the exception for states, municipalities and their political subdivisions applies only to
tax-exempt securities issued by such entities.
Additional investment restrictions adopted by the Acquiring Fund,
which may be changed by the Board of Directors without shareholder approval, provide that the Acquiring Fund may not:
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a)
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Purchase securities of other investment companies, except to the extent that such purchases are permitted by
applicable law. Applicable law currently prohibits the Acquiring Fund from purchasing the securities of other investment companies except if immediately thereafter not more than (i) 3% of the total outstanding voting stock of such company is owned
by the Acquiring Fund, (ii) 5% of the Acquiring Funds total assets, taken at market value, would be invested in any one such company, (iii) 10% of the Acquiring Funds total assets, taken at market value, would be invested in such
securities, and (iv) the Acquiring Fund, together with other investment companies having the same investment adviser and companies controlled by such companies, owns not more than 10% of the total outstanding stock of any one closed-end investment company.
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b)
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Mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or
held by the Acquiring Fund except as may be necessary in connection with borrowings mentioned in investment restriction (3) above or except as may be necessary in connection with transactions in financial futures contracts and options thereon.
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B-1
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c)
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Purchase any securities on margin, except that the Acquiring Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of portfolio securities (the deposit or payment by the Acquiring Fund of initial or variation margin in connection with financial futures contracts and options thereon is not considered the purchase
of a security on margin).
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d)
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Make short sales of securities or maintain a short position or invest in put, call, straddle or spread options,
except that the Acquiring Fund may write, purchase and sell options and futures on New York Municipal Bonds, Municipal Bonds, U.S. Government obligations and related indices or otherwise in connection with bona fide hedging activities and may
purchase and sell a New York Municipal Bond or Municipal Bond issuers rights to call all or a portion of such New York Municipal Bond or Municipal Bond for mandatory tender for purchase to require mandatory tender for the purchase of related
New York Municipal Bonds and Municipal Bonds.
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If a percentage restriction on the investment or use of assets set forth above is adhered
to at the time a transaction is effected, later changes in percentages resulting from changing values will not be considered a violation.
BAF
The following are fundamental investment restrictions of the Fund and may not be changed without the approval of the holders of a majority of the
Funds outstanding Common Shares and outstanding Preferred Shares, voting together as a single class, and a majority of the outstanding Preferred Shares, voting as a separate class (which for this purpose and under the 1940 Act means the lesser
of (i) 67% of the shares of each class of shares represented at a meeting at which more than 50% of the outstanding shares of each class of shares are represented or (ii) more than 50% of the outstanding shares of each class of shares). The
Fund may not:
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1.
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invest 25% or more of the value of its Managed Assets in any one industry, provided that this limitation does
not apply to municipal bonds other than those municipal bonds backed only by assets and revenues of non-governmental issuers;
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2.
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issue senior securities or borrow money other than as permitted by the 1940 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;
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3.
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make loans of money or property to any person, except through loans of portfolio securities, the purchase of
fixed income securities consistent with the Funds investment objective and policies or the entry into repurchase agreements;
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4.
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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 Fund may be deemed to be an underwriter;
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5.
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purchase or sell real estate or interests therein other than municipal bonds secured by real estate or
interests therein; provided that the Fund may hold and sell any real estate acquired in connection with its investment in portfolio securities; or
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6.
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purchase or sell commodities or commodity contracts for any purposes except as, and to the extent, permitted by
applicable law without the Fund becoming subject to registration with the Commodity Futures Trading Commission as a commodity pool.
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For
purposes of applying the limitation set forth in subparagraph (1) above, securities of the U.S. government, its agencies, or instrumentalities, and securities backed by the credit of a 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 Fund may invest more than 25% of its Managed Assets in a broader economic sector of the market for municipal bonds, such as revenue obligations of
hospitals and other health care facilities or electrical utility revenue obligations. The Fund reserves the right to invest more than 25% of its Managed Assets in industrial development bonds and private activity securities.
B-2
For the purpose of applying the limitation set forth in subparagraph (1) above, a non-governmental issuer will 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 also backed by the enforceable obligation of a superior
or unrelated governmental or other entity (other than a bond insurer), it will also be included in the computation of securities owned that are issued by such governmental or other 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 bond is
insured by bond insurance, it will not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such municipal bond will be determined in accordance with the principles set forth above. The foregoing restrictions
do not limit the percentage of the Funds assets that may be invested in municipal bonds insured by any given insurer.
As a fundamental policy,
under normal market conditions, the Fund will invest at least 80% of its Managed Assets in Municipal Bonds, the interest of which is exempt from federal income tax, including the alternative minimum tax, and Florida intangible property tax.
The State of Florida repealed the Florida Intangible Tax as of January 2007. As a result, on September 12, 2008, the Board of Trustees of BAF voted
unanimously to approve BAF investing in Municipal Bonds regardless of geographic location. If Florida were to reinstate the Florida Intangible Tax or adopt a state income tax, however, BAF would be required to realign its portfolio such that
substantially all of its assets would be invested in Florida Municipal Bonds or obtain shareholder approval to amend BAFs fundamental investment objective to remove references to the Florida Intangible Tax.
In addition to the foregoing fundamental investment policies, the Fund is also subject to the following
non-fundamental restrictions and policies, which may be changed by the Board of the Fund. The Fund may not:
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1.
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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 Funds Managed Assets and the Funds aggregate short sales of a particular class of securities does not exceed 25% of
the then outstanding securities of that class. The Fund 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 Fund owns or has the immediate and
unconditional right to acquire at no additional cost the identical security;
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2.
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purchase securities of open-end or
closed-end investment companies except in compliance with the 1940 Act or any exemptive relief obtained thereunder; or
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3.
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purchase securities of companies for the purpose of exercising control.
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If a percentage restriction on the investment policies or the investment or use of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be considered a violation.
BBK
The following are fundamental investment restrictions of the Fund and may not be changed without the approval of the holders of a majority of the Funds
outstanding Common Shares and outstanding Preferred Shares, voting together as a single class, and a majority of the outstanding Preferred Shares, voting as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67%
of the shares of each class of shares represented at a meeting at which more than 50% of the outstanding shares of each class of shares are represented or (ii) more than 50% of the outstanding shares of each class of shares). The Fund may not:
B-3
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1.
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invest 25% or more of the value of its Managed Assets in any one industry, provided that this limitation does
not apply to municipal bonds other than those municipal bonds backed only by assets and revenues of non-governmental issuers;
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2.
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with respect to 75% of its Managed Assets, invest more than 5% of the value of its Managed Assets in the
securities of any single issuer or purchase more than 10% of the outstanding securities of any one issuer;
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3.
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issue senior securities or borrow money other than as permitted by the 1940 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;
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4.
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make loans of money or property to any person, except through loans of portfolio securities, the purchase of
fixed income securities consistent with the Funds investment objective and policies or the entry into repurchase agreements;
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5.
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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 Fund may be deemed to be an underwriter;
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6.
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purchase or sell real estate or interests therein other than municipal bonds secured by real estate or
interests therein; provided that the Fund may hold and sell any real estate acquired in connection with its investment in portfolio securities; or
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7.
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purchase or sell commodities or commodity contracts for any purposes except as, and to the extent, permitted by
applicable law without the Fund becoming subject to registration with the Commodity Futures Trading Commission as a commodity pool.
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For
purposes of applying the limitation set forth in subparagraph (1) above, securities of the U.S. government, its agencies, or instrumentalities, and securities backed by the credit of a 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 Fund may invest more than 25% of its Managed Assets in a broader economic sector of the market for municipal bonds, such as revenue obligations of
hospitals and other health care facilities or electrical utility revenue obligations. The Fund reserves the right to invest more than 25% of its Managed Assets in industrial development bonds and private activity securities.
For the purpose of applying the limitation set forth in subparagraph (1) above, a non-governmental issuer will 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 also backed by the enforceable obligation of a
superior or unrelated governmental or other entity (other than a bond insurer), it will also be included in the computation of securities owned that are issued by such governmental or other 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
bond is insured by bond insurance, it will not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such municipal bond will be determined in accordance with the principles set forth above. The foregoing
restrictions do not limit the percentage of the Funds assets that may be invested in municipal bonds insured by any given insurer.
As a fundamental
policy, under normal market conditions, the Fund will invest at least 80% of its Managed Assets in Municipal Bonds, the interest of which is exempt from regular federal income tax.
In addition to the foregoing fundamental investment policies, the Fund is also subject to the following
non-fundamental restrictions and policies, which may be changed by the Board of each Fund. The Fund may not:
B-4
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1.
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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 Funds Managed Assets and the Funds aggregate short sales of a particular class of securities does not exceed 25% of
the then outstanding securities of that class. The Fund 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 Fund owns or has the immediate and
unconditional right to acquire at no additional cost the identical security;
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2.
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purchase securities of open-end or
closed-end investment companies except in compliance with the 1940 Act or any exemptive relief obtained thereunder; or
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3.
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purchase securities of companies for the purpose of exercising control.
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If a percentage restriction on the investment policies or the investment or use of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be considered a violation.
B-5
APPENDIX C
FORM OF AMENDMENT TO MHD ARTICLES SUPPLEMENTARY
[TO COME]
C-1
APPENDIX D
RATINGS OF INVESTMENTS
A Description
of Moodys Investors Service, Inc.s (Moodys) Global Rating Scales
Ratings assigned on Moodys global long-term and
short-term rating scales are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project
finance vehicles, and public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default on contractually promised payments and the expected
financial loss suffered in the event of default. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default on contractually promised payments and the expected
financial loss suffered in the event of default.
Description of Moodys Long-Term Obligation Ratings
Aaa
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Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
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Aa
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Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
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A
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Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
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Baa
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Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess
certain speculative characteristics.
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Ba
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Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
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B
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Obligations rated B are considered speculative and are subject to high credit risk.
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Caa
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Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
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Ca
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Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of
recovery of principal and interest.
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C
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Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of
principal or interest.
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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.
Hybrid Indicator (hyb)
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The hybrid indicator (hyb) is appended to all ratings of hybrid securities issued by banks, insurers, finance
companies, and securities firms. By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be
subject to contractually allowable write-downs of principal that could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated
with that security.
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Description of Short-Term Obligation Ratings
Moodys employs the following designations to indicate the relative repayment ability of rated issuers:
D-1
P-1
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Issuers (or supporting institutions) rated Prime-1 have a superior
ability to repay short-term debt obligations.
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P-2
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Issuers (or supporting institutions) rated Prime-2 have a strong
ability to repay short-term debt obligations.
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P-3
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Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability to repay short-term obligations.
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NP
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Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
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Description of Moodys US Municipal Short-Term Obligation Ratings
The Municipal Investment Grade (MIG) scale is used to rate US municipal bond anticipation notes of up to three years maturity. Municipal notes
rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG ratings expire at the maturity of the obligation, and the issuers
long-term rating is only one consideration in assigning the MIG rating. MIG ratings are divided into three levelsMIG 1 through MIG 3while speculative grade short-term obligations are designated SG.
MIG 1
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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.
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MIG 2
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This designation denotes strong credit quality. Margins of protection are ample, although not as large as in
the preceding group.
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MIG 3
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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.
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SG
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This designation denotes speculative-grade credit quality. Debt instruments in this category may lack
sufficient margins of protection.
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Description of Moodys Demand Obligation Ratings
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned: a long or
short-term debt rating and a demand obligation rating. The first element represents Moodys evaluation of risk associated with scheduled principal and interest payments. The second element represents Moodys evaluation of risk associated
with the ability to receive purchase price upon demand (demand feature). The second element uses a rating from a variation of the MIG scale called the Variable Municipal Investment Grade (VMIG) scale.
VMIG 1
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This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term
credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
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VMIG 2
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This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit
strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
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VMIG 3
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This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory
short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
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SG
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This designation denotes speculative-grade credit quality. Demand features rated in this category may be
supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural and/or legal protections necessary to ensure the timely payment of purchase price upon demand.
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D-2
Description of S&P Global Ratings (S&P), a Division of S&P Global Inc., Issue Credit
Ratings
A S&P 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 daysincluding commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in varying degrees, on S&Ps analysis of the following considerations:
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Likelihood of paymentcapacity and willingness of the obligor to meet its financial commitment on an
obligation in accordance with the terms of the obligation;
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Nature of and provisions of the obligation, and the promise we impute;
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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.
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Long-Term Issue Credit Ratings*
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AAA
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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.
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AA
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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.
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A
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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.
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BBB
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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.
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BB; B; CCC; CC; and C
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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 will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
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BB
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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.
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B
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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,
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D-3
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or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitment on the obligation.
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CCC
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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.
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CC
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An obligation rated CC is currently highly vulnerable to nonpayment. The CC rating is used when a default has not yet occurred, but S&P expects default to be a virtual certainty, regardless of the
anticipated time to default.
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C
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An obligation rated C is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared to obligations that are rated higher.
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D
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An obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used when payments on an
obligation are not made on the date due, unless S&P believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The
D rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligations rating is
lowered to D if it is subject to a distressed exchange offer.
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NR
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This indicates that no rating has been requested, or 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.
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*
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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.
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Short-Term Issue Credit Ratings
A-1
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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.
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A-2
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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.
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A-3
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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.
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B
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A short-term obligation rated B is regarded as vulnerable and has significant speculative
characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligors inadequate capacity to meet its financial commitments.
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C
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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.
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D-4
D
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A short-term obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used when payments on an obligation are not made on the date due, unless S&P believes that such payments will be made within any stated grace
period. However, any stated grace period longer than five business days will be treated as five business days. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on
an obligation is a virtual certainty, for example due to automatic stay provisions. An obligations rating is lowered to D if it is subject to a distressed exchange offer.
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Description of S&Ps Municipal Short-Term Note Ratings
A S&P 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:
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Amortization schedulethe larger the final maturity relative to other maturities, the more likely it will be
treated as a note; and
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Source of paymentthe more dependent the issue is on the market for its refinancing, the more likely it will
be treated as a note.
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S&Ps municipal short-term note rating symbols are as follows:
SP-1
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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.
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SP-2
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Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic
changes over the term of the notes.
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SP-3
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Speculative capacity to pay principal and interest.
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Description of Fitch Ratings (Fitchs) Credit Ratings Scales
Fitchs credit ratings provide an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends,
repayment of principal, insurance claims or counterparty obligations. Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested.
Fitchs credit ratings do not directly address any risk other than credit risk. In particular, ratings do not deal with the risk of a market value loss
on a rated security due to changes in interest rates, liquidity and other market considerations. However, in terms of payment obligation on the rated liability, market risk may be considered to the extent that it influences the ability of an
issuer to pay upon a commitment. Ratings nonetheless do not reflect market risk to the extent that they influence the size or other conditionality of the obligation to pay upon a commitment (for example, in the case of index-linked bonds).
In the default components of ratings assigned to individual obligations or instruments, the agency typically rates to the likelihood of non-payment or default in accordance with the terms of that instruments documentation. In limited cases, Fitch may include additional considerations (i.e., rate to a higher or lower standard than that
implied in the obligations documentation). In such cases, the agency will make clear the assumptions underlying the agencys opinion in the accompanying rating commentary.
The terms investment grade and speculative grade have established themselves over time as shorthand to describe the categories
AAA to BBB (investment grade) and BB to D (speculative grade). The terms investment grade and speculative grade are market conventions, and do not imply any recommendation or
endorsement of a specific
D-5
security for investment purposes. Investment grade categories indicate relatively low to moderate credit risk, while ratings in the speculative categories either signal a
higher level of credit risk or that a default has already occurred.
A designation of Not Rated or NR is used to denote securities not rated by Fitch
where Fitch has rated some, but not all, securities comprising an issuance capital structure.
Description of Fitchs Long-Term Corporate Finance
Obligations Rating Scales
Fitch long-term obligations rating scales are as follows:
AAA
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Highest credit quality. AAA ratings denote the lowest expectation of credit 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.
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AA
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Very high credit quality. AA ratings denote expectations of very low credit risk. They indicate
very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
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A
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High credit quality. A ratings denote expectations of low credit 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.
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BBB
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Good credit quality. BBB ratings indicate that expectations of credit 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.
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BB
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Speculative. BB ratings indicate an elevated vulnerability to credit risk, particularly in the
event of adverse changes in business or economic conditions over time; however, business or financial alternatives may be available to allow financial commitments to be met.
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B
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Highly speculative. B ratings indicate that material credit risk is present.
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CCC
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Substantial credit risk. CCC ratings indicate that substantial credit risk is present.
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CC
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Very high levels of credit risk. CC ratings indicate very high levels of credit risk.
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C
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Exceptionally high levels of credit risk. C indicates exceptionally high levels of credit risk.
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Defaulted obligations typically are not assigned RD or D ratings, but are instead rated in the B to
C rating categories, depending upon their recovery prospects and other relevant characteristics. This approach better aligns obligations that have comparable overall expected loss but varying vulnerability to default and loss.
Notes: 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 obligation rating category, or to corporate finance obligation ratings in the categories below CCC.
The
subscript emr is appended to a rating to denote embedded market risk which is beyond the scope of the rating. The designation is intended to make clear that the rating solely addresses the counterparty risk of the issuing bank. It is not
meant to indicate any limitation in the analysis of the counterparty risk, which in all other respects follows published Fitch criteria for analyzing the issuing financial institution. Fitch does not rate these instruments where the principal is to
any degree subject to market risk.
D-6
Description of Fitchs Short-Term Ratings
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.
Fitch short-term ratings are as follows:
F1
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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.
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F2
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Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments.
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F3
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Fair short-term credit quality. The intrinsic capacity for timely payment of financial commitments is
adequate.
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B
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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.
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C
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High short-term default risk. Default is a real possibility.
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RD
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Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments,
although it continues to meet other financial obligations. Typically applicable to entity ratings only.
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D
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Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.
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D-7