Statements of Cash
Flows (unaudited)
Six Months Ended
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
BTZ
|
|
|
BGT
|
|
|
|
|
|
|
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$
|
(1,314,409
|
)
|
|
$
|
(26,686,911
|
)
|
|
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of long-term investments and principal paydowns
|
|
|
604,547,659
|
|
|
|
163,407,333
|
|
|
Purchases of long-term investments
|
|
|
(437,870,063
|
)
|
|
|
(143,828,352
|
)
|
|
Net proceeds from sales (purchases) of short-term securities
|
|
|
6,335,165
|
|
|
|
(837,780
|
)
|
|
Amortization of premium and accretion of discount on investments and other fees
|
|
|
831,725
|
|
|
|
(502,630
|
)
|
|
Paid-in-kind income
|
|
|
—
|
|
|
|
(360,414
|
)
|
|
Premiums paid on closing options written
|
|
|
(81,786
|
)
|
|
|
—
|
|
|
Premiums received from options written
|
|
|
1,591,189
|
|
|
|
—
|
|
|
Net realized (gain) loss on investments and options written
|
|
|
(2,206,426
|
)
|
|
|
11,761,325
|
|
|
Net unrealized depreciation on investments, options written, swaps and foreign currency translations
|
|
|
51,090,264
|
|
|
|
23,044,209
|
|
|
|
|
(Increase) Decrease in Assets:
|
|
|
Receivables:
|
|
|
Dividends — affiliated
|
|
|
16,612
|
|
|
|
1,227
|
|
|
Dividends — unaffiliated
|
|
|
17
|
|
|
|
—
|
|
|
Interest — unaffiliated
|
|
|
2,415,730
|
|
|
|
(108,236
|
)
|
|
Variation margin on futures contracts
|
|
|
(14,719
|
)
|
|
|
—
|
|
|
Swap premiums paid
|
|
|
16,479
|
|
|
|
—
|
|
|
Prepaid expenses
|
|
|
(10,561
|
)
|
|
|
(2,686
|
)
|
|
|
|
Increase (Decrease) in Liabilities:
|
|
|
Cash received:
|
|
|
|
|
|
|
|
|
|
Collateral — OTC derivatives
|
|
|
(800,000
|
)
|
|
|
—
|
|
|
Collateral — reverse repurchase agreements
|
|
|
(3,650,077
|
)
|
|
|
—
|
|
|
Due to Broker
|
|
|
6,543,668
|
|
|
|
—
|
|
|
Payables:
|
|
|
Interest expense
|
|
|
(934,207
|
)
|
|
|
(164,590
|
)
|
|
Investment advisory fees
|
|
|
(1,230,941
|
)
|
|
|
(318,216
|
)
|
|
Trustees’ and Officer’s fees
|
|
|
(123,224
|
)
|
|
|
(35,693
|
)
|
|
Variation margin on futures contracts
|
|
|
(225,556
|
)
|
|
|
—
|
|
|
Variation margin on centrally cleared swaps
|
|
|
—
|
|
|
|
54,058
|
|
|
Other accrued expenses
|
|
|
(232,398
|
)
|
|
|
(54,635
|
)
|
|
Other liabilities
|
|
|
—
|
|
|
|
(352,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
224,694,141
|
|
|
|
25,015,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH USED FOR FINANCING ACTIVITIES
|
|
|
Cash dividends paid to Common Shareholders
|
|
|
(47,508,777
|
)
|
|
|
(10,434,617
|
)
|
|
Payments on bank borrowings
|
|
|
—
|
|
|
|
(97,000,000
|
)
|
|
Payments on Common Shares redeemed
|
|
|
(155,227,064
|
)
|
|
|
(3,564,399
|
)
|
|
Proceeds from bank borrowings
|
|
|
—
|
|
|
|
85,000,000
|
|
|
Increase in bank overdraft
|
|
|
41,711
|
|
|
|
50,714
|
|
|
Net borrowing of reverse repurchase agreements
|
|
|
(21,651,704
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(224,345,834
|
)
|
|
|
(25,948,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH IMPACT FROM FOREIGN EXCHANGE FLUCTUATIONS
|
|
|
Cash impact from foreign exchange fluctuations
|
|
$
|
204
|
|
|
$
|
(235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND FOREIGN CURRENCY
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in restricted and unrestricted cash and foreign currency
|
|
|
348,511
|
|
|
|
(933,001
|
)
|
|
Restricted and unrestricted cash and foreign currency at beginning of period
|
|
|
491,902
|
|
|
|
2,051,274
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted and unrestricted cash and foreign currency at end of period
|
|
$
|
840,413
|
|
|
$
|
1,118,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
Cash paid during the period for interest expense
|
|
|
4,915,460
|
|
|
|
1,130,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
2020 BLACKROCK
SEMI-ANNUAL REPORT TO SHAREHOLDERS
|
Statements of Cash Flows (unaudited) (continued)
Six Months Ended June 30,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
BTZ
|
|
|
BGT
|
|
|
|
|
|
|
RECONCILIATION OF RESTRICTED AND UNRESTRICTED CASH AND FOREIGN CURRENCY AT THE END OF PERIOD TO THE
STATEMENTS OF ASSETS AND LIABILITIES
|
|
|
|
|
|
|
|
|
|
Cash pledged:
|
|
|
|
|
|
|
|
|
|
Futures contracts
|
|
$
|
823,000
|
|
|
$
|
—
|
|
|
Centrally cleared swaps
|
|
|
—
|
|
|
|
1,110,000
|
|
|
Foreign currency at value
|
|
|
17,413
|
|
|
|
8,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
840,413
|
|
|
$
|
1,118,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RECONCILIATION OF RESTRICTED AND UNRESTRICTED CASH AND FOREIGN CURRENCY AT THE BEGINNING OF PERIOD TO THE
STATEMENTS OF ASSETS AND LIABILITIES
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
—
|
|
|
$
|
2,039,426
|
|
|
Cash pledged:
|
|
|
|
|
|
|
|
|
|
Futures contracts
|
|
|
483,000
|
|
|
|
—
|
|
|
Foreign currency at value
|
|
|
8,902
|
|
|
|
11,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
491,902
|
|
|
$
|
2,051,274
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
Financial Highlights
(For a share outstanding throughout each period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BTZ
|
|
|
|
|
Six Months Ended
06/30/20
(Unaudited)
|
|
|
Period from
11/01/19 to
12/31/19
|
|
|
|
|
|
Year Ended October 31,
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
14.97
|
|
|
$
|
14.94
|
|
|
|
|
|
|
$
|
13.72
|
|
|
$
|
14.88
|
|
|
$
|
14.61
|
|
|
$
|
14.33
|
|
|
$
|
15.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(a)
|
|
|
0.42
|
|
|
|
0.13
|
|
|
|
|
|
|
|
0.79
|
|
|
|
0.81
|
|
|
|
0.81
|
|
|
|
0.88
|
|
|
|
0.96
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.43
|
)
|
|
|
0.15
|
|
|
|
|
|
|
|
1.25
|
|
|
|
(1.17
|
)
|
|
|
0.30
|
|
|
|
0.32
|
|
|
|
(1.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
(0.01
|
)
|
|
|
0.28
|
|
|
|
|
|
|
|
2.04
|
|
|
|
(0.36
|
)
|
|
|
1.11
|
|
|
|
1.20
|
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.42
|
)(c)
|
|
|
(0.23
|
)
|
|
|
|
|
|
|
(0.79
|
)
|
|
|
(0.80
|
)
|
|
|
(0.79
|
)
|
|
|
(0.86
|
)
|
|
|
(0.91
|
)
|
|
From return of capital
|
|
|
—
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
—
|
|
|
|
(0.05
|
)
|
|
|
(0.06
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(0.42
|
)
|
|
|
(0.25
|
)
|
|
|
|
|
|
|
(0.82
|
)
|
|
|
(0.80
|
)
|
|
|
(0.84
|
)
|
|
|
(0.92
|
)
|
|
|
(0.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
14.54
|
|
|
$
|
14.97
|
|
|
|
|
|
|
$
|
14.94
|
|
|
$
|
13.72
|
|
|
$
|
14.88
|
|
|
$
|
14.61
|
|
|
$
|
14.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of period
|
|
$
|
13.20
|
|
|
$
|
13.98
|
|
|
|
|
|
|
$
|
13.55
|
|
|
$
|
11.72
|
|
|
$
|
13.36
|
|
|
$
|
12.87
|
|
|
$
|
12.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
0.23
|
%(e)
|
|
|
2.02
|
%(e)
|
|
|
|
|
|
|
16.17
|
%
|
|
|
(1.72
|
)%
|
|
|
8.53
|
%
|
|
|
9.61
|
%
|
|
|
0.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
(2.57
|
)%(e)
|
|
|
5.05
|
%(e)
|
|
|
|
|
|
|
23.34
|
%
|
|
|
(6.49
|
)%
|
|
|
10.62
|
%
|
|
|
10.43
|
%
|
|
|
(0.33
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1.51
|
%(f)
|
|
|
1.68
|
%(f)(g)
|
|
|
|
|
|
|
2.26
|
%
|
|
|
1.82
|
%
|
|
|
1.23
|
%
|
|
|
1.20
|
%
|
|
|
1.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and paid indirectly
|
|
|
1.51
|
%(f)
|
|
|
1.68
|
%(f)(g)
|
|
|
|
|
|
|
2.25
|
%
|
|
|
1.82
|
%
|
|
|
1.23
|
%
|
|
|
1.20
|
%
|
|
|
1.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and paid indirectly and excluding interest expense and
fees, and amortization of offering costs
|
|
|
0.92
|
%(f)
|
|
|
0.92
|
%(f)
|
|
|
|
|
|
|
1.08
|
%
|
|
|
0.94
|
%
|
|
|
0.87
|
%
|
|
|
0.95
|
%
|
|
|
0.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
5.85
|
%(f)
|
|
|
5.29
|
%(f)
|
|
|
|
|
|
|
5.57
|
%
|
|
|
5.69
|
%
|
|
|
5.53
|
%
|
|
|
6.21
|
%
|
|
|
6.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (000)
|
|
$
|
1,359,072
|
|
|
$
|
1,554,828
|
|
|
|
|
|
|
$
|
1,551,243
|
|
|
$
|
1,439,954
|
|
|
$
|
1,598,034
|
|
|
$
|
1,579,170
|
|
|
$
|
1,549,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of period (000)
|
|
$
|
554,645
|
|
|
$
|
577,231
|
|
|
|
|
|
|
$
|
568,461
|
|
|
$
|
707,102
|
|
|
$
|
477,822
|
|
|
$
|
638,327
|
|
|
$
|
685,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
24
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
18
|
%
|
|
|
30
|
%
|
|
|
25
|
%
|
|
|
29
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Based on average shares outstanding.
|
|
(b)
|
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
|
(c)
|
A portion of the distributions from net investment income may be deemed a return of capital or net realized gain at fiscal
year end.
|
|
(d)
|
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.
|
|
(e)
|
Aggregate total return.
|
|
(g)
|
Audit costs were not annualized in the calculation of the expense ratio. If these expenses were annualized, the expense
ratio would have been 1.70%.
|
See notes to financial statements.
|
|
|
|
|
50
|
|
2020 BLACKROCK
SEMI-ANNUAL REPORT TO SHAREHOLDERS
|
Financial Highlights (continued)
(For a share outstanding throughout each period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BGT
|
|
|
|
|
Six Months Ended
06/30/20
(unaudited)
|
|
|
Period from
11/01/19 to
12/31/19
|
|
|
|
|
|
Year Ended October 31,
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015 (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
14.10
|
|
|
$
|
13.95
|
|
|
|
|
|
|
$
|
14.33
|
|
|
$
|
14.49
|
|
|
$
|
14.41
|
|
|
$
|
14.18
|
|
|
$
|
14.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(b)
|
|
|
0.35
|
|
|
|
0.12
|
|
|
|
|
|
|
|
0.80
|
|
|
|
0.76
|
|
|
|
0.73
|
|
|
|
0.74
|
|
|
|
0.78
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(1.48
|
)
|
|
|
0.26
|
|
|
|
|
|
|
|
(0.37
|
)
|
|
|
(0.21
|
)
|
|
|
0.12
|
|
|
|
0.19
|
|
|
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
(1.13
|
)
|
|
|
0.38
|
|
|
|
|
|
|
|
0.43
|
|
|
|
0.55
|
|
|
|
0.85
|
|
|
|
0.93
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from net investment income(c)
|
|
|
(0.38
|
)(d)
|
|
|
(0.23
|
)
|
|
|
|
|
|
|
(0.81
|
)
|
|
|
(0.71
|
)
|
|
|
(0.77
|
)
|
|
|
(0.70
|
)
|
|
|
(0.81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
12.59
|
|
|
$
|
14.10
|
|
|
|
|
|
|
$
|
13.95
|
|
|
$
|
14.33
|
|
|
$
|
14.49
|
|
|
$
|
14.41
|
|
|
$
|
14.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of period
|
|
$
|
10.98
|
|
|
$
|
12.87
|
|
|
|
|
|
|
$
|
12.42
|
|
|
$
|
12.72
|
|
|
$
|
14.31
|
|
|
$
|
13.58
|
|
|
$
|
12.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
(7.53
|
)%(f)
|
|
|
2.89
|
%(f)
|
|
|
|
|
|
|
4.00
|
%
|
|
|
4.25
|
%
|
|
|
6.13
|
%
|
|
|
7.27
|
%
|
|
|
3.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
(11.65
|
)%(f)
|
|
|
5.48
|
%(f)
|
|
|
|
|
|
|
4.31
|
%
|
|
|
(6.30
|
)%
|
|
|
11.21
|
%
|
|
|
12.25
|
%
|
|
|
3.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1.81
|
%(h)
|
|
|
2.11
|
%(h)(i)
|
|
|
|
|
|
|
2.41
|
%
|
|
|
2.29
|
%
|
|
|
1.92
|
%
|
|
|
1.58
|
%
|
|
|
1.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed
|
|
|
1.80
|
%(h)
|
|
|
2.11
|
%(h)(i)
|
|
|
|
|
|
|
2.41
|
%
|
|
|
2.29
|
%
|
|
|
1.92
|
%
|
|
|
1.58
|
%
|
|
|
1.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and excluding interest expense
|
|
|
1.14
|
%(h)
|
|
|
1.28
|
%(h)
|
|
|
|
|
|
|
1.16
|
%
|
|
|
1.21
|
%
|
|
|
1.20
|
%
|
|
|
1.16
|
%
|
|
|
1.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
5.53
|
%(h)
|
|
|
5.23
|
%(h)
|
|
|
|
|
|
|
5.68
|
%
|
|
|
5.27
|
%
|
|
|
5.02
|
%
|
|
|
5.29
|
%
|
|
|
5.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (000)
|
|
$
|
284,549
|
|
|
$
|
323,708
|
|
|
|
|
|
|
$
|
321,091
|
|
|
$
|
339,096
|
|
|
$
|
342,890
|
|
|
$
|
340,944
|
|
|
$
|
335,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of period (000)
|
|
$
|
118,000
|
|
|
$
|
130,000
|
|
|
|
|
|
|
$
|
123,000
|
|
|
$
|
142,000
|
|
|
$
|
150,000
|
|
|
$
|
148,000
|
|
|
$
|
104,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage, end of period per $1,000
|
|
$
|
3,412
|
|
|
$
|
3,490
|
|
|
|
|
|
|
$
|
3,610
|
|
|
$
|
3,389
|
|
|
$
|
3,287
|
|
|
$
|
3,304
|
|
|
$
|
4,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
38
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
53
|
%
|
|
|
57
|
%
|
|
|
63
|
%
|
|
|
47
|
%
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
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.
|
|
(f)
|
Aggregate total return.
|
|
(g)
|
Excludes expenses incurred indirectly as a result of investments in underlying funds as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
06/30/20
(unaudited)
|
|
|
Period from
11/01/19 to
12/31/19
|
|
|
|
|
|
Year Ended October 31,
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015 (a)
|
|
|
Investments in underlying funds
|
|
|
0.04
|
%
|
|
|
0.04
|
%
|
|
|
|
|
|
|
0.04
|
%
|
|
|
0.01
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
Audit costs were not annualized in the calculation of the expense ratio. If these expenses were annualized, the expense
ratio would have been 2.21%.
|
See notes to financial statements.
Notes to Financial
Statements (unaudited)
The following are registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as closed-end
management investment companies and are referred to herein collectively as the “Trusts”, or individually as a “Trust”:
|
|
|
|
|
|
|
|
|
Trust Name
|
|
Herein Referred To As
|
|
Organized
|
|
Diversification
Classification
|
|
BlackRock Credit Allocation Income Trust
|
|
BTZ
|
|
Delaware
|
|
Diversified
|
|
BlackRock Floating Rate Income Trust
|
|
BGT
|
|
Delaware
|
|
Diversified
|
The Boards of Trustees of the Trusts are collectively referred to throughout this report as the “Board of Trustees” or the
“Board,” and the trustees thereof are collectively referred to throughout this report as “Trustees”. The Trusts determine and make available for publication the net asset values (“NAVs”) of their Common Shares on a
daily basis.
The Trusts, together with certain other registered investment companies advised by BlackRock Advisors, LLC (the “Manager”) or its affiliates,
are included in a complex of non-index fixed-income mutual funds and all BlackRock-advised closed-end funds referred to as the BlackRock Fixed-Income Complex.
On September 5, 2019, the Board approved a change in the fiscal year-end of BTZ and BGT, effective as of December 31,
2019, from October 31 to December 31.
|
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. Each 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 on the identified cost basis. Dividend income and non-cash dividend income, if any, are recorded on the ex-dividend date. Dividends from foreign securities where the ex-dividend date
may have passed are subsequently recorded when the Trusts are informed of the ex-dividend date. 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 and payment-in-kind interest, is recognized on an accrual basis.
Foreign Currency Translation: Each Trust’s 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.
Each Trust does not isolate the portion of the results of operations arising as a result of changes in the exchange rates from the changes in the market
prices of investments held or sold for financial reporting purposes. Accordingly, the effects of changes in exchange rates on investments are not segregated in the Statements 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. Each 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.
Segregation and
Collateralization: In cases where a Trust enters into certain investments (e.g., 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, a 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 investment or borrowings to be excluded from treatment as a “senior security.” Furthermore, if required by an exchange or counterparty agreement, the Trusts 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
Trusts are recorded on the ex-dividend date. Subject to the Trusts’ managed distribution plan, the Trusts intend 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.
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 a Trust’s 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, the trustees who are not “interested persons” of the Trusts, 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.
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52
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2020 BLACKROCK
SEMI-ANNUAL REPORT TO SHAREHOLDERS
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Notes to Financial Statements (unaudited) (continued)
The Plan is not funded and obligations
thereunder represent general unsecured claims against the general assets of each Trust, as applicable. Deferred compensation liabilities are included in the Trustees’ and Officer’s fees payable in the Statements of Assets and Liabilities
and will remain as a liability of the Trusts until such amounts are distributed in accordance with the Plan.
Indemnifications: In the normal course of
business, a Trust enters into contracts that contain a variety of representations that provide general indemnification. A Trust’s maximum exposure under these arrangements is unknown because it involves future potential claims against a Trust,
which cannot be predicted with any certainty.
Other: Expenses directly related to a Trust are charged to that 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.
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3.
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INVESTMENT VALUATION AND FAIR VALUE MEASUREMENTS
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Investment Valuation Policies: The Trusts’ investments are valued at fair value (also referred to as “market value” within the financial statements)
as of the close of trading on the NYSE (generally 4:00 p.m., Eastern time). U.S. GAAP defines fair value as the price the Trusts would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at
the measurement date. The Trusts determine the fair values of their financial instruments using various independent dealers or pricing services under policies approved by each Board. If a security’s 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 each Trust’s assets and liabilities:
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•
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Equity investments traded on a recognized securities exchange are valued at the official closing price each day, if
available. For equity investments traded on more than one exchange, the official closing price on the exchange where the stock is primarily traded is used. 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.
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•
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Fixed-income securities for which market quotations are readily available are generally valued using the last available bid
prices 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), 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.
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Generally, trading in foreign instruments is substantially completed each day at various times prior to the close of trading on the NYSE. Occasionally,
events affecting the values of such instruments may occur between the foreign market close and the close of trading on the NYSE that may not be reflected in the computation of the Trusts’ net assets. Each business day, the Trusts use a pricing
service to assist with the valuation of certain foreign exchange-traded equity securities and foreign exchange-traded and over-the-counter (“OTC”) options (the
“Systematic Fair Value Price”). Using current market factors, the Systematic Fair Value Price is designed to value such foreign securities and foreign options at fair value as of the close of trading on the NYSE, which follows the close of
the local markets.
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•
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Municipal investments (including commitments to purchase such investments on a “when-issued” basis) are valued on
the basis of prices provided by dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing
matrixes, market transactions in comparable investments and information with respect to various relationships between investments.
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•
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Investments in open-end U.S. mutual funds are valued at NAV each business day.
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•
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Futures contracts notional values are determined based on that day’s last reported settlement price on the exchange
where the contract is traded.
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•
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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 day’s prevailing forward exchange rate for the underlying currencies. Interpolated values are derived when the settlement date of the contract is an interim date for which quotations are not
available.
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•
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Exchange-traded equity options for which market quotations are readily available will be valued at the National Best Bid and
Offer quotes (“NBBO”). NBBO represents the mean of the bid and ask prices as quoted on the exchange on which such options are traded. In the event that there is no mean price available, the last bid (long positions) or ask (short
positions) price will be used. If no bid or ask price is available, the prior day’s price may be used. OTC and options on swaps (“swaptions”) are valued by an independent pricing service using a mathematical model, which incorporates
a number of market data factors, such as the trades and prices of the underlying instruments.
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•
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Swap agreements are valued utilizing quotes received daily by the Trusts’ pricing service 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.
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NOTES TO FINANCIAL STATEMENTS
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53
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Notes to Financial Statements (unaudited) (continued)
If events (e.g., a company announcement,
market volatility or a natural disaster) occur that are expected to materially affect the value of such investments, or in the event that the 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 Valued Investments”). The fair valuation approaches that may be used by the Global Valuation Committee will 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 each Trust might reasonably expect to receive or pay from the current sale or purchase of that asset or liability in an arm’s-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.
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Standard Inputs Generally Considered By Third Party Pricing Services
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Market approach
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(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.
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Income approach
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(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.
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Cost approach
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(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 Company’s
interests and merger or acquisition activity in companies comparable to the Private Company.
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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. Valuation techniques such as an option pricing model (“OPM”),
a probability weighted expected return model (“PWERM”) or a hybrid of those techniques are used in allocating enterprise value of the company, as deemed appropriate under the circumstances. The use of OPM and PWERM 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 as other investments held by a Trust. Typically, the most recently
available information by a Private Company is as of a date that is earlier than the date a Trust is calculating its NAV. This factor may result in a difference between the value of the investment and the price a Trust could receive upon the sale of
the investment.
Fair Value Hierarchy: Various inputs are used in determining the fair value of investments and derivative financial instruments. These inputs
to valuation techniques are categorized into a fair value hierarchy consisting of three broad levels for financial statement purposes as follows:
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•
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Level 1 — Unadjusted price quotations in active markets/exchanges for identical assets or liabilities that each
Trust has the ability to access
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•
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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 market–corroborated inputs)
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•
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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 Committee’s assumptions used in determining the fair value of investments and derivative financial instruments)
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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. There may not be a secondary
market, and/or there are a limited number of investors. The categorization of a value determined for investments and derivative financial instruments is based on the pricing transparency of the investments and derivative financial instruments and is
not necessarily an indication of the risks associated with investing in those securities.
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4.
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SECURITIES AND OTHER INVESTMENTS
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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
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54
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2020 BLACKROCK
SEMI-ANNUAL REPORT TO SHAREHOLDERS
|
Notes to Financial Statements (unaudited) (continued)
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 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 borrower’s 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.
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 fund’s initial investment in the IOs may not fully recoup.
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 company’s senior debt securities and are
freely callable at the issuer’s 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 issuer’s board of directors. Preferred stock also may be subject to optional or mandatory redemption provisions.
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
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NOTES TO FINANCIAL STATEMENTS
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55
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Notes to Financial Statements (unaudited) (continued)
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 fund’s 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 borrower’s 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 fund’s 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, certain funds may also enter into unfunded floating rate loan interests (“commitments”). In connection
with these commitments, a 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 Statements 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 Statements of Assets and Liabilities
and Statements of Operations. As of period end, BGT had the following unfunded floating rate loan interests:
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Trust Name
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Borrower
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Par
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Commitment
Amount
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Value
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Unrealized
Appreciation
(Depreciation)
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BGT
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EyeCare Partners LLC
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|
$
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200,923
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|
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$
|
200,923
|
|
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$
|
180,378
|
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|
$
|
(20,545
|
)
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Intelsat Jackson Holdings SA
|
|
|
41,737
|
|
|
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41,727
|
|
|
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42,285
|
|
|
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558
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|
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MED ParentCo LP
|
|
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64,900
|
|
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|
64,062
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|
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58,572
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(5,490
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)
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Neiman Marcus Group Ltd LLC
|
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33,799
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33,799
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34,475
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676
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Forward Commitments, When-Issued and Delayed Delivery Securities: Certain funds 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. A fund 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, a fund may be required to pay more at
settlement than the security is worth. In addition, a fund is not entitled to any of the interest earned prior to settlement. When purchasing a security on a delayed delivery basis, a fund 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, a fund’s maximum amount of loss is the unrealized appreciation of unsettled when-issued transactions.
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 Statements 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 Statements 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.
|
|
|
|
|
56
|
|
2020 BLACKROCK
SEMI-ANNUAL REPORT TO SHAREHOLDERS
|
Notes to Financial Statements (unaudited) (continued)
For the six months ended June 30, 2020,
the average amount of reverse repurchase agreements outstanding and the daily weighted average interest rate for the BTZ was $537,711,871 and 1.49%, 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 counterparty’s 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 ended, the following table is a summary of a Trust’s open
reverse repurchase agreements by counterparty which are subject to offset under an MRA on a net basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BTZ
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
Reverse
Repurchase
Agreements
|
|
|
Fair Value of
Non-cash Collateral
Pledged Including
Accrued Interest (a)
|
|
|
Cash Collateral
Pledged/Received
|
|
|
Net
Amount
|
|
|
Barclays Capital, Inc.
|
|
$
|
(145,410,649
|
)
|
|
$
|
145,410,649
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
BNP Paribas S.A.
|
|
|
(123,860,202
|
)
|
|
|
123,860,202
|
|
|
|
—
|
|
|
|
—
|
|
|
Credit Suisse Securities (USA) LLC
|
|
|
(654,291
|
)
|
|
|
654,291
|
|
|
|
—
|
|
|
|
—
|
|
|
HSBC Securities (USA), Inc.
|
|
|
(13,283,369
|
)
|
|
|
13,283,369
|
|
|
|
|
|
|
|
|
|
|
J.P. Morgan Securities LLC
|
|
|
(3,724,450
|
)
|
|
|
3,724,450
|
|
|
|
—
|
|
|
|
—
|
|
|
RBC Capital Markets LLC
|
|
|
(267,712,079
|
)
|
|
|
267,712,079
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(554,645,040
|
)
|
|
$
|
554,645,040
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Net collateral, including accrued interest, with a value of $646,223,094 has been pledged/received in connection with open
reverse repurchase agreements. Excess of net collateral pledged to the individual counterparty is not shown for financial reporting purposes.
|
|
In the event the counterparty of securities under an MRA files for bankruptcy or becomes insolvent, a fund’s 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 fund’s obligation to repurchase the securities.
|
5.
|
DERIVATIVE FINANCIAL INSTRUMENTS
|
The Trusts engage in various portfolio investment strategies using derivative contracts both to increase the returns of the Trusts and/or to manage their 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
Schedules of Investments. These contracts may be transacted on an exchange or OTC.
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 agreements between the Trusts 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 Trusts are required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on a contract’s 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 Statements of Assets and Liabilities.
Securities deposited as initial margin are designated in the Schedules of Investments and cash deposited, if any, are shown as cash pledged for futures contracts in the
Statements of Assets and Liabilities. Pursuant to the contract, the Trusts agree to receive from or pay to the broker an amount of cash equal to the daily fluctuation in 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 Statements of Assets and Liabilities. When the contract is closed, a realized gain or loss is recorded
in the Statements 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, 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 Trusts are denominated and in some cases, may be used to obtain exposure to a particular market.
|
|
|
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
57
|
Notes to Financial Statements (unaudited) (continued)
The contract is marked-to-market daily and the change in market value is recorded as unrealized appreciation (depreciation) in the Statements of Assets and Liabilities. When a contract is
closed, a realized gain or loss is recorded in the Statements 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 Statements 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 Statements of Assets and Liabilities.
Options: Certain Trusts purchase and write call and put options to increase or decrease their 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 Statements 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 Statements 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 Statements of Operations to
the extent the cost of the closing transaction exceeds the premiums received or paid. When the Trusts write a call option, such option is typically “covered,” meaning that they hold the underlying instrument subject to being called by the
option counterparty. When the Trusts write 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
Statements of Assets and Liabilities.
|
|
•
|
|
Swaptions — Certain Trusts 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 Trusts bear the risk of an unfavorable change in the value of the underlying instrument or the risk that they may not be able to
enter into a closing transaction due to an illiquid market. Exercise of a written option could result in the Trusts purchasing or selling a security when they 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 Trusts 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 Statements 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 Statements of Assets and
Liabilities. Payments received or paid are recorded in the Statements of Operations as realized gains or losses, respectively. When an OTC swap is terminated, a realized gain or loss is recorded in the Statements 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.
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
Trusts’ counterparty on the swap agreement becomes the CCP. The Trusts are required to interface with the CCP through the broker. Upon entering into a centrally cleared swap, the Trusts are required to deposit initial margin with the broker in
the form of cash or securities in an amount that varies depending on the size and risk profile of the particular swap. Securities deposited as initial margin are designated in the Schedules of Investments and cash deposited is shown as cash
pledged for centrally cleared swaps in the Statements of Assets and Liabilities. Amounts pledged, which are considered restricted cash, are included in cash pledged for centrally cleared swaps in the Statements of Assets and Liabilities.
Pursuant to the contract, the Trusts agree to receive from or pay to the broker an amount of cash equal to the daily fluctuation in 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 Statements of Assets and Liabilities. Payments received from (paid to) the counterparty, including at termination, are recorded as realized gains
(losses) in the Statements of Operations.
|
|
•
|
|
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 Trusts 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 Trusts 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 Trusts 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.
|
|
|
|
|
58
|
|
2020 BLACKROCK
SEMI-ANNUAL REPORT TO SHAREHOLDERS
|
Notes to Financial Statements (unaudited) (continued)
|
|
•
|
|
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 party’s 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.
Swap transactions involve, to varying degrees, elements of interest rate, credit and market risk in
excess of the amounts recognized in the Statements 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 their contractual rights and to secure rights that will help them mitigate their counterparty risk, the Trusts may
enter into an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or similar agreement with their counterparties. An ISDA Master Agreement is a bilateral agreement between each 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, each 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. Bankruptcy or insolvency laws of a particular jurisdiction may restrict or prohibit 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 Trusts and the counterparty.
Cash collateral that has been pledged to cover obligations of the Trusts and cash collateral received from the counterparty, if any,
is reported separately in the Statements of Assets and Liabilities as cash pledged as collateral and cash received as collateral, respectively. Non-cash collateral pledged by the Trusts, if any, is noted in
the Schedules 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 Trusts. Any
additional required collateral is delivered to/pledged by the Trusts on the next business day. Typically, the counterparty is not permitted to sell, re-pledge or use cash and
non-cash collateral it receives. A 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 Trusts from their
counterparties are not fully collateralized, they bear the risk of loss from counterparty non-performance. Likewise, to the extent the Trusts have delivered collateral to a counterparty and stand ready to
perform under the terms of their agreement with such counterparty, they bear 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 Trusts do not offset derivative assets and derivative
liabilities that are subject to netting arrangements, if any, in the Statements of Assets and Liabilities.
|
6.
|
INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
|
Investment Advisory: Each 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 each Trust’s portfolio and provides the personnel, facilities, equipment and
certain other services necessary to the operations of each Trust.
For such services, BTZ and BGT each pays the Manager a monthly fee at an annual rate equal to 0.62%
and 0.75%, respectively, of the average weekly value of each Trust’s managed assets. For purposes of calculating these fees, “managed assets” are determined as total assets of the Trust (including any assets attributable to money
borrowed for investment purposes) less the sum of its accrued liabilities (other than money borrowed for investment purposes).
With respect to each Trust, the
Manager entered into separate sub-advisory agreements, effective March 2, 2020, with BlackRock International Limited (“BIL”), an affiliate of the Manager. The Manager pays BIL for services it
provides for that portion of each Trust for which BIL acts as sub-adviser, a monthly fee that is equal to a percentage of the investment advisory fees paid by each Trust to the Manager.
Expense Waivers: With respect to each Trust, the Manager contractually agreed to waive its investment advisory fees by the amount of investment advisory fees each
Trust pays to the Manager indirectly through its investment in affiliated money market funds (the “affiliated money market fund waiver”) through June 30, 2021. 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. These amounts are included in fees waived and/or reimbursed by the Manager in the Statements of Operations. For the six months ended
June 30, 2020, the amounts waived were as follows:
|
|
|
|
|
|
|
|
|
BTZ
|
|
BGT
|
|
Amounts waived
|
|
$9,106
|
|
$315
|
The Manager contractually agreed to waive its investment advisory fee with respect to any portion of each Trust’s assets invested in
affiliated equity and fixed income mutual funds and affiliated exchange-traded funds that have a contractual management fee through June 30, 2021. 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 June 30, 2020, the Manager, with respect to BGT, waived $18,004 in investment advisory fees pursuant to these
arrangements.
|
|
|
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
59
|
Notes to Financial Statements (unaudited) (continued)
Trustees and Officers: Certain
trustees and/or officers of the Trusts are directors and/or officers of BlackRock or its affiliates. The Trusts reimburse the Manager for a portion of the compensation paid to the Trusts’ Chief Compliance Officer, which is included in Trustees
and Officer in the Statements of Operations.
Other Transactions: The Trusts may purchase securities from, or sell securities to, an affiliated fund provided
the affiliation is due solely to having a common investment adviser, common officers, or common trustees. For the six months ended June 30, 2020, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
Sales
|
|
|
Net
Realized
Gain (Loss)
|
|
|
BTZ
|
|
$
|
287,024
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
BGT
|
|
|
—
|
|
|
|
386,655
|
|
|
|
(58,110
|
)
|
For the six months ended June 30, 2020, purchases and sales of investments, including paydowns and excluding short-term securities, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
BTZ
|
|
|
BGT
|
|
|
Purchases
|
|
$
|
453,939,286
|
|
|
$
|
161,126,536
|
|
|
Sales
|
|
|
627,855,458
|
|
|
|
164,167,711
|
|
|
8.
|
INCOME TAX INFORMATION
|
It is each Trust’s 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.
Each 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 each Trust’s U.S. federal tax returns generally remains open for the period ended December 31, 2019 and each of
the four years ended October 31, 2019. The statutes of limitations on each Trust’s 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 Trusts as of June 30, 2020, 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 December 31,
2019, the Trusts had non-expiring capital loss carryforwards available to offset future realized capital gains as follows:
|
|
|
|
|
|
|
|
|
|
|
BTZ
|
|
BGT
|
|
|
|
|
$51,626,561
|
|
$
|
16,422,605
|
|
As of June 30, 2020, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal
income tax purposes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
BTZ
|
|
|
BGT
|
|
|
Tax cost
|
|
$
|
1,768,879,940
|
|
|
$
|
445,913,522
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
$
|
168,375,343
|
|
|
$
|
1,356,303
|
|
|
Gross unrealized depreciation
|
|
|
(39,818,347
|
)
|
|
|
(25,383,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation)
|
|
$
|
128,556,996
|
|
|
$
|
(24,027,068)
|
|
|
|
|
|
|
|
|
|
|
|
BGT is party to a senior committed secured, 360-day rolling line of credit facility and a separate security agreement (the
“SSB Agreement”) with State Street Bank and Trust Company (“SSB”). SSB may elect to terminate its commitment upon 360-days written notice to BGT. As of period end, BGT has not received any
notice to terminate. BGT has granted a security interest in substantially all of its assets to SSB.
The SSB Agreement allows for the maximum commitment amount of
$168,000,000 for BGT.
Advances will be made by SSB to BGT, at BGT’s option of (a) the higher of (i) 0.80% above the Fed Funds rate and (ii) 0.80% above
Overnight LIBOR or (b) 0.80% above 7-day, 30-day, 60-day or 90-day LIBOR. Overnight LIBOR
and LIBOR rates are subject to a 0% floor.
In addition, BGT paid a commitment fee (based on the daily unused portion of the commitments). The fees associated with
each of the agreements are included in the Statements of Operations as borrowing costs, if any. Advances to BGT as of period end, if any, are shown in the Statements of Assets and Liabilities as bank borrowings payable. Based on the short-term
nature of the borrowings under the line of credit and the variable interest rate, the carrying amount of the borrowings approximates fair value.
BGT may not declare
dividends or make other distributions on shares or purchase any such shares if, at the time of the declaration, distribution or purchase, asset coverage with respect to the outstanding short-term borrowings is less than 300%.
|
|
|
|
|
60
|
|
2020 BLACKROCK
SEMI-ANNUAL REPORT TO SHAREHOLDERS
|
Notes to Financial Statements (unaudited) (continued)
For the six months ended June 30, 2020,
the average amount of bank borrowings and the daily weighted average interest rates for BGT for loans under the revolving credit agreements were $118,093,407 and 1.64%, respectively.
Many municipalities insure repayment of their bonds, which may reduce the potential for loss due to credit risk. The market value of these bonds may fluctuate for other
reasons, including market perception of the value of such insurance, and there is no guarantee that the insurer will meet its obligation.
Inventories of municipal
bonds held by brokers and dealers may decrease, which would lessen their ability to make a market in these securities. Such a reduction in market making capacity could potentially decrease a Trust’s ability to buy or sell bonds. As a result, a
Trust may sell a security at a lower price, sell other securities to raise cash, or give up an investment opportunity, any of which could have a negative impact on performance. If a Trust needed to sell large blocks of bonds, those sales could
further reduce the bonds’ prices and impact performance.
In the normal course of business, the Trusts invest in securities or other instruments and may enter
into certain transactions, and such activities subject each 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 Trusts and their investments.
Each 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 each Trust to reinvest in lower yielding securities. Each Trust may also be exposed to reinvestment
risk, which is the risk that income from each Trust’s portfolio will decline if each Trust invests the proceeds from matured, traded or called fixed-income securities at market interest rates that are below each Trust portfolio’s current
earnings rate.
Each 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. A Trust may not be able to readily dispose of such investments at prices that approximate those at which a Trust could sell such investments if they were more widely traded and,
as a result of such illiquidity, a 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 a Trust’s net asset value 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.
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. A Trust may
invest in illiquid investments. An illiquid investment is any investment that a 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. A 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 each Trust’s 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 a Trust may lose value, regardless of the individual results of the securities and other instruments in which a Trust invests.
The price a Trust could receive upon the sale of any particular portfolio investment may differ from a Trust’s 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 a Trust’s results of operations. As a result, the price received upon the sale of an investment may be
less than the value ascribed by a Trust, and a Trust could realize a greater than expected loss or lesser than expected gain upon the sale of the investment. A Trust’s ability to value its investments may also be impacted by technological
issues and/or errors by pricing services or other third party service providers.
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 fund’s investments. The duration of this pandemic and its effects cannot be determined with certainty.
Counterparty Credit
Risk: The Trusts 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. The Trusts manage 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 Trusts to
market, issuer and counterparty credit risks, consist principally of financial instruments and receivables due from counterparties. The extent of the Trusts’ exposure to market, issuer and counterparty credit risks with respect to these
financial assets is approximately their value recorded in the Statements of Assets and Liabilities, less any collateral held by the Trusts.
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.
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NOTES TO FINANCIAL STATEMENTS
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61
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Notes to Financial Statements (unaudited) (continued)
A Trust’s risk of loss from
counterparty credit risk on OTC derivatives is generally limited to the aggregate unrealized gain less the value of any collateral held by such Trust.
For OTC
options purchased, each Trust bears the risk of loss in the amount of the premiums paid plus the positive change in market values net of any collateral held by the Trusts should the counterparty fail to perform under the contracts. Options written
by the Trusts do not typically give rise to counterparty credit risk, as options written generally obligate the Trusts, and not the counterparty, to perform. The Trusts may be exposed to counterparty credit risk with respect to options written to
the extent each Trust deposits collateral with its counterparty to a written option.
With exchange-traded options purchased and futures and centrally cleared swaps,
there is less counterparty credit risk to the Trusts 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, a 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 broker’s 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 broker’s customers, potentially resulting in losses to the Trusts.
Concentration Risk: Certain Trusts may invest in securities that are rated below investment grade quality (sometimes called “junk bonds”) or are unrated,
which are predominantly speculative, have greater credit risk and generally are less liquid than, and have more volatile prices than, higher quality securities.
Certain Trusts invest a significant portion of their assets in fixed-income securities and/or use 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 Trusts may be subject to a greater risk of rising interest rates due to the current period of historically low rates.
Certain Trusts invest a significant portion of their assets in securities backed by commercial or residential mortgage loans or in issuers that hold mortgage and other
asset-backed securities. Investment percentages in these securities are presented in the Schedules of Investments. 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.
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11.
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CAPITAL SHARE TRANSACTIONS
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Each Trust is authorized to issue an unlimited number of shares, all of which were initially classified as Common Shares. The par value for each Trust’s Common
Shares is $0.001. The Board is authorized, however, to reclassify any unissued Common Shares to Preferred Shares without the approval of Common Shareholders.
The
Trusts participate in an open market share repurchase program (the “Repurchase Program”). From December 1, 2018 through November 30, 2019, each Trust was permitted to repurchase up to 5% of its outstanding common shares under the
Repurchase Program, based on common shares outstanding as of the close of business on November 30, 2018, subject to certain conditions. From December 1, 2019 through November 30, 2020, each Trust may repurchase up to 5% of its
outstanding common shares under the Repurchase Program, based on common shares outstanding as of the close of business on November 30, 2019, subject to certain conditions. There is no assurance that the Trusts will purchase shares in any
particular amounts.
The total cost of the shares repurchased is reflected in the Trusts’ Statements of Changes in Net Assets. For the periods shown, shares
repurchased and cost, including transaction costs were as follows:
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BTZ
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BGT
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Shares
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Amount
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Shares
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Amount
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Six months ended June 30, 2020
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10,386,555
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(a)
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$
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155,227,064
|
|
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351,945
|
|
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$
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3,741,043
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Period ended December 31, 2019
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—
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—
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64,799
|
|
|
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810,222
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Year ended October 31, 2019
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1,057,409
|
|
|
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12,507,349
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|
|
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649,075
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7,974,829
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(a)
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Common shares issued and outstanding had a net decrease of 10,386,555 as a result of shares repurchased in a tender offer.
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BTZ conducted a tender offer to purchase for cash up to 10% of BTZ’s outstanding common shares of beneficial interest, at a
price equal to 98% of the NAV per share, determined on the business day on which the Tender Offer expires (“Valuation Date”).
With respect to BTZ, tender
offers for the six months ended June 30, 2020 were as follows:
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Commencement Date (a)
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Valuation Date
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Number of
Shares
Tendered
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Tendered Shares
as a Percentage of
Outstanding Shares
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Number of
Tendered Shares
Purchased
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Tendered Shares
Purchased as a
Percentage of
Outstanding Shares
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|
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January 2, 2020
|
|
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February 3, 2020
|
|
|
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41,241,878
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|
|
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40
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%
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|
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10,386,555
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|
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10
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%
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(a)
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Date the tender offer period began.
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62
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2020 BLACKROCK
SEMI-ANNUAL REPORT TO SHAREHOLDERS
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Notes to Financial Statements (unaudited) (continued)
Management’s 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:
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Common Dividend
Per Share
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Paid (a)
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Declared (b)
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BTZ
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$
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0.083900
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$
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0.083900
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BGT
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0.076400
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0.076400
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(a)
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Net investment income dividend paid on July 31, 2020 to shareholders of record on July 15, 2020.
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(b)
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Net investment income dividend declared on August 3, 2020 payable to shareholders of record on August 14, 2020.
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NOTES TO FINANCIAL STATEMENTS
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63
|
Disclosure of Investment Advisory Agreements
The Boards of Trustees (together, the “Board,” the members of which are referred to as
“Board Members”) of BlackRock Credit Allocation Income Trust (“BTZ”) and BlackRock Floating Rate Income Trust (“BGT” and together with BTZ, the “Funds” and each, a “Fund”) met on April 16, 2020
(the “April Meeting”) and May 20-21, 2020 (the “May Meeting”) to consider the approval of the investment advisory agreements (the “Advisory Agreements” or the “Agreements”) between each Fund and BlackRock
Advisors, LLC (the “Manager” or “BlackRock”), each Fund’s investment advisor.
Activities and Composition of the Board
On the date of the May Meeting, the Board consisted of ten individuals, eight of whom were not “interested persons” of each Fund as defined in the Investment
Company Act of 1940, as amended (the “1940 Act”) (the “Independent Board Members”). The Board Members are responsible for the oversight of the operations of each Fund and perform the various duties imposed on the directors of
investment companies by the 1940 Act. The Independent Board Members have retained independent legal counsel to assist them in connection with their duties. The Co-Chairs of the Board are Independent Board
Members. The Board has established five standing committees: an Audit Committee, a Governance and Nominating Committee, a Compliance Committee, a Performance Oversight Committee and an Executive Committee, each of which is chaired by an Independent
Board Member and composed of Independent Board Members (except for the Executive Committee, which also has one interested Board Member).
The Agreements
Consistent with the requirements of the 1940 Act, the Board considers the continuation of the Agreements on an annual basis. The Board has four quarterly
meetings per year, each typically extending for two days, and additional in-person and telephonic meetings throughout the year, as needed. While the Board also has a fifth
one-day meeting to consider specific information surrounding the renewal of the Agreements, the Board’s consideration entails a year-long deliberative process whereby the Board and its committees assess
BlackRock’s services to each Fund. In particular, the Board assessed, among other things, the nature, extent and quality of the services provided to each Fund by BlackRock, BlackRock’s personnel and affiliates, including (as applicable):
investment management services; accounting oversight; administrative and shareholder services; oversight of each Fund’s service providers; risk management and oversight; and legal, regulatory and compliance services. Throughout the year,
including during the contract renewal process, the Independent Board Members were advised by independent legal counsel, and met with independent legal counsel in various executive sessions outside of the presence of BlackRock’s management.
During the year, the Board, acting directly and through its committees, considers information that is relevant to its annual consideration of the renewal of the
Agreements, including the services and support provided by BlackRock to each Fund and its shareholders. BlackRock also furnished additional information to the Board in response to specific questions from the Board. This additional information is
discussed further in the section titled “Board Considerations in Approving the Agreements.” Among the matters the Board considered were: (a) investment performance for one-year, three-year, five-year, and/or since inception periods,
as applicable, against peer funds, applicable benchmarks, and other performance metrics, as applicable, as well as BlackRock senior management’s and portfolio managers’ analyses of the reasons for any outperformance or underperformance
relative to its peers, benchmarks, and other performance metrics, as applicable; (b) leverage management, as applicable; (c) fees, including advisory, administration, if applicable, and other amounts paid to BlackRock and its affiliates by
each Fund for services; (d) Fund operating expenses and how BlackRock allocates expenses to each Fund; (e) the resources devoted to risk oversight of, and compliance reports relating to, implementation of each Fund’s investment
objective, policies and restrictions, and meeting regulatory requirements; (f) BlackRock’s and each Fund’s adherence to applicable compliance policies and procedures; (g) the nature, character and scope of non-investment management services provided by BlackRock and its affiliates and the estimated cost of such services; (h) BlackRock’s and other service providers’ internal controls and risk and
compliance oversight mechanisms; (i) BlackRock’s implementation of the proxy voting policies approved by the Board; (j) execution quality of portfolio transactions; (k) BlackRock’s implementation of each Fund’s
valuation and liquidity procedures; (l) an analysis of management fees for products with similar investment mandates across the open-end fund, closed-end fund, sub-advised mutual fund, collective investment trust and institutional separate account product channels, as applicable, and the similarities and differences between these products and the services provided as
compared to each Fund; (m) BlackRock’s compensation methodology for its investment professionals and the incentives and accountability it creates, along with investment professionals’ investments in the fund(s) they manage;
(n) periodic updates on BlackRock’s business; and (o) each Fund’s market discount/premium compared to peer funds.
Board Considerations in
Approving the Agreements
The Approval Process: Prior to the April Meeting, the Board requested and received materials specifically relating to the
Agreements. The Independent Board Members are continuously engaged in a process with their independent legal counsel and BlackRock to review the nature and scope of the information provided to the Board to better assist its deliberations. The
materials provided in connection with the April Meeting included, among other things: (a) information independently compiled and prepared by Broadridge Financial Solutions, Inc. (“Broadridge”), based on Lipper classifications,
regarding each Fund’s fees and expenses as compared with a peer group of funds as determined by Broadridge (“Expense Peers”) and the investment performance of each Fund as compared with a peer group of funds (“Performance
Peers”); (b) information on the composition of the Expense Peers and Performance Peers and a description of Broadridge’s methodology; (c) information on the estimated profits realized by BlackRock and its affiliates pursuant to the
Agreements and a discussion of fall-out benefits to BlackRock and its affiliates; (d) a general analysis provided by BlackRock concerning investment management fees received in connection with other types
of investment products, such as institutional accounts, sub-advised mutual funds, closed-end funds, and open-end funds, under similar investment mandates, as applicable;
(e) a review of non-management fees; (f) the existence, impact and sharing of potential economies of scale, if any, with each Fund; (g) a summary of aggregate amounts paid by each Fund to
BlackRock; and (h) various additional information requested by the Board as appropriate regarding BlackRock’s and each Fund’s operations.
At the April
Meeting, the Board reviewed materials relating to its consideration of the Agreements. As a result of the discussions that occurred during the April Meeting, and as a culmination of the Board’s year-long deliberative process, the Board
presented BlackRock with questions and requests for additional information. BlackRock responded to these questions and requests with additional written information in advance of the May Meeting. Topics covered included: (a) the methodology for
measuring estimated fund profitability; (b) fund expenses and potential fee waivers; (c) differences in services provided and management fees between closed-end funds and other product channels; and
(d) BlackRock’s option overwrite strategy.
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64
|
|
2020 BLACKROCK SEMI-ANNUAL REPORT TO SHAREHOLDERS
|
Disclosure of Investment Advisory Agreements (continued)
At the May Meeting, the Board concluded its
assessment of, among other things: (a) the nature, extent and quality of the services provided by BlackRock; (b) the investment performance of each Fund as compared to its Performance Peers and to other metrics, as applicable; (c) the
advisory fee and the estimated cost of the services and estimated profits realized by BlackRock and its affiliates from their relationship with each Fund; (d) each Fund’s fees and expenses compared to its Expense Peers; (e) the
existence and sharing of potential economies of scale; (f) any fall-out benefits to BlackRock and its affiliates as a result of BlackRock’s relationship with each Fund; and (g) other factors deemed relevant by the Board Members.
The Board also considered other matters it deemed important to the approval process, such as other payments made to BlackRock or its affiliates relating to securities
lending and cash management, and BlackRock’s services related to the valuation and pricing of Fund portfolio holdings. The Board noted the willingness of BlackRock’s personnel to engage in open, candid discussions with the Board. The Board
did not identify any particular information as determinative, and each Board Member may have attributed different weights to the various items considered.
A.
Nature, Extent and Quality of the Services Provided by BlackRock: The Board, including the Independent Board Members, reviewed the nature, extent and quality of services provided by BlackRock, including the investment advisory services,
and the resulting performance of each Fund. Throughout the year, the Board compared Fund performance to the performance of a comparable group of closed-end funds, relevant benchmarks, and performance metrics,
as applicable. The Board met with BlackRock’s senior management personnel responsible for investment activities, including the senior investment officers. The Board also reviewed the materials provided by each Fund’s portfolio management
team discussing each Fund’s performance, investment strategies and outlook.
The Board considered, among other factors, with respect to BlackRock: the number,
education and experience of investment personnel generally and each Fund’s portfolio management team; research capabilities; investments by portfolio managers in the funds they manage; portfolio trading capabilities; use of technology;
commitment to compliance; credit analysis capabilities; risk analysis and oversight capabilities; and the approach to training and retaining portfolio managers and other research, advisory and management personnel. The Board also considered
BlackRock’s overall risk management program, including the continued efforts of BlackRock and its affiliates to address cybersecurity risks and the role of BlackRock’s Risk & Quantitative Analysis Group. The Board engaged in a
review of BlackRock’s compensation structure with respect to each Fund’s portfolio management team and BlackRock’s ability to attract and retain high-quality talent and create performance incentives.
In addition to investment advisory services, the Board considered the nature and quality of the administrative and other
non-investment advisory services provided to each Fund. BlackRock and its affiliates provide each Fund with certain administrative, shareholder and other services (in addition to any such services provided to
each Fund by third-parties) and officers and other personnel as are necessary for the operations of each Fund. In particular, BlackRock and its affiliates provide each Fund with administrative services including, among others:
(i) responsibility for disclosure documents, such as the prospectus and the statement of additional information in connection with the initial public offering and periodic shareholder reports; (ii) preparing communications with analysts to
support secondary market trading of each Fund; (iii) oversight of daily accounting and pricing; (iv) responsibility for periodic filings with regulators and stock exchanges; (v) overseeing and coordinating the activities of
third-party service providers including, among others, each Fund’s custodian, fund accountant, transfer agent, and auditor; (vi) organizing Board meetings and preparing the materials for such Board meetings; (vii) providing legal and
compliance support; (viii) furnishing analytical and other support to assist the Board in its consideration of strategic issues such as the merger, consolidation or repurposing of certain closed-end funds; and (ix) performing or managing
administrative functions necessary for the operation of each Fund, such as tax reporting, expense management, fulfilling regulatory filing requirements, and shareholder call center and other services. The Board reviewed the structure and duties of
BlackRock’s fund administration, shareholder services, and legal & compliance departments and considered BlackRock’s policies and procedures for assuring compliance with applicable laws and regulations.
B. The Investment Performance of each Fund and BlackRock: The Board, including the Independent Board Members, also reviewed and considered the performance
history of each Fund. In preparation for the April Meeting, the Board was provided with reports independently prepared by Broadridge, which included an analysis of each Fund’s performance as of December 31, 2019, as compared to its
Performance Peers. The performance information is based on net asset value (NAV), and utilizes Lipper data. Lipper’s methodology calculates a fund’s total return assuming distributions are reinvested on the
ex-date at a fund’s ex-date NAV. Broadridge ranks funds in quartiles, ranging from first to fourth, where first is the most desirable quartile position and fourth
is the least desirable. In connection with its review, the Board received and reviewed information regarding the investment performance of each Fund as compared to its Performance Peers and a custom peer group of funds as defined by BlackRock
(“Customized Peer Group”). The Board and its Performance Oversight Committee regularly review and meet with Fund management to discuss the performance of each Fund throughout the year.
In evaluating performance, the Board focused particular attention on funds with less favorable performance records. The Board also noted that while it found the data
provided by Broadridge generally useful, it recognized the limitations of such data, including in particular, that notable differences may exist between a fund and its Performance Peers (for example, the investment objectives and strategies).
Further, the Board recognized that the performance data reflects a snapshot of a period as of a particular date and that selecting a different performance period could produce significantly different results. The Board also acknowledged that
long-term performance could be impacted by even one period of significant outperformance or underperformance, and that a single investment theme could have the ability to disproportionately affect long-term performance.
The Board noted that for each of the one-, three- and five-year periods reported, BTZ ranked in the first quartile against its
Customized Peer Group. The Board noted that BlackRock believes that the Customized Peer Group is an appropriate performance metric for BTZ, and that BlackRock has explained its rationale for this belief to the Board.
The Board noted that for the one-, three- and five-year periods reported, BGT ranked in the first, second and second quartiles,
respectively, against its Customized Peer Group. The Board noted that BlackRock believes that the Customized Peer Group is an appropriate performance metric for BGT, and that BlackRock has explained its rationale for this belief to the Board.
C. Consideration of the Advisory/Management Fees and the Estimated Cost of the Services and Estimated Profits Realized by BlackRock and its Affiliates from their
Relationship with each Fund: The Board, including the Independent Board Members, reviewed each Fund’s contractual management fee rate compared with
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|
DISCLOSURE OF INVESTMENT ADVISORY AGREEMENTS
|
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|
65
|
|
Disclosure of Investment Advisory Agreements (continued)
those of its Expense Peers. The contractual
management fee rate represents a combination of the advisory fee and any administrative fees, before taking into account any reimbursements or fee waivers. The Board also compared each Fund’s total expense ratio, as well as its actual
management fee rate as a percentage of managed assets, which is the total assets of each Fund (including any assets attributable to money borrowed for investment purposes) minus the sum of each Fund’s accrued liabilities (other than money
borrowed for investment purposes) to those of its Expense Peers. The total expense ratio represents a fund’s total net operating expenses, excluding any investment related expenses. The total expense ratio gives effect to any expense
reimbursements or fee waivers, and the actual management fee rate gives effect to any management fee reimbursements or waivers. The Board considered the services provided and the fees charged by BlackRock and its affiliates to other types of clients
with similar investment mandates, as applicable, including institutional accounts and sub-advised mutual funds (including mutual funds sponsored by third parties).
The Board received and reviewed statements relating to BlackRock’s financial condition. The Board reviewed BlackRock’s profitability methodology and was also
provided with an estimated profitability analysis that detailed the revenues earned and the expenses incurred by BlackRock for services provided to each Fund. The Board reviewed BlackRock’s estimated profitability with respect to each Fund and
other funds the Board currently oversees for the year ended December 31, 2019 compared to available aggregate estimated profitability data provided for the prior two years. The Board reviewed BlackRock’s estimated profitability with respect to
certain other U.S. fund complexes managed by the Manager and/or its affiliates. The Board reviewed BlackRock’s assumptions and methodology of allocating expenses in the estimated profitability analysis, noting the inherent limitations in
allocating costs among various advisory products. The Board recognized that profitability may be affected by numerous factors including, among other things, fee waivers and expense reimbursements by the Manager, the types of funds managed, precision
of expense allocations and business mix. The Board thus recognized that calculating and comparing profitability at the individual fund level is difficult.
The Board
noted that, in general, individual fund or product line profitability of other advisors is not publicly available. The Board reviewed BlackRock’s overall operating margin, in general, compared to that of certain other publicly traded asset
management firms. The Board considered the differences between BlackRock and these other firms, including the contribution of technology at BlackRock, BlackRock’s expense management, and the relative product mix.
The Board considered whether BlackRock has the financial resources necessary to attract and retain high quality investment management personnel to perform its obligations
under the Agreements and to continue to provide the high quality of services that is expected by the Board. The Board further considered factors including but not limited to BlackRock’s commitment of time, assumption of risk, and liability
profile in servicing each Fund, including in contrast to what is required of BlackRock with respect to other products with similar investment mandates across the open-end fund,
closed-end fund, sub-advised mutual fund, collective investment trust, and institutional separate account product channels, as applicable.
The Board noted that BTZ’s contractual management fee rate ranked in the fourth quartile, and that the actual management fee rate and total expense ratio each ranked
in the fourth quartile relative to the Expense Peers. The Board also noted, however, that given the comparability limitations of the Expense Peers, BlackRock provided the Board a supplemental peer group consisting of funds that are generally similar
to BTZ. The Board noted that BTZ’s actual management fee rate and total expense ratio ranked in the second and third quartiles, respectively, relative to the supplemental peer group.
The Board noted that BGT’s contractual management fee rate ranked in the first quartile, and that the actual management fee rate and total expense ratio each ranked
in the first quartile, relative to the Expense Peers.
D. Economies of Scale: The Board, including the Independent Board Members, considered the extent
to which economies of scale might be realized as the assets of each Fund increase. The Board also considered the extent to which each Fund benefits from such economies of scale in a variety of ways, and whether there should be changes in the
advisory fee rate or breakpoint structure in order to enable each Fund to more fully participate in these economies of scale. The Board considered each Fund’s asset levels and whether the current fee was appropriate.
Based on the Board’s review and consideration of the issue, the Board concluded that most closed-end funds do not have fund
level breakpoints because closed-end funds generally do not experience substantial growth after the initial public offering. Closed-end funds are typically priced at
scale at a fund’s inception.
E. Other Factors Deemed Relevant by the Board Members: The Board, including the Independent Board Members, also took
into account other ancillary or “fall-out” benefits that BlackRock or its affiliates may derive from BlackRock’s respective relationships with each Fund, both tangible and intangible, such as
BlackRock’s ability to leverage its investment professionals who manage other portfolios and its risk management personnel, an increase in BlackRock’s profile in the investment advisory community, and the engagement of BlackRock’s
affiliates as service providers to each Fund, including for administrative, securities lending and cash management services. The Board also considered BlackRock’s overall operations and its efforts to expand the scale of, and improve the
quality of, its operations. The Board also noted that, subject to applicable law, BlackRock may use and benefit from third-party research obtained by soft dollars generated by certain registered fund transactions to assist in managing all or a
number of its other client accounts.
In connection with its consideration of the Agreements, the Board also received information regarding BlackRock’s brokerage
and soft dollar practices. The Board received reports from BlackRock which included information on brokerage commissions and trade execution practices throughout the year.
The Board noted the competitive nature of the closed-end fund marketplace, and that shareholders are able to sell their Fund
shares in the secondary market if they believe that each Fund’s fees and expenses are too high or if they are dissatisfied with the performance of each Fund.
The Board also considered the various notable initiatives and projects BlackRock performed in connection with its closed-end fund
product line. These initiatives included developing equity shelf programs; efforts to eliminate product overlap with fund mergers; ongoing services to manage leverage that has become increasingly complex; periodic evaluation of share repurchases and
other support initiatives for certain BlackRock funds; and continued communication efforts with shareholders, fund analysts and financial advisers. With respect to the latter, the Independent Board Members noted BlackRock’s continued commitment
to supporting the secondary market for the common shares of its closed-end funds through a comprehensive secondary market communication program designed to raise investor and analyst awareness and
understanding of closed-end funds. BlackRock’s support services included, among other things: sponsoring and participating in conferences; communicating with
closed-end fund analysts covering the BlackRock funds throughout the year; providing marketing and product updates for the closed-end funds; and maintaining and
enhancing its closed-end fund website.
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2020 BLACKROCK SEMI-ANNUAL REPORT TO SHAREHOLDERS
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Disclosure of Investment Advisory Agreements (continued)
Conclusion
The Board, including the Independent Board Members, unanimously approved the continuation of the Advisory Agreements between the Manager and each Fund for a one-year term ending June 30, 2021. Based upon its evaluation of all of the aforementioned factors in their totality, as well as other information, the Board, including the Independent Board Members, was
satisfied that the terms of the Agreements were fair and reasonable and in the best interest of each Fund and its shareholders. In arriving at its decision to approve the Agreements, the Board did not identify any single factor or group of factors
as all-important or controlling, but considered all factors together, and different Board Members may have attributed different weights to the various factors considered. The Independent Board Members were
also assisted by the advice of independent legal counsel in making this determination.
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DISCLOSURE OF INVESTMENT ADVISORY AGREEMENTS
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Disclosure of Sub-Advisory Agreement
The Board of Trustees (the “Board,” and the members of which are referred to as
“Board Members”) of BlackRock Credit Allocation Income Trust (the “Fund”), met in person on February 19, 2020 (the “February Meeting”) to consider the initial approval of the
sub-advisory agreement (the “Sub-Advisory Agreement”) among the Fund, BlackRock Advisors, LLC (the “Manager”), the Fund’s investment advisor,
and BlackRock International Limited. The Sub-Advisory Agreement was substantially similar to the sub-advisory agreements previously approved with respect to certain
other portfolios in the BlackRock Fixed-Income Complex.
On the date of the February Meeting, the Board consisted of ten individuals, eight of whom were not
“interested persons” of the Fund as defined in the Investment Company Act of 1940, as amended (the “1940 Act”) (the “Independent Board Members”). Pursuant to the 1940 Act, the Board is required to consider the initial
approval of the Sub-Advisory Agreement.
At the February Meeting, the Board reviewed materials relating to its consideration
of the proposed Sub-Advisory Agreement. The Fund’s investment advisory agreement with the Manager was most recently approved by the Board at in-person meetings on
May 1, 2019 (the “May Meeting”) and June 5-6, 2019 (the “June Meeting”). A discussion of the basis for the Board’s approval of this agreement at the May and June Meetings is
included in the Fund’s annual shareholder report for the fiscal year ended October 31, 2019. The factors considered by the Board at the February Meeting in connection with approval of the proposed
Sub-Advisory Agreement were substantially the same as the factors considered at the May and June Meetings.
Following
discussion, all the Board Members present at the February Meeting, including all the Independent Board Members present, approved the Sub-Advisory Agreement among the Fund, the Manager and BlackRock
International Limited for a two-year term beginning on the effective date of the Sub-Advisory Agreement. Based upon its evaluation of all of the aforementioned factors
in their totality, the Board, including the Independent Board Members, was satisfied that the terms of the Sub-Advisory Agreement were fair and reasonable and in the best interest of the Fund and its
shareholders. In arriving at its decision to approve the Sub-Advisory Agreement, the Board did not identify any single factor or group of factors as all-important or
controlling, but considered all factors together, and different Board Members may have attributed different weights to the various factors considered. The Independent Board Members were also assisted by the advice of independent legal counsel in
making this determination.
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2020 BLACKROCK SEMI-ANNUAL REPORT TO SHAREHOLDERS
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Disclosure of Sub-Advisory Agreement
The Board of Trustees (the “Board,” and the members of which are referred to as
“Board Members”) of BlackRock Floating Rate Income Trust (the “Fund”), met in person on February 19, 2020 (the “February Meeting”) to consider the initial approval of the
sub-advisory agreement (the “Sub-Advisory Agreement”) among the Fund, BlackRock Advisors, LLC (the “Manager”), the Fund’s investment advisor,
and BlackRock International Limited. The Sub-Advisory Agreement was substantially similar to the sub-advisory agreements previously approved with respect to certain
other portfolios in the BlackRock Fixed-Income Complex.
On the date of the February Meeting, the Board consisted of ten individuals, eight of whom were not
“interested persons” of the Fund as defined in the Investment Company Act of 1940, as amended (the “1940 Act”) (the “Independent Board Members”). Pursuant to the 1940 Act, the Board is required to consider the initial
approval of the Sub-Advisory Agreement.
At the February Meeting, the Board reviewed materials relating to its consideration
of the proposed Sub-Advisory Agreement. The Fund’s investment advisory agreement with the Manager was most recently approved by the Board at in-person meetings on
May 1, 2019 (the “May Meeting”) and June 5-6, 2019 (the “June Meeting”). A discussion of the basis for the Board’s approval of this agreement at the May and June Meetings is
included in the Fund’s annual shareholder report for the fiscal year ended October 31, 2019. The factors considered by the Board at the February Meeting in connection with approval of the proposed
Sub-Advisory Agreement were substantially the same as the factors considered at the May and June Meetings.
Following
discussion, all the Board Members present at the February Meeting, including all the Independent Board Members present, approved the Sub-Advisory Agreement among the Fund, the Manager and BlackRock
International Limited for a two-year term beginning on the effective date of the Sub-Advisory Agreement. Based upon its evaluation of all of the aforementioned factors
in their totality, the Board, including the Independent Board Members, was satisfied that the terms of the Sub-Advisory Agreement were fair and reasonable and in the best interest of the Fund and its
shareholders. In arriving at its decision to approve the Sub-Advisory Agreement, the Board did not identify any single factor or group of factors as all-important or
controlling, but considered all factors together, and different Board Members may have attributed different weights to the various factors considered. The Independent Board Members were also assisted by the advice of independent legal counsel in
making this determination.
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DISCLOSURE OF SUB-ADVISORY AGREEMENT
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