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52 |
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2 0 2 2 B L A C
K R O C K S E M I - A N N U A L R
E P O R T T O S H A R E H O
L D E R S |
Financial Highlights
(For a share outstanding throughout each period)
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BIT |
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Six Months Ended
04/30/22 (unaudited) |
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Year Ended October 31, |
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|
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2021 |
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2020 |
(a) |
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2019 |
(a) |
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2018 |
(a) |
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2017 |
(a) |
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|
Net asset value, beginning of period |
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|
|
$ |
17.98 |
|
|
$ |
17.66 |
|
|
$ |
17.28 |
|
|
$ |
18.79 |
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$ |
20.07 |
|
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$ |
18.91 |
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Net investment income(b) |
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|
0.55 |
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|
1.13 |
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|
1.08 |
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1.18 |
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1.38 |
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|
1.51 |
|
Net realized and unrealized gain (loss) |
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|
(1.59 |
) |
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|
0.67 |
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|
0.78 |
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(1.28 |
) |
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(1.13 |
) |
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|
1.42 |
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Net increase (decrease) from investment operations |
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|
|
(1.04 |
) |
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|
1.80 |
|
|
|
1.86 |
|
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|
(0.10 |
) |
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|
0.25 |
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2.93 |
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Distributions(c) |
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From net investment income |
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|
|
(0.74 |
)(d) |
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|
(1.11 |
) |
|
|
(0.99 |
) |
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(1.14 |
) |
|
|
(1.49 |
) |
|
|
(1.77 |
) |
Return of capital |
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|
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|
|
|
(0.37 |
) |
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(0.49 |
) |
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|
(0.27 |
) |
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(0.04 |
) |
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Total distributions |
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|
(0.74 |
) |
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|
(1.48 |
) |
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|
(1.48 |
) |
|
|
(1.41 |
) |
|
|
(1.53 |
) |
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|
(1.77 |
) |
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Net asset value, end of period |
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$ |
16.20 |
|
|
$ |
17.98 |
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|
$ |
17.66 |
|
|
$ |
17.28 |
(e) |
|
$ |
18.79 |
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$ |
20.07 |
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Market price, end of period |
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$ |
15.80 |
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|
$ |
18.90 |
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|
$ |
15.65 |
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$ |
17.15 |
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$ |
16.25 |
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$ |
18.55 |
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Total Return(f) |
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Based on net asset value |
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|
(5.85 |
)%(g) |
|
|
10.55 |
% |
|
|
12.68 |
%(h) |
|
|
0.00 |
%(e)(i) |
|
|
2.18 |
%(j) |
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|
17.34 |
%(k) |
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Based on market price |
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|
(12.65 |
)%(g) |
|
|
31.13 |
% |
|
|
0.61 |
% |
|
|
14.76 |
% |
|
|
(4.40 |
)% |
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|
22.36 |
% |
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Ratios to Average Net Assets(l)
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Total expenses |
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|
|
1.56 |
%(m) |
|
|
1.70 |
% |
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|
2.36 |
% |
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|
2.89 |
% |
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|
2.90 |
% |
|
|
2.33 |
% |
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Total expenses after fees waived and/or reimbursed |
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|
1.56 |
%(m) |
|
|
1.70 |
% |
|
|
2.19 |
%(n) |
|
|
2.89 |
% |
|
|
2.89 |
% |
|
|
2.33 |
% |
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|
Total expenses after fees waived and/or reimbursed and excluding interest expense |
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|
|
1.34 |
%(m) |
|
|
1.42 |
% |
|
|
1.39 |
% |
|
|
1.35 |
% |
|
|
1.42 |
% |
|
|
1.39 |
% |
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|
Net investment income |
|
|
|
|
6.44 |
%(m) |
|
|
6.14 |
% |
|
|
6.51 |
% |
|
|
6.43 |
% |
|
|
7.17 |
% |
|
|
7.86 |
% |
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Supplemental Data |
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|
Net assets, end of period (000) |
|
|
|
$ |
609,816 |
|
|
$ |
676,391 |
|
|
$ |
662,853 |
|
|
$ |
648,617 |
|
|
$ |
710,832 |
|
|
$ |
765,859 |
|
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|
Borrowings outstanding, end of period (000) |
|
|
|
$ |
354,227 |
|
|
$ |
386,820 |
|
|
$ |
353,128 |
|
|
$ |
373,345 |
|
|
$ |
376,302 |
|
|
$ |
471,082 |
|
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|
Portfolio turnover rate(o) |
|
|
|
|
61 |
% |
|
|
75 |
% |
|
|
101 |
% |
|
|
32 |
% |
|
|
38 |
% |
|
|
53 |
% |
|
|
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|
|
(a) Consolidated Financial
Highlights. |
|
(b) Based on average shares
outstanding. |
|
(c) Distributions for annual periods
determined in accordance with U.S. federal income tax regulations. |
|
(d) A
portion of the distributions from net investment income may be deemed a return of capital or net realized gain at fiscal year-end. |
|
(e) For
financial reporting purposes, the market value of certain investments were adjusted as of report date. Accordingly, the NAV per share and total return performance based on NAV presented herein are different than the information previously
published on October 31, 2019. |
|
(f) 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. |
|
(g) Aggregate total return. |
|
(h) Includes payments received from an
affiliate and unaffiliated third parties, which impacted the Trusts total return. Excluding the payments, the Trusts total return would have been 1.38%. |
|
(i) Amount is greater
than (0.005)%. |
|
(j) Includes payment
received from an affiliate, which had no impact on the Trusts total return. |
|
(k) Includes payment received from a
settlement of litigation, which impacted the Trusts total return. Excluding the payment from a settlement of litigation, the Trusts total return is 16.70%. |
|
(l) Excludes fees and
expenses incurred indirectly as a result of investments in underlying funds. |
|
(m) Annualized. |
|
(n) Includes reimbursement of
professional fees by unaffiliated third parties, which impacted the Trusts expense ratio. Excluding the payment, the Trusts total expense ratio would have been 2.36%. |
|
(o) Includes mortgage dollar roll
transactions (MDRs). Additional information regarding portfolio turnover rate is as follows: |
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|
|
|
|
|
|
Six Months Ended
04/30/22 (unaudited) |
|
|
Year Ended October 31, |
|
|
|
|
|
|
2021 |
|
|
|
2020 |
(a) |
|
|
2019 |
(a) |
|
|
2018 |
(a) |
|
|
2017 |
(a) |
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate (excluding MDRs) |
|
|
|
|
38 |
% |
|
|
58 |
% |
|
|
72 |
% |
|
|
32 |
% |
|
|
38 |
% |
|
|
53 |
% |
|
|
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|
|
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|
See notes to financial statements.
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F I N A N C I A L
H I G H L I G H T S |
|
53 |
Notes to Financial Statements (unaudited)
BlackRock Multi-Sector Income Trust (BIT) (the Trust) is registered under the Investment Company Act of 1940, as amended (the 1940
Act). The Trust is registered as a diversified, closed-end management investment company. The Trust is organized as a Delaware statutory trust. The Trust determines and makes available for publication
the net asset value (NAV) of its Common Shares on a daily basis.
The Trust, together with certain other registered investment companies
advised by BlackRock Advisors, LLC (the Manager) or its affiliates, is included in a complex of open-end non-index fixed-income funds and all
BlackRock-advised closed-end funds referred to as the BlackRock Fixed-Income Complex.
Basis of
Consolidation: The accompanying consolidated financial statements of the Trust include the account of BIT Subsidiary, LLC (the Taxable Subsidiary). Effective December 20, 2019, the Taxable Subsidiary, which was wholly-owned by
the Trust, was dissolved. The Taxable Subsidiary enabled the Trust to hold an investment in an operating partnership and satisfy Regulated Investment Company (RIC) tax requirements. Income earned and gains realized on the investment held
by the Taxable Subsidiary were taxable to such subsidiary. There was no tax provision required for income or realized gains during the period.
2. |
SIGNIFICANT ACCOUNTING POLICIES |
The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (U.S.
GAAP), which may require management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements, disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. The Trust is considered an investment company under U.S. GAAP and follows the
accounting and reporting guidance applicable to investment companies. Below is a summary of significant accounting policies:
Investment
Transactions and Income Recognition: For financial reporting purposes, investment transactions are recorded on the dates the transactions are executed. Realized gains and losses on investment transactions are determined using the specific
identification method. Dividend income and capital gain distributions, if any, are recorded on the ex-dividend dates. Non-cash dividends, if any, are recorded on
the ex-dividend dates at fair value. Dividends from foreign securities where the ex-dividend dates may have passed are subsequently recorded when the Trust is
informed of the ex-dividend dates. Under the applicable foreign tax laws, a withholding tax at various rates may be imposed on capital gains, dividends and interest. Upon notification from issuers, a
portion of the dividend income received from a real estate investment trust may be redesignated as a reduction of cost of the related investment and/or realized gain. Interest income, including amortization and accretion of premiums and
discounts on debt securities, is recognized daily on an accrual basis. For convertible securities, premiums attributable to the debt instrument are amortized, but premiums attributable to the conversion feature are not amortized.
Foreign Currency Translation: The Trusts books and records are maintained in U.S. dollars. Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars using exchange rates determined as of the close of trading on the New York Stock Exchange (NYSE). Purchases and sales of investments are recorded at the rates of exchange
prevailing on the respective dates of such transactions. Generally, when the U.S. dollar rises in value against a foreign currency, the investments denominated in that currency will lose value; the opposite effect occurs if the U.S. dollar falls in
relative value.
The Trust does not isolate the effect of fluctuations in foreign exchange rates from the effect of fluctuations in the market prices
of investments for financial reporting purposes. Accordingly, the effects of changes in exchange rates on investments are not segregated in the Statement of Operations from the effects of changes in market prices of those investments, but are
included as a component of net realized and unrealized gain (loss) from investments. The Trust reports realized currency gains (losses) on foreign currency related transactions as components of net realized gain (loss) for financial reporting
purposes, whereas such components are generally treated as ordinary income for U.S. federal income tax purposes.
Foreign Taxes: The Trust may
be subject to foreign taxes (a portion of which may be reclaimable) on income, stock dividends, capital gains on investments, or certain foreign currency transactions. All foreign taxes are recorded in accordance with the applicable foreign tax
regulations and rates that exist in the foreign jurisdictions in which the Trust invests. These foreign taxes, if any, are paid by the Trust and are reflected in its Statement of Operations as follows: foreign taxes withheld at source are presented
as a reduction of income, foreign taxes on securities lending income are presented as a reduction of securities lending income, foreign taxes on stock dividends are presented as Foreign taxes withheld, and foreign taxes on capital gains
from sales of investments and foreign taxes on foreign currency transactions are included in their respective net realized gain (loss) categories. Foreign taxes payable or deferred as of April 30, 2022, if any, are disclosed in the Statement of
Assets and Liabilities.
The Trust files withholding tax reclaims in certain jurisdictions to recover a portion of amounts previously withheld. The
Trust may record a reclaim receivable based on collectability, which includes factors such as the jurisdictions applicable laws, payment history and market convention. The Statement of Operations includes tax reclaims recorded as well as
professional and other fees, if any, associated with recovery of foreign withholding taxes.
Segregation and Collateralization: In cases where
the Trust enters into certain investments (e.g., dollar rolls, futures contracts, forward foreign currency exchange contracts, options written and swaps) or certain borrowings (e.g., reverse repurchase transactions) that would be treated as
senior securities for 1940 Act purposes, the Trust may segregate or designate on its books and records cash or liquid assets having a market value at least equal to the amount of its future obligations under such investments or
borrowings. Doing so allows the investments or borrowings to be excluded from treatment as a senior security. Furthermore, if required by an exchange or counterparty agreement, the Trust may be required to deliver/deposit cash and/or
securities to/with an exchange, or broker-dealer or custodian as collateral for certain investments or obligations.
Distributions:
Distributions paid by the Trust are recorded on the ex-dividend dates. Subject to the Trusts managed distribution plan, the Trust intends to make monthly cash distributions to shareholders, which may
consist of net investment income, and net realized and unrealized gains on investments and/or return of capital.
|
|
|
54 |
|
2 0 2 2 B L A C
K R O C K S E M I - A N N U A L R
E P O R T T O S H A R E H O
L D E R S |
Notes to Financial Statements (unaudited) (continued)
The character of
distributions is determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. The portion of distributions that exceeds the Trusts current and accumulated earnings and profits, which are measured on a tax
basis, will constitute a non-taxable return of capital.
Deferred Compensation Plan: Under the Deferred
Compensation Plan (the Plan) approved by the Board of Trustees of the Trust (the Board), the trustees who are not interested persons of the Trust, as defined in the 1940 Act (Independent Trustees), may
defer a portion of their annual complex-wide compensation. Deferred amounts earn an approximate return as though equivalent dollar amounts had been invested in common shares of certain funds in the BlackRock Fixed-Income Complex selected by the
Independent Trustees. This has the same economic effect for the Independent Trustees as if the Independent Trustees had invested the deferred amounts directly in certain funds in the BlackRock Fixed-Income Complex.
The Plan is not funded and obligations thereunder represent general unsecured claims against the general assets of the Trust, as applicable. Deferred
compensation liabilities, if any, are included in the Trustees and Officers fees payable in the Statement of Assets and Liabilities and will remain as a liability of the Trust until such amounts are distributed in accordance with the
Plan.
Indemnifications: In the normal course of business, the Trust enters into contracts that contain a variety of representations that
provide general indemnification. The Trusts maximum exposure under these arrangements is unknown because it involves future potential claims against the Trust, which cannot be predicted with any certainty.
Other: Expenses directly related to the Trust are charged to the Trust. Other operating expenses shared by several funds, including other funds
managed by the Manager, are prorated among those funds on the basis of relative net assets or other appropriate methods.
3. |
INVESTMENT VALUATION AND FAIR VALUE MEASUREMENTS |
Investment Valuation Policies: The Trusts investments are valued at fair value (also referred to as market value within the
financial statements) each day that the Trust is open for business and, for financial reporting purposes, as of the report date. U.S. GAAP defines fair value as the price a fund would receive to sell an asset or pay to transfer a liability in an
orderly transaction between market participants at the measurement date. The Trust determines the fair values of its financial instruments using various independent dealers or pricing services under policies approved by the Board. If a
securitys market price is not readily available or does not otherwise accurately represent the fair value of the security, the security will be valued in accordance with a policy approved by the Board as reflecting fair value. The BlackRock
Global Valuation Methodologies Committee (the Global Valuation Committee) is the committee formed by management to develop global pricing policies and procedures and to oversee the pricing function for all financial instruments.
Fair Value Inputs and Methodologies: The following methods and inputs are used to establish the fair value of the Trusts assets and
liabilities:
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|
|
Equity investments traded on a recognized securities exchange are valued at that days official closing price, as
applicable, on the exchange where the stock is primarily traded. Equity investments traded on a recognized exchange for which there were no sales on that day may be valued at the last available bid (long positions) or ask (short positions) price.
|
|
|
|
Fixed-income investments for which market quotations are readily available are generally valued using the last available
bid price or current market quotations provided by independent dealers or third-party pricing services. Floating rate loan interests are valued at the mean of the bid prices from one or more independent brokers or dealers as obtained from a
third-party pricing service. Pricing services generally value fixed-income securities assuming orderly transactions of an institutional round lot size, but a fund may hold or transact in such securities in smaller, odd lot sizes. Odd lots may trade
at lower prices than institutional round lots. The pricing services may use matrix pricing or valuation models that utilize certain inputs and assumptions to derive values, including transaction data (e.g., recent representative bids and offers),
market data, credit quality information, perceived market movements, news, and other relevant information. Certain fixed-income securities, including asset-backed and mortgage related securities may be valued based on valuation models that consider
the estimated cash flows of each tranche of the entity, establish a benchmark yield and develop an estimated tranche specific spread to the benchmark yield based on the unique attributes of the tranche. The amortized cost method of valuation may be
used with respect to debt obligations with sixty days or less remaining to maturity unless the Manager determines such method does not represent fair value. |
|
|
|
Investments in open-end U.S. mutual funds (including money market funds) are
valued at that days published NAV. |
|
|
|
Futures contracts are valued based on that days last reported settlement or trade price on the exchange where the
contract is traded. |
|
|
|
Forward foreign currency exchange contracts are valued at the mean between the bid and ask prices and are determined as
of the close of trading on the NYSE based on that days prevailing forward exchange rate for the underlying currencies. |
|
|
|
Swap agreements are valued utilizing quotes received daily by independent pricing services or through brokers, which are
derived using daily swap curves and models that incorporate a number of market data factors, such as discounted cash flows, trades and values of the underlying reference instruments. |
|
|
|
Repurchase agreements are valued at amortized cost, which approximates market value. |
Generally, trading in foreign instruments is substantially completed each day at various times prior to the close of trading on the NYSE. Each business
day, the Trust uses current market factors supplied by independent pricing services to value certain foreign instruments (Systematic Fair Value Price). The Systematic Fair Value Price is designed to value such foreign securities at fair
value as of the close of trading on the NYSE, which follows the close of the local markets.
If events (e.g., market volatility, company announcement
or a natural disaster) occur that are expected to materially affect the value of such investment, or in the event that application of these methods of valuation results in a price for an investment that is deemed not to be representative of the
market value of such investment, or if a price is not available, the investment will be valued by the Global Valuation Committee, or its delegate, in accordance with a policy approved by the Board as reflecting fair value (Fair
|
|
|
N O T E S T O F
I N A N C I A L S T A T E M
E N T S |
|
55 |
Notes to Financial Statements (unaudited) (continued)
Valued Investments).
The fair valuation approaches that may be used by the Global Valuation Committee include market approach, income approach and cost approach. Valuation techniques such as discounted cash flow, use of market comparables and matrix pricing are types of
valuation approaches and are typically used in determining fair value. When determining the price for Fair Valued Investments, the Global Valuation Committee, or its delegate, seeks to determine the price that the Trust might reasonably expect to
receive or pay from the current sale or purchase of that asset or liability in an arms-length transaction. Fair value determinations shall be based upon all available factors that the Global Valuation
Committee, or its delegate, deems relevant and consistent with the principles of fair value measurement. The pricing of all Fair Valued Investments is subsequently reported to the Board or a committee thereof on a quarterly basis.
For investments in equity or debt issued by privately held companies or funds (Private Company or collectively, the Private
Companies) and other Fair Valued Investments, the fair valuation approaches that are used by the Global Valuation Committee and third-party pricing services utilize one or a combination of, but not limited to, the following inputs.
|
|
|
|
|
|
|
|
|
Standard Inputs Generally Considered By Third-Party Pricing Services |
|
|
|
Market approach |
|
(i) |
|
recent market transactions, including subsequent rounds of financing, in the underlying investment or comparable issuers; |
|
|
|
|
|
(ii) |
|
recapitalizations and other transactions across the capital structure; and |
|
|
|
|
|
(iii) |
|
market multiples of comparable issuers. |
|
|
|
Income approach |
|
(i) |
|
future cash flows discounted to present and adjusted as appropriate for liquidity, credit, and/or market risks; |
|
|
|
|
|
(ii) |
|
quoted prices for similar investments or assets in active markets; and |
|
|
|
|
|
(iii) |
|
other risk factors, such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, recovery rates, liquidation amounts and/or
default rates. |
|
|
|
Cost approach |
|
(i) |
|
audited or unaudited financial statements, investor communications and financial or operational metrics issued by the Private Company; |
|
|
|
|
|
(ii) |
|
changes in the valuation of relevant indices or publicly traded companies comparable to the Private Company; |
|
|
|
|
|
(iii) |
|
relevant news and other public sources; and |
|
|
|
|
|
(iv) |
|
known secondary market transactions in the Private Companys interests and merger or acquisition activity in companies comparable to the Private Company. |
Investments in series of preferred stock issued by Private Companies are typically valued utilizing market approach in
determining the enterprise value of the company. Such investments often contain rights and preferences that differ from other series of preferred and common stock of the same issuer. Enterprise valuation techniques such as an option pricing model
(OPM), a probability weighted expected return model (PWERM), current value method or a hybrid of those techniques are used as deemed appropriate under the circumstances. The use of these valuation techniques involve a
determination of the exit scenarios of the investment in order to appropriately allocate the enterprise value of the company among the various parts of its capital structure.
The Private Companies are not subject to the public company disclosure, timing, and reporting standards applicable to other investments held by the Trust.
Typically, the most recently available information by a Private Company is as of a date that is earlier than the date the Trust is calculating its NAV. This factor may result in a difference between the value of the investment and the price the
Trust could receive upon the sale of the investment.
Fair Value Hierarchy: Various inputs are used in determining the fair value of financial
instruments. These inputs to valuation techniques are categorized into a fair value hierarchy consisting of three broad levels for financial reporting purposes as follows:
|
|
|
Level 1 Unadjusted price quotations in active markets/exchanges for identical assets or liabilities that the
Trust has the ability to access; |
|
|
|
Level 2 Other observable inputs (including, but not limited to, quoted prices for similar assets or
liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield
curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other marketcorroborated inputs); and |
|
|
|
Level 3 Unobservable inputs based on the best information available in the circumstances, to the extent
observable inputs are not available (including the Global Valuation Committees assumptions used in determining the fair value of financial instruments). |
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. The inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for disclosure purposes, the fair value hierarchy classification is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Investments classified within Level 3 have significant unobservable inputs used by the Global Valuation Committee in determining the price for Fair Valued Investments. Level 3 investments include equity or debt issued by Private
Companies that may not have a secondary market and/or may have a limited number of investors. The categorization of a value determined for financial instruments is based on the pricing transparency of the financial instruments and is not
necessarily an indication of the risks associated with investing in those securities.
4. |
SECURITIES AND OTHER INVESTMENTS |
Asset-Backed and Mortgage-Backed Securities: Asset-backed securities are generally issued as pass-through certificates or as debt instruments.
Asset-backed securities issued as pass-through certificates represent undivided fractional ownership interests in an underlying pool of assets. Asset-backed securities issued as debt instruments, which are also known as collateralized obligations,
are typically issued as the debt of a special purpose entity organized solely for the purpose of owning such assets and issuing such debt. Asset-backed securities are often backed by a pool of assets representing the obligations of a number of
different parties. The yield characteristics of certain asset-backed securities may differ from traditional debt securities. One such major difference is that all or a principal part of the obligations may be prepaid at any time because the
underlying assets (i.e., loans) may be prepaid at any time. As a result, a decrease in interest rates in the market may result in increases in the level of prepayments as
|
|
|
56 |
|
2 0 2 2 B L A C
K R O C K S E M I - A N N U A L R
E P O R T T O S H A R E H O
L D E R S |
Notes to Financial Statements (unaudited) (continued)
borrowers, particularly
mortgagors, refinance and repay their loans. An increased prepayment rate with respect to an asset-backed security will have the effect of shortening the maturity of the security. In addition, a fund may subsequently have to reinvest the proceeds at
lower interest rates. If a fund has purchased such an asset-backed security at a premium, a faster than anticipated prepayment rate could result in a loss of principal to the extent of the premium paid.
For mortgage pass-through securities (the Mortgage Assets) there are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities and among the securities that they issue. For example, mortgage-related securities guaranteed by Ginnie Mae are guaranteed as to the timely payment of principal and
interest by Ginnie Mae and such guarantee is backed by the full faith and credit of the United States. However, mortgage-related securities issued by Freddie Mac and Fannie Mae, including Freddie Mac and Fannie Mae guaranteed mortgage pass-through
certificates, which are solely the obligations of Freddie Mac and Fannie Mae, are not backed by or entitled to the full faith and credit of the United States, but are supported by the right of the issuer to borrow from the U.S. Treasury.
Non-agency mortgage-backed securities are securities issued by
non-governmental issuers and have no direct or indirect government guarantees of payment and are subject to various risks. Non-agency mortgage loans are obligations of
the borrowers thereunder only and are not typically insured or guaranteed by any other person or entity. The ability of a borrower to repay a loan is dependent upon the income or assets of the borrower. A number of factors, including a general
economic downturn, acts of God, terrorism, social unrest and civil disturbances, may impair a borrowers ability to repay its loans.
Collateralized Debt Obligations: Collateralized debt obligations (CDOs), including collateralized bond obligations (CBOs)
and collateralized loan obligations (CLOs), are types of asset-backed securities. A CDO is an entity that is backed by a diversified pool of debt securities (CBOs) or syndicated bank loans (CLOs). The cash flows of the CDO can be split
into multiple segments, called tranches, which will vary in risk profile and yield. The riskiest segment is the subordinated or equity tranche. This tranche bears the greatest risk of defaults from the underlying assets in
the CDO and serves to protect the other, more senior, tranches from default in all but the most severe circumstances. Since it is shielded from defaults by the more junior tranches, a senior tranche will typically have higher credit
ratings and lower yields than their underlying securities, and often receive investment grade ratings from one or more of the nationally recognized rating agencies. Despite the protection from the more junior tranches, senior tranches can experience
substantial losses due to actual defaults, increased sensitivity to future defaults and the disappearance of one or more protecting tranches as a result of changes in the credit profile of the underlying pool of assets.
Inflation-Indexed Bonds: Inflation-indexed bonds (other than municipal inflation-indexed and certain corporate inflation-indexed bonds) are
fixed-income securities whose principal value is periodically adjusted according to the rate of inflation. If the index measuring inflation rises or falls, the principal value of inflation-indexed bonds (other than municipal inflation-indexed and
certain corporate inflation-indexed bonds) will be adjusted upward or downward, and consequently the interest payable on these securities (calculated with respect to a larger or smaller principal amount) will be increased or reduced, respectively.
Any upward or downward adjustment in the principal amount of an inflation-indexed bond is included as interest income in the Statement of Operations, even though investors do not receive their principal until maturity. Repayment of the original bond
principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than
the original principal. With regard to municipal inflation-indexed bonds and certain corporate inflation-indexed bonds, the inflation adjustment is typically reflected in the semi-annual coupon payment. As a result, the principal value of municipal
inflation-indexed bonds and such corporate inflation-indexed bonds does not adjust according to the rate of inflation.
Multiple
Class Pass-Through Securities: Multiple class pass-through securities, including collateralized mortgage obligations (CMOs) and commercial mortgage-backed securities, may be issued by Ginnie Mae, U.S. Government
agencies or instrumentalities or by trusts formed by private originators of, or investors in, mortgage loans. In general, CMOs are debt obligations of a legal entity that are collateralized by a pool of residential or commercial mortgage loans or
mortgage pass-through securities (the Mortgage Assets). The payments on these are used to make payments on the CMOs or multiple pass-through securities. Multiple class pass-through securities represent direct ownership interests in the
Mortgage Assets. Classes of CMOs include interest only (IOs), principal only (POs), planned amortization classes and targeted amortization classes. IOs and POs are stripped mortgage-backed securities representing interests in
a pool of mortgages, the cash flow from which has been separated into interest and principal components. IOs receive the interest portion of the cash flow while POs receive the principal portion. IOs and POs can be extremely volatile in response to
changes in interest rates. As interest rates rise and fall, the value of IOs tends to move in the same direction as interest rates. POs perform best when prepayments on the underlying mortgages rise since this increases the rate at which the
principal is returned and the yield to maturity on the PO. When payments on mortgages underlying a PO are slower than anticipated, the life of the PO is lengthened and the yield to maturity is reduced. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, a funds initial investment in the IOs may not fully recoup.
Zero-Coupon Bonds:
Zero-coupon bonds are normally issued at a significant discount from face value and do not provide for periodic interest payments. These bonds may experience greater volatility in market value than other debt obligations of similar maturity
which provide for regular interest payments.
Capital Securities and Trust Preferred Securities: Capital securities, including trust preferred
securities, are typically issued by corporations, generally in the form of interest-bearing notes with preferred securities characteristics. In the case of trust preferred securities, an affiliated business trust of a corporation issues these
securities, generally in the form of beneficial interests in subordinated debentures or similarly structured securities. The securities can be structured with either a fixed or adjustable coupon that can have either a perpetual or stated maturity
date. For trust preferred securities, the issuing bank or corporation pays interest to the trust, which is then distributed to holders of these securities as a dividend. Dividends can be deferred without creating an event of default or acceleration,
although maturity cannot take place unless all cumulative payment obligations have been met. The deferral of payments does not affect the purchase or sale of these securities in the open market. These securities generally are rated below that of the
issuing companys senior debt securities and are freely callable at the issuers option.
Preferred Stocks: Preferred stock has a
preference over common stock in liquidation (and generally in receiving dividends as well), but is subordinated to the liabilities of the issuer in all respects. As a general rule, the market value of preferred stock with a fixed dividend rate and
no conversion element varies inversely with interest rates and perceived credit risk, while the market price of convertible preferred stock generally also reflects some element of conversion value. Because preferred stock is junior to debt
securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics. Unlike
interest payments on debt securities, preferred stock dividends are payable only if declared by the issuers board of directors. Preferred stock also may be subject to optional or mandatory redemption provisions.
|
|
|
N O T E S T O F
I N A N C I A L S T A T E M
E N T S |
|
57 |
Notes to Financial Statements (unaudited) (continued)
Warrants: Warrants
entitle a fund to purchase a specified number of shares of common stock and are non-income producing. The purchase price and number of shares are subject to adjustment under certain conditions until the
expiration date of the warrants, if any. If the price of the underlying stock does not rise above the strike price before the warrant expires, the warrant generally expires without any value and a fund will lose any amount it paid for the warrant.
Thus, investments in warrants may involve more risk than investments in common stock. Warrants may trade in the same markets as their underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying
stock.
Floating Rate Loan Interests: Floating rate loan interests are typically issued to companies (the borrower) by banks, other
financial institutions, or privately and publicly offered corporations (the lender). Floating rate loan interests are generally non-investment grade, often involve borrowers whose financial
condition is troubled or uncertain and companies that are highly leveraged or in bankruptcy proceedings. In addition, transactions in floating rate loan interests may settle on a delayed basis, which may result in proceeds from the sale not being
readily available for a fund to make additional investments or meet its redemption obligations. Floating rate loan interests may include fully funded term loans or revolving lines of credit. Floating rate loan interests are typically senior in the
corporate capital structure of the borrower. Floating rate loan interests generally pay interest at rates that are periodically determined by reference to a base lending rate plus a premium. Since the rates 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 a fund to the extent that it invests in floating rate loan interests. The base lending rates are generally the
lending rate offered by one or more European banks, such as the London Interbank Offered Rate (LIBOR), the prime rate offered by one or more U.S. banks or the certificate of deposit rate. Floating rate loan interests may involve foreign
borrowers, and investments may be denominated in foreign currencies. These investments are treated as investments in debt securities for purposes of a funds investment policies.
When a fund purchases a floating rate loan interest, it may receive a facility fee and when it sells a floating rate loan interest, it may pay a facility
fee. On an ongoing basis, a fund may receive a commitment fee based on the undrawn portion of the underlying line of credit amount of a floating rate loan interest. Facility and commitment fees are typically amortized to income over the term of the
loan or term of the commitment, respectively. Consent and amendment fees are recorded to income as earned. Prepayment penalty fees, which may be received by a fund upon the prepayment of a floating rate loan interest by a borrower, are recorded as
realized gains. A fund may invest in multiple series or tranches of a loan. A different series or tranche may have varying terms and carry different associated risks.
Floating rate loan interests are usually freely callable at the borrowers option. A fund may invest in such loans in the form of participations in
loans (Participations) or assignments (Assignments) of all or a portion of loans from third parties. Participations typically will result in a fund having a contractual relationship only with the lender, not with the
borrower. A fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the Participation and only upon receipt by the lender of the payments from the borrower. In connection with
purchasing Participations, a fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement, nor any rights of offset against the borrower. A fund may not benefit directly from any collateral supporting
the loan in which it has purchased the Participation. As a result, a fund assumes the credit risk of both the borrower and the lender that is selling the Participation. A funds investment in loan participation interests involves the risk of
insolvency of the financial intermediaries who are parties to the transactions. In the event of the insolvency of the lender selling the Participation, a fund may be treated as a general creditor of the lender and may not benefit from any offset
between the lender and the borrower. Assignments typically result in a fund having a direct contractual relationship with the borrower, and a fund may enforce compliance by the borrower with the terms of the loan agreement.
In connection with floating rate loan interests, the Trust may also enter into unfunded floating rate loan interests (commitments). In
connection with these commitments, the fund earns a commitment fee, typically set as a percentage of the commitment amount. Such fee income, which is included in interest income in the Statement of Operations, is recognized ratably over the
commitment period. Unfunded floating rate loan interests are marked-to-market daily, and any unrealized appreciation (depreciation) is included in the Statement of
Assets and Liabilities and Statement of Operations. As of period end, the Trust had the following unfunded floating rate loan interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust Name |
|
Borrower |
|
Par |
|
|
Commitment
Amount |
|
|
Value |
|
|
Unrealized
Appreciation (Depreciation) |
|
|
|
|
|
|
|
|
|
BIT |
|
Athenahealth, Inc. |
|
$ |
389,847 |
|
|
$ |
389,847 |
|
|
$ |
384,000 |
|
|
$ |
(5,848) |
|
|
|
New Arclin U.S. Holding Corp. |
|
|
30,545 |
|
|
|
30,393 |
|
|
|
29,661 |
|
|
|
(732) |
|
|
|
Sovos Compliance LLC |
|
|
33,168 |
|
|
|
33,167 |
|
|
|
33,103 |
|
|
|
(64) |
|
|
|
Forward Commitments, When-Issued and Delayed Delivery Securities: The Trust may purchase securities on a
when-issued basis and may purchase or sell securities on a forward commitment basis. Settlement of such transactions normally occurs within a month or more after the purchase or sale commitment is made. The Trust may purchase securities under such
conditions with the intention of actually acquiring them but may enter into a separate agreement to sell the securities before the settlement date. Since the value of securities purchased may fluctuate prior to settlement, the Trust may be required
to pay more at settlement than the security is worth. In addition, the Trust is not entitled to any of the interest earned prior to settlement. When purchasing a security on a delayed delivery basis, the Trust assumes the rights and risks of
ownership of the security, including the risk of price and yield fluctuations. In the event of default by the counterparty, the Trusts maximum amount of loss is the unrealized appreciation of unsettled when-issued transactions.
TBA Commitments: TBA commitments are forward agreements for the purchase or sale of securities, including mortgage-backed securities for a fixed
price, with payment and delivery on an agreed upon future settlement date. The specific securities to be delivered are not identified at the trade date. However, delivered securities must meet specified terms, including issuer, rate and mortgage
terms. When entering into TBA commitments, a fund may take possession of or deliver the underlying mortgage-backed securities but can extend the settlement or roll the transaction. TBA commitments involve a risk of loss if the value of the security
to be purchased or sold declines or increases, respectively, prior to settlement date, if there are expenses or delays in connection with the TBA transactions, or if the counterparty fails to complete the transaction.
In order to better define contractual rights and to secure rights that will help a fund mitigate its counterparty risk, TBA commitments may be entered
into by a fund under Master Securities Forward Transaction Agreements (each, an MSFTA). An MSFTA typically contains, among other things, collateral posting terms and netting provisions in the event of default and/or termination event.
The collateral requirements are typically calculated by netting the mark-to-market amount for each transaction under such agreement and comparing that amount to the
value of the collateral currently pledged by a fund and the counterparty. Cash collateral that has been pledged to cover the obligations of a fund and cash collateral received from the counterparty, if any, is reported separately in the Statement of
Assets and Liabilities as cash pledged as collateral for TBA commitments
|
|
|
58 |
|
2 0 2 2 B L A C
K R O C K S E M I - A N N U A L R
E P O R T T O S H A R E H O
L D E R S |
Notes to Financial Statements (unaudited) (continued)
or cash received as
collateral for TBA commitments, respectively. Non-cash collateral pledged by a fund, if any, is noted in the Schedule of Investments. Typically, a fund is permitted to sell,
re-pledge or use the collateral it receives; however, the counterparty is not permitted to do so. To the extent amounts due to a fund are not fully collateralized, contractually or otherwise, a fund bears the
risk of loss from counterparty non-performance.
Mortgage Dollar Roll Transactions: The Trust may sell
TBA mortgage-backed securities and simultaneously contract to repurchase substantially similar (i.e., same type, coupon and maturity) securities on a specific future date at an agreed upon price. During the period between the sale and repurchase, a
fund is not entitled to receive interest and principal payments on the securities sold. Mortgage dollar roll transactions are treated as purchases and sales and a fund realizes gains and losses on these transactions. Mortgage dollar rolls involve
the risk that the market value of the securities that a fund is required to purchase may decline below the agreed upon repurchase price of those securities.
Reverse Repurchase Agreements: Reverse repurchase agreements are agreements with qualified third-party broker dealers in which a fund sells
securities to a bank or broker-dealer and agrees to repurchase the same securities at a mutually agreed upon date and price. A fund receives cash from the sale to use for other investment purposes. During the term of the reverse repurchase
agreement, a fund continues to receive the principal and interest payments on the securities sold. Certain agreements have no stated maturity and can be terminated by either party at any time. Interest on the value of the reverse repurchase
agreements issued and outstanding is based upon competitive market rates determined at the time of issuance. A fund may utilize reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the transaction. Reverse repurchase agreements involve leverage risk. If a fund suffers a loss on its investment of the transaction proceeds from a reverse repurchase agreement, a
fund would still be required to pay the full repurchase price. Further, a fund remains subject to the risk that the market value of the securities repurchased declines below the repurchase price. In such cases, a fund would be required to return a
portion of the cash received from the transaction or provide additional securities to the counterparty.
Cash received in exchange for securities
delivered plus accrued interest due to the counterparty is recorded as a liability in the Statement of Assets and Liabilities at face value including accrued interest. Due to the short-term nature of the reverse repurchase agreements, face value
approximates fair value. Interest payments made by a fund to the counterparties are recorded as a component of interest expense in the Statement of Operations. In periods of increased demand for the security, a fund may receive a fee for the use of
the security by the counterparty, which may result in interest income to a fund.
For the six months ended April 30, 2022, the average daily
amount of reverse repurchase agreements outstanding and the weighted average interest rate for the Trust were $369,358,169 and 0.39%, respectively.
Reverse repurchase transactions are entered into by a fund under Master Repurchase Agreements (each, an MRA), which permit a fund, under
certain circumstances, including an event of default (such as bankruptcy or insolvency), to offset payables and/or receivables under the MRA with collateral held and/or posted to the counterparty and create one single net payment due to or from a
fund. With reverse repurchase transactions, typically a fund and counterparty under an MRA are permitted to sell, re-pledge, or use the collateral associated with the transaction. Bankruptcy or insolvency laws
of a particular jurisdiction may impose restrictions on or prohibitions against such a right of offset in the event of the MRA counterpartys bankruptcy or insolvency. Pursuant to the terms of the MRA, a fund receives or posts securities and
cash as collateral with a market value in excess of the repurchase price to be paid or received by a fund upon the maturity of the transaction. Upon a bankruptcy or insolvency of the MRA counterparty, a fund is considered an unsecured creditor with
respect to excess collateral and, as such, the return of excess collateral may be delayed.
As of period end, the following table is a summary of the
Trusts open reverse repurchase agreements by counterparty which are subject to offset under an MRA on a net basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty |
|
|
Reverse Repurchase Agreements |
|
|
|
Fair Value of
Non-Cash Collateral
Pledged Including
Accrued Interest |
(a)
|
|
|
Cash Collateral Pledged/Received |
(a) |
|
|
Net Amount |
(b) |
|
|
|
|
|
Barclays Bank PLC |
|
$ |
(48,361,741 |
) |
|
$ |
48,361,741 |
|
|
$ |
|
|
|
$ |
|
|
Barclays Capital Inc. |
|
|
(46,361,388 |
) |
|
|
46,361,388 |
|
|
|
|
|
|
|
|
|
BNP Paribas S.A. |
|
|
(76,300,346 |
) |
|
|
76,300,346 |
|
|
|
|
|
|
|
|
|
Cantor Fitzgerald & Company |
|
|
(80,357,348 |
) |
|
|
76,955,132 |
|
|
|
|
|
|
|
(3,402,216 |
) |
Credit Agricole Corporate and Investment Bank |
|
|
(9,116,916 |
) |
|
|
9,116,916 |
|
|
|
|
|
|
|
|
|
Credit Suisse Securities (USA) LLC |
|
|
(2,469,448 |
) |
|
|
2,469,448 |
|
|
|
|
|
|
|
|
|
HSBC Securities (USA), Inc. |
|
|
(16,746,362 |
) |
|
|
16,746,362 |
|
|
|
|
|
|
|
|
|
RBC Capital Markets LLC |
|
|
(74,513,727 |
) |
|
|
73,697,921 |
|
|
|
|
|
|
|
(815,806 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(354,227,276 |
) |
|
$ |
350,009,254 |
|
|
$ |
|
|
|
$ |
(4,218,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Collateral with a value of $385,136,311 has been pledged in connection with open reverse repurchase agreements. Excess
of net collateral pledged to the individual counterparty is not shown for financial reporting purposes. |
|
|
(b) |
Net amount represents the net amount payable due to the counterparty in the event of default. |
|
In the event the counterparty of securities under an MRA files for bankruptcy or becomes insolvent, a funds
use of the proceeds from the agreement may be restricted while the counterparty, or its trustee or receiver, determines whether or not to enforce a funds obligation to repurchase the securities.
5. |
DERIVATIVE FINANCIAL INSTRUMENTS |
The Trust engages in various portfolio investment strategies using derivative contracts both to increase the returns of the Trust and/or to manage its
exposure to certain risks such as credit risk, equity risk, interest rate risk, foreign currency exchange rate risk, commodity price risk or other risks (e.g., inflation risk). Derivative financial instruments categorized by risk exposure are
included in the Schedule of Investments. These contracts may be transacted on an exchange or OTC.
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|
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N O T E S T O F
I N A N C I A L S T A T E M
E N T S |
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59 |
Notes to Financial Statements (unaudited) (continued)
Futures Contracts:
Futures contracts are purchased or sold to gain exposure to, or manage exposure to, changes in interest rates (interest rate risk) and changes in the value of equity securities (equity risk) or foreign currencies (foreign currency exchange rate
risk).
Futures contracts are exchange-traded agreements between the Trust and a counterparty to buy or sell a specific quantity of an underlying
instrument at a specified price and on a specified date. Depending on the terms of a contract, it is settled either through physical delivery of the underlying instrument on the settlement date or by payment of a cash amount on the settlement date.
Upon entering into a futures contract, the Trust is required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on a contracts size and risk profile. The initial margin deposit must
then be maintained at an established level over the life of the contract. Amounts pledged, which are considered restricted, are included in cash pledged for futures contracts in the Statement of Assets and Liabilities.
Securities deposited as initial margin are designated in the Schedule of Investments and cash deposited, if any, are shown as cash pledged for futures
contracts in the Statement of Assets and Liabilities. Pursuant to the contract, the Trust agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in market value of the contract (variation margin).
Variation margin is recorded as unrealized appreciation (depreciation) and, if any, shown as variation margin receivable (or payable) on futures contracts in the Statement of Assets and Liabilities. When the contract is closed, a realized gain or
loss is recorded in the Statement of Operations equal to the difference between the notional amount of the contract at the time it was opened and the notional amount at the time it was closed. The use of futures contracts involves the risk of an
imperfect correlation in the movements in the price of futures contracts and interest rates, foreign currency exchange rates or underlying assets.
Forward Foreign Currency Exchange Contracts: Forward foreign currency exchange contracts are entered into to gain or reduce exposure to foreign
currencies (foreign currency exchange rate risk).
A forward foreign currency exchange contract is an agreement between two parties to buy and sell a
currency at a set exchange rate on a specified date. These contracts help to manage the overall exposure to the currencies in which some of the investments held by the Trust are denominated and in some cases, may be used to obtain exposure to a
particular market. The contracts are traded OTC and not on an organized exchange.
The contract is marked-to-market daily and the change in market value is recorded as unrealized appreciation (depreciation) in the Statement of Assets and Liabilities. When a contract is closed, a realized gain or loss is
recorded in the Statement of Operations equal to the difference between the value at the time it was opened and the value at the time it was closed. Non-deliverable forward foreign currency exchange contracts
are settled with the counterparty in cash without the delivery of foreign currency. The use of forward foreign currency exchange contracts involves the risk that the value of a forward foreign currency exchange contract changes unfavorably due to
movements in the value of the referenced foreign currencies, and such value may exceed the amount(s) reflected in the Statement of Assets and Liabilities. Cash amounts pledged for forward foreign currency exchange contracts are considered restricted
and are included in cash pledged as collateral for OTC derivatives in the Statement of Assets and Liabilities. A Trusts risk of loss from counterparty credit risk on OTC derivatives is generally limited to the aggregate unrealized gain netted
against any collateral held by the Trust.
Options: The Trust may purchase and write call and put options to increase or decrease its exposure
to the risks of underlying instruments, including equity risk, interest rate risk and/or commodity price risk and/or, in the case of options written, to generate gains from options premiums.
A call option gives the purchaser (holder) of the option the right (but not the obligation) to buy, and obligates the seller (writer) to sell (when the
option is exercised) the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. A put option gives the holder the right to sell and obligates the writer to buy the underlying instrument at
the exercise or strike price at any time or at a specified time during the option period.
Premiums paid on options purchased and premiums received on
options written, as well as the daily fluctuation in market value, are included in investments at value unaffiliated and options written at value, respectively, in the Statement of Assets and Liabilities. When an instrument is purchased or
sold through the exercise of an option, the premium is offset against the cost or proceeds of the underlying instrument. When an option expires, a realized gain or loss is recorded in the Statement of Operations to the extent of the premiums
received or paid. When an option is closed or sold, a gain or loss is recorded in the Statement of Operations to the extent the cost of the closing transaction exceeds the premiums received or paid. When the Trust writes a call option, such option
is typically covered, meaning that it holds the underlying instrument subject to being called by the option counterparty. When the Trust writes a put option, cash is segregated in an amount sufficient to cover the obligation. These
amounts, which are considered restricted, are included in cash pledged as collateral for options written in the Statement of Assets and Liabilities.
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|
Swaptions The Trust may purchase and write options on swaps (swaptions) primarily to preserve a return
or spread on a particular investment or portion of the Trusts holdings, as a duration management technique or to protect against an increase in the price of securities it anticipates purchasing at a later date. The purchaser and writer of a
swaption is buying or granting the right to enter into a previously agreed upon interest rate or credit default swap agreement (interest rate risk and/or credit risk) at any time before the expiration of the option. |
In purchasing and writing options, the Trust bears the risk of an unfavorable change in the value of the underlying instrument or the risk that it may not
be able to enter into a closing transaction due to an illiquid market. Exercise of a written option could result in the Trust purchasing or selling a security when it otherwise would not, or at a price different from the current market value.
Swaps: Swap contracts are entered into to manage exposure to issuers, markets and securities. Such contracts are agreements between the Trust and a
counterparty to make periodic net payments on a specified notional amount or a net payment upon termination. Swap agreements are privately negotiated in the OTC market and may be entered into as a bilateral contract (OTC swaps) or
centrally cleared (centrally cleared swaps).
For OTC swaps, any upfront premiums paid and any upfront fees received are shown as swap
premiums paid and swap premiums received, respectively, in the Statement of Assets and Liabilities and amortized over the term of the contract. The daily fluctuation in market value is recorded as unrealized appreciation (depreciation) on OTC
Swaps in the Statement of Assets and Liabilities. Payments received or paid are recorded in the Statement of Operations as realized gains or losses, respectively. When an OTC swap is terminated, a realized gain or loss is recorded in the Statement
of Operations equal to the difference between the proceeds from (or cost of) the closing transaction and the Trusts basis in the contract, if any. Generally, the basis of the contract is the premium received or paid.
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60 |
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2 0 2 2 B L A C
K R O C K S E M I - A N N U A L R
E P O R T T O S H A R E H O
L D E R S |
Notes to Financial Statements (unaudited) (continued)
In a centrally cleared swap,
immediately following execution of the swap contract, the swap contract is novated to a central counterparty (the CCP) and the CCP becomes the Trusts counterparty on the swap. The Trust is required to interface with the CCP through
the broker. Upon entering into a centrally cleared swap, the Trust is required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on the size and risk profile of the particular swap.
Securities deposited as initial margin are designated in the Schedule of Investments and cash deposited is shown as cash pledged for centrally cleared swaps in the Statement of Assets and Liabilities. Amounts pledged, which are considered restricted
cash, are included in cash pledged for centrally cleared swaps in the Statement of Assets and Liabilities. Pursuant to the contract, the Trust agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in market
value of the contract (variation margin). Variation margin is recorded as unrealized appreciation (depreciation) and shown as variation margin receivable (or payable) on centrally cleared swaps in the Statement of Assets and Liabilities.
Payments received from (paid to) the counterparty are amortized over the term of the contract and recorded as realized gains (losses) in the Statement of Operations, including those at termination.
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|
Credit default swaps Credit default swaps are entered into to manage exposure to the market or certain sectors of
the market, to reduce risk exposure to defaults of corporate and/or sovereign issuers or to create exposure to corporate and/or sovereign issuers to which a fund is not otherwise exposed (credit risk). |
The Trust may either buy or sell (write) credit default swaps on single-name issuers (corporate or sovereign), a combination or basket of
single-name issuers or traded indexes. Credit default swaps are agreements in which the protection buyer pays fixed periodic payments to the seller in consideration for a promise from the protection seller to make a specific payment should a
negative credit event take place with respect to the referenced entity (e.g., bankruptcy, failure to pay, obligation acceleration, repudiation, moratorium or restructuring). As a buyer, if an underlying credit event occurs, the Trust will either
(i) receive from the seller an amount equal to the notional amount of the swap and deliver the referenced security or underlying securities comprising the index, or (ii) receive a net settlement of cash equal to the notional amount of the
swap less the recovery value of the security or underlying securities comprising the index. As a seller (writer), if an underlying credit event occurs, the Trust will either pay the buyer an amount equal to the notional amount of the swap and take
delivery of the referenced security or underlying securities comprising the index or pay a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying securities comprising the index.
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|
Interest rate swaps Interest rate swaps are entered into to gain or reduce exposure to interest rates or to manage
duration, the yield curve or interest rate (interest rate risk). |
Interest rate swaps are agreements in which one
party pays a stream of interest payments, either fixed or floating, in exchange for another partys stream of interest payments, either fixed or floating, on the same notional amount for a specified period of time. In more complex interest rate
swaps, the notional principal amount may decline (or amortize) over time.
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|
|
Forward swaps The Trust may enter into forward interest rate swaps and forward total return swaps. In a forward
swap, the Trust and the counterparty agree to make periodic net payments beginning on a specified date or a net payment at termination. |
Swap transactions involve, to varying degrees, elements of interest rate, credit and market risk in excess of the amounts recognized in the Statement of
Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of the contractual
terms in the agreements, and that there may be unfavorable changes in interest rates and/or market values associated with these transactions.
Master Netting Arrangements: In order to define its contractual rights and to secure rights that will help it mitigate its counterparty risk, the
Trust may enter into an International Swaps and Derivatives Association, Inc. Master Agreement (ISDA Master Agreement) or similar agreement with its counterparties. An ISDA Master Agreement is a bilateral agreement between a Trust and a
counterparty that governs certain OTC derivatives and typically contains, among other things, collateral posting terms and netting provisions in the event of a default and/or termination event. Under an ISDA Master Agreement, a Trust may, under
certain circumstances, offset with the counterparty certain derivative financial instruments payables and/or receivables with collateral held and/or posted and create one single net payment. The provisions of the ISDA Master Agreement
typically permit a single net payment in the event of default including the bankruptcy or insolvency of the counterparty. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against the
right of offset in bankruptcy, insolvency or other events.
Collateral Requirements: For derivatives traded under an ISDA Master Agreement, the
collateral requirements are typically calculated by netting the mark-to-market amount for each transaction under such agreement and comparing that amount to the value of
any collateral currently pledged by the Trust and the counterparty.
Cash collateral that has been pledged to cover obligations of the Trust and cash
collateral received from the counterparty, if any, is reported separately in the Statement of Assets and Liabilities as cash pledged as collateral and cash received as collateral, respectively. Non-cash
collateral pledged by the Trust, if any, is noted in the Schedule of Investments. Generally, the amount of collateral due from or to a counterparty is subject to a certain minimum transfer amount threshold before a transfer is required, which is
determined at the close of business of the Trust. Any additional required collateral is delivered to/pledged by the Trust on the next business day. Typically, the counterparty is not permitted to sell,
re-pledge or use cash and non-cash collateral it receives. The Trust generally agrees not to use non-cash collateral that it
receives but may, absent default or certain other circumstances defined in the underlying ISDA Master Agreement, be permitted to use cash collateral received. In such cases, interest may be paid pursuant to the collateral arrangement with the
counterparty. To the extent amounts due to the Trust from the counterparties are not fully collateralized, the Trust bears the risk of loss from counterparty non-performance. Likewise, to the extent the Trust
has delivered collateral to a counterparty and stands ready to perform under the terms of its agreement with such counterparty, the Trust bears the risk of loss from a counterparty in the amount of the value of the collateral in the event the
counterparty fails to return such collateral. Based on the terms of agreements, collateral may not be required for all derivative contracts.
For
financial reporting purposes, the Trust does not offset derivative assets and derivative liabilities that are subject to netting arrangements, if any, in the Statement of Assets and Liabilities.
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|
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N O T E S T O F
I N A N C I A L S T A T E M
E N T S |
|
61 |
Notes to Financial Statements (unaudited) (continued)
6. |
INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES |
Investment Advisory: The Trust entered into an Investment Advisory Agreement with the Manager, the Trusts investment adviser and an
indirect, wholly-owned subsidiary of BlackRock, Inc. (BlackRock), to provide investment advisory and administrative services. The Manager is responsible for the management of the Trusts portfolio and provides the personnel,
facilities, equipment and certain other services necessary to the operations of the Trust.
For such services, the Trust pays the Manager a monthly
fee at an annual rate equal to 0.80% of the average daily value of the Trusts managed assets.
The Manager entered into a sub-advisory agreement with BlackRock (Singapore) Limited (BSL) and BlackRock International Limited (BIL) (collectively, the Sub-Advisers),
each an affiliate of the Manager. The Manager pays BSL and BIL, for services they provide for that portion of the Trust for which BSL and BIL, as applicable, acts as sub-adviser, a monthly fee that is equal to
a percentage of the investment advisory fees paid by the Trust to the Manager.
Expense Waivers: The Manager contractually agreed to waive its
investment advisory fees by the amount of investment advisory fees the Trust pays to the Manager indirectly through its investment in affiliated money market funds (the affiliated money market fund waiver) through June 30, 2023. The
contractual agreement may be terminated upon 90 days notice by a majority of the Independent Trustees, or by a vote of a majority of the outstanding voting securities of the Trust. This amount is included in fees waived and/or reimbursed by
the Manager in the Statement of Operations. For the six months ended April 30, 2022, the amount waived was $4,775.
The Manager has contractually
agreed to waive its investment advisory fee with respect to any portion of the Trusts assets invested in affiliated equity and fixed-income mutual funds and affiliated exchange-traded funds that have a contractual management fee through
June 30, 2023. The agreement can be renewed for annual periods thereafter, and may be terminated on 90 days notice, each subject to approval by a majority of the Trusts Independent Trustees. For the six months ended April 30,
2022, there were no fees waived by the Manager pursuant to this arrangement.
Trustees and Officers: Certain trustees and/or officers of the
Trust are directors and/or officers of BlackRock or its affiliates. The Trust reimburses the Manager for a portion of the compensation paid to the Trusts Chief Compliance Officer, which is included in Trustees and Officer in the Statement of
Operations.
Other Transactions: The Trust may purchase securities from, or sell securities to, an affiliated fund provided the affiliation is
due solely to having a common investment adviser, common officers, or common trustees. For the six months ended April 30, 2022, the purchase and sale transactions and any net realized gains (losses) with affiliated funds in compliance with Rule
17a-7 under the 1940 Act were as follows:
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Trust Name |
|
Purchases |
|
|
Sales |
|
|
Net Realized
Gain (Loss) |
|
|
|
|
|
|
|
BIT |
|
$ |
616,625 |
|
|
$ |
992,957 |
|
|
$ |
(227,309 |
) |
|
|
For the six months ended April 30, 2022, purchases and sales of investments, including paydowns/payups, excluding short-term investments, were
$596,632,417 and $679,114,506, respectively.
For the six months ended April 30, 2022, purchases and sales related to mortgage dollar rolls were
$221,424,402 and $221,686,226, respectively.
8. |
INCOME TAX INFORMATION |
It is the Trusts policy to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment
companies, and to distribute substantially all of its taxable income to its shareholders. Therefore, no U.S. federal income tax provision is required.
The Trust files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on
the Trusts U.S. federal tax returns generally remains open for a period of three fiscal years after they are filed. The statutes of limitations on the Trusts state and local tax returns may remain open for an additional year depending
upon the jurisdiction.
Management has analyzed tax laws and regulations and their application to the Trust as of April 30, 2022, inclusive of
the open tax return years, and does not believe that there are any uncertain tax positions that require recognition of a tax liability in the Trusts financial statements.
As of October 31, 2021, the Trust had non-expiring capital loss carryforwards, subject to limitations,
amounts available to offset future realized capital gains of $27,546,345.
As of April 30, 2022, gross unrealized appreciation and depreciation
based on cost of investments (including short positions and derivatives, if any) for U.S. federal income tax purposes were as follows:
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Trust Name |
|
Tax Cost |
|
|
Gross Unrealized
Appreciation |
|
|
Gross Unrealized
Depreciation |
|
|
Net Unrealized
Appreciation (Depreciation) |
|
|
|
|
|
|
|
|
BIT |
|
$ |
985,619,846 |
|
|
$ |
64,725,824 |
|
|
$ |
(101,141,614 |
) |
|
$ |
(36,415,790 |
) |
|
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|
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|
62 |
|
2 0 2 2 B L A C
K R O C K S E M I - A N N U A L R
E P O R T T O S H A R E H O
L D E R S |
Notes to Financial Statements (unaudited) (continued)
In the normal course of business, the Trust invests in securities or other instruments and may enter into certain transactions, and such activities
subject the Trust to various risks, including among others, fluctuations in the market (market risk) or failure of an issuer to meet all of its obligations. The value of securities or other instruments may also be affected by various factors,
including, without limitation: (i) the general economy; (ii) the overall market as well as local, regional or global political and/or social instability; (iii) regulation, taxation or international tax treaties between various
countries; or (iv) currency, interest rate and price fluctuations. Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues, recessions, or other events could have a
significant impact on the Trust and its investments.
The Trust may invest without limitation 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 Trust may not be able to readily dispose of such investments at prices that approximate those at which the Trust could sell
such investments if they were more widely traded and, as a result of such illiquidity, the Trust may have to sell other investments or engage in borrowing transactions if necessary to raise funds to meet its obligations. Limited liquidity can also
affect the market price of investments, thereby adversely affecting the Trusts NAV and ability to make dividend distributions. 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.
Market Risk: The Trust may be exposed to prepayment
risk, which is the risk that borrowers may exercise their option to prepay principal earlier than scheduled during periods of declining interest rates, which would force the Trust to reinvest in lower yielding securities. The Trust may also be
exposed to reinvestment risk, which is the risk that income from the Trusts portfolio will decline if the Trust invests the proceeds from matured, traded or called fixed-income securities at market interest rates that are below the Trust
portfolios current earnings rate.
An outbreak of respiratory disease caused by a novel coronavirus has developed into a global pandemic and has
resulted in closing borders, quarantines, disruptions to supply chains and customer activity, as well as general concern and uncertainty. The impact of this pandemic, and other global health crises 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. This pandemic may result in substantial market volatility and may adversely impact the prices and liquidity of
a funds investments. Although vaccines have been developed and approved for use by various governments, the duration of this pandemic and its effects cannot be determined with certainty.
Valuation Risk: The market values of equities, such as common stocks and preferred securities or equity related investments, such as futures and
options, may decline due to general market conditions which are not specifically related to a particular company. They may also decline due to factors which affect a particular industry or industries. The Trust may invest in illiquid investments. An
illiquid investment is any investment that the Trust reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the
investment. The Trust may experience difficulty in selling illiquid investments in a timely manner at the price that it believes the investments are worth. Prices may fluctuate widely over short or extended periods in response to company, market or
economic news. Markets also tend to move in cycles, with periods of rising and falling prices. This volatility may cause the Trusts NAV to experience significant increases or decreases over short periods of time. If there is a general decline
in the securities and other markets, the NAV of the Trust may lose value, regardless of the individual results of the securities and other instruments in which the Trust invests.
The price the Trust could receive upon the sale of any particular portfolio investment may differ from the Trusts valuation of the investment,
particularly for securities that trade in thin or volatile markets or that are valued using a fair valuation technique or a price provided by an independent pricing service. Changes to significant unobservable inputs and assumptions (i.e., publicly
traded company multiples, growth rate, time to exit) due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Trusts results of operations. As a result, the price received upon the sale of an
investment may be less than the value ascribed by the Trust, and the Trust could realize a greater than expected loss or lesser than expected gain upon the sale of the investment. The Trusts ability to value its investments may also be
impacted by technological issues and/or errors by pricing services or other third-party service providers.
Counterparty Credit Risk: The Trust
may be exposed to counterparty credit risk, or the risk that an entity may fail to or be unable to perform on its commitments related to unsettled or open transactions, including making timely interest and/or principal payments or otherwise honoring
its obligations. The Trust manages counterparty credit risk by entering into transactions only with counterparties that the Manager believes have the financial resources to honor their obligations and by monitoring the financial stability of those
counterparties. Financial assets, which potentially expose the Trust to market, issuer and counterparty credit risks, consist principally of financial instruments and receivables due from counterparties. The extent of the Trusts exposure to
market, issuer and counterparty credit risks with respect to these financial assets is approximately their value recorded in the Statement of Assets and Liabilities, less any collateral held by the Trust.
A derivative contract may suffer a mark-to-market loss if the value of the
contract decreases due to an unfavorable change in the market rates or values of the underlying instrument. Losses can also occur if the counterparty does not perform under the contract.
With exchange-traded futures and centrally cleared swaps, there is less counterparty credit risk to the Trust since the exchange or clearinghouse, as
counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, credit risk is limited to failure of the clearinghouse. While offset rights may exist
under applicable law, the Trust does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default (including the bankruptcy or insolvency). Additionally, credit risk exists in exchange-traded futures
and centrally cleared swaps with respect to initial and variation margin that is held in a clearing brokers customer accounts. While clearing brokers are required to segregate customer margin from their own assets, in the event that a clearing
broker becomes insolvent or goes into bankruptcy and at that time there is a shortfall in the aggregate amount of margin held by the clearing broker for all its clients, typically the shortfall would be allocated on a pro rata basis across all the
clearing brokers customers, potentially resulting in losses to the Trust.
Concentration Risk: A diversified portfolio, where this is
appropriate and consistent with a funds objectives, minimizes the risk that a price change of a particular investment will have a material impact on the NAV of a fund. The investment concentrations within the Trusts portfolio are
disclosed in its Schedule of Investments.
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N O T E S T O F
I N A N C I A L S T A T E M
E N T S |
|
63 |
Notes to Financial Statements (unaudited) (continued)
The Trust invests a
significant portion of its assets in high yield securities. High yield securities that are rated below investment-grade (commonly referred to as junk bonds) or are unrated may be deemed speculative, involve greater levels of risk than
higher-rated securities of similar maturity and are more likely to default. High yield securities may be issued by less creditworthy issuers, and issuers of high yield securities may be unable to meet their interest or principal payment obligations.
High yield securities are subject to extreme price fluctuations, may be less liquid than higher rated fixed-income securities, even under normal economic conditions, and frequently have redemption features.
The Trust invests a significant portion of its assets in fixed-income securities and/or uses derivatives tied to the fixed-income markets. Changes in
market interest rates or economic conditions may affect the value and/or liquidity of such investments. 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 Trust may be subject to a greater risk of rising interest rates due to the current period of historically low rates.
The
Trust invests a significant portion of its assets in securities backed by commercial or residential mortgage loans or in issuers that hold mortgage and other asset-backed securities. When a Trust concentrates its investments in this manner, it
assumes a greater risk of prepayment or payment extension by securities issuers. Changes in economic conditions, including delinquencies and/or defaults on assets underlying these securities, can affect the value, income and/or liquidity of such
positions. Investment percentages in these securities are presented in the Schedule of Investments.
LIBOR Transition Risk: The United
Kingdoms Financial Conduct Authority announced a phase out of the LIBOR. Although many LIBOR rates ceased to be published or no longer are representative of the underlying market they seek to measure after December 31, 2021, a selection
of widely used USD LIBOR rates will continue to be published through June 2023 in order to assist with the transition. The Trust may be exposed to financial instruments tied to LIBOR to determine payment obligations, financing terms, hedging
strategies or investment value. The transition process away from LIBOR 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. The
ultimate effect of the LIBOR transition process on the Trust is uncertain.
10. |
CAPITAL SHARE TRANSACTIONS |
The Trust is authorized to issue an unlimited number of shares, all of which were initially classified as Common Shares. The Board is authorized,
however, to reclassify any unissued Common Shares to Preferred Shares without the approval of Common Shareholders.
Common Shares
For the periods shown, shares issued and outstanding increased by the following amounts as a result of dividend reinvestment:
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Trust Name |
|
|
Six Months Ended 04/30/22 |
|
|
|
Year Ended 10/31/21 |
|
|
|
|
|
|
BIT |
|
|
35,912 |
|
|
|
74,028 |
|
|
|
The Trust participates in an open market share repurchase program (the Repurchase Program). From
December 1, 2021 through November 30, 2022, the Trust may repurchase up to 5% of its outstanding common shares under the Repurchase Program, based on common shares outstanding as of the close of business on November 30, 2021, subject
to certain conditions. The Repurchase Program has an accretive effect as shares are purchased at a discount to the Trusts NAV. There is no assurance that the Trust will purchase shares in any particular amounts. For the six months ended
April 30, 2022, the Trust did not repurchase any shares.
The Trust filed a registration statement with the SEC seeking the ability to issue
additional Common Shares through an equity shelf program (a Shelf Offering), which was declared effective on March 3, 2022. The Trust may not sell any Common Shares in the Shelf Offering until a definitive prospectus relating to the
Shelf Offering has been filed with the SEC. Under the Shelf Offering, the Trust, subject to market conditions, may raise additional equity capital from time to time in varying amounts and utilizing various offering methods at a net price at or above
the Trusts NAV per Common Share (calculated within 48 hours of pricing). See Additional Information - Shelf Offering Program for additional information.
Initial costs incurred by the Trust in connection with its Shelf Offering are recorded as Deferred offering costs in the Statement of Assets
and Liabilities. As shares are sold, a portion of the costs attributable to the shares sold will be charged against paid-in-capital. Any remaining deferred charges at
the end of the shelf offering period will be charged to expense.
Managements evaluation of the impact of all subsequent events on the Trusts financial statements was completed through the date the financial
statements were issued and the following items were noted:
The Trust declared and paid or will pay distributions to Common Shareholders as follows:
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Trust Name |
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Declaration Date |
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Record Date |
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Payable/ Paid Date |
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Dividend Per Common Share |
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BIT |
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05/02/22 |
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05/16/22 |
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05/31/22 |
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$ |
0.123700 |
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06/01/22 |
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06/15/22 |
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06/30/22 |
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0.123700 |
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On May 3, 2022, the Trust filed a definitive prospectus with the SEC in connection with its Shelf Offering and may
sell additional Common Shares through the Shelf Offering.
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64 |
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2 0 2 2 B L A C
K R O C K S E M I - A N N U A L R
E P O R T T O S H A R E H O
L D E R S |
Additional Information