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 Funds, or individually as a Fund:
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Fund Name
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Herein Referred To As
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Organized
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Diversification
Classification
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BlackRock MuniYield Fund, Inc.
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MYD
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Maryland
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Diversified
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BlackRock MuniYield Quality Fund, Inc.
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MQY
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Maryland
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Diversified
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BlackRock MuniYield Quality Fund II, Inc.
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MQT
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Maryland
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Diversified
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The Boards of Directors of the Funds are collectively referred to throughout this report as the Board of Directors or the
Board, and the directors thereof are collectively referred to throughout this report as Directors. The Funds determine and make available for publication the net asset values (NAVs) of their Common Shares on a
daily basis.
The Funds, together with certain other registered investment companies advised by BlackRock Advisors, LLC (the Manager) or its affiliates,
are included in a complex of open-end non-index fixed-income mutual funds and all BlackRock-advised closed-end funds referred to
as the BlackRock Fixed-Income Complex.
2.
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SIGNIFICANT ACCOUNTING POLICIES
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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 Fund 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 is recorded on the
ex-dividend date. Interest income, including amortization and accretion of premiums and discounts on debt securities, is recognized on an accrual basis.
Segregation and Collateralization: In cases where a Fund enters into certain investments (e.g., futures contracts) or certain borrowings (e.g., TOB Trust
transactions) that would be treated as senior securities for 1940 Act purposes, a Fund 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 Funds 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 from net investment income are declared monthly and paid monthly. Distributions of capital gains are recorded on the ex-dividend date and made at least annually. The character and timing of distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Distributions to
Preferred Shareholders are accrued and determined as described in Note 10.
Deferred Compensation Plan: Under the Deferred Compensation Plan (the
Plan) approved by the Board of Directors of the Funds (the Board), the directors who are not interested persons of the Fund, as defined in the 1940 Act (Independent Directors), 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 Directors.
This has the same economic effect for the Independent Directors as if the Independent Directors had invested the deferred amounts directly in certain funds in the BlackRock Fixed-Income Complex.
The Plan is not funded and obligations thereunder represent general unsecured claims against the general assets of each Fund, as applicable. Deferred compensation
liabilities are included in the Directors and Officers fees payable in the Statements of Assets and Liabilities and will remain as a liability of the Funds until such amounts are distributed in accordance with the Plan.
Recent Accounting Standards: The Funds have adopted Financial Accounting Standards Board Accounting Standards Update
2017-08 to amend the amortization period for certain purchased callable debt securities held at a premium. Under the new standard, the Funds have changed the amortization period for the premium on certain
purchased callable debt securities with non-contingent call features to the earliest call date. In accordance with the transition provisions of the standard, the Funds applied the amendments on a modified
retrospective basis beginning with the fiscal period ended October 31, 2019. The adjusted cost basis of securities at April 30, 2019 are as follows:
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MYD
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$
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993,382,888
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MQY
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732,135,624
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MQT
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479,774,057
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This change in accounting policy has been made to comply with the newly issued accounting standard and had no impact on accumulated
earnings (loss) or the net asset value of the Funds.
Indemnifications: In the normal course of business, a Fund enters into contracts that contain a variety
of representations that provide general indemnification. A Funds maximum exposure under these arrangements is unknown because it involves future potential claims against a Fund, which cannot be predicted with any certainty.
Other: Expenses directly related to a Fund are charged to that Fund. 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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46
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2019 BLACKROCK SEMI-ANNUAL REPORT TO SHAREHOLDERS
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Notes to Financial Statements (unaudited) (continued)
3.
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INVESTMENT VALUATION AND FAIR VALUE MEASUREMENTS
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Investment Valuation Policies: The Funds investments are valued at fair value (also referred to as market value within the financial statements)
as of the close of trading on the New York Stock Exchange (NYSE) (generally 4:00 p.m., Eastern time). U.S. GAAP defines fair value as the price the Funds would receive to sell an asset or pay to transfer a liability in an orderly
transaction between market participants at the measurement date. The Funds determine the fair values of their financial instruments using various independent dealers or pricing services under policies approved by the Board. The BlackRock Global
Valuation Methodologies Committee (the Global Valuation Committee) is the committee formed by management to develop global pricing policies and procedures and to 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 Funds assets and liabilities:
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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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Investments in open-end U.S. mutual funds are valued at NAV each business day.
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Futures contracts traded on exchanges are valued at their last sale price.
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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 Fund might reasonably expect to receive or pay from the current sale or purchase of that asset or liability in an arms-length transaction. Fair value determinations shall be based upon all available factors that the Global Valuation Committee, or its delegate, deems relevant and consistent with the principles of fair
value measurement. The pricing of all Fair Valued Investments is subsequently reported to the Board or a committee thereof on a quarterly basis.
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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Level 1 Unadjusted price quotations in active markets/exchanges for identical assets or liabilities that each
Fund has the ability to access
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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 marketcorroborated inputs)
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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 Committees 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 privately held companies or funds. 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.
4.
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SECURITIES AND OTHER INVESTMENTS
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Zero-Coupon Bonds: Zero-coupon bonds are normally issued at a significant discount from face value and do not provide for periodic interest payments. These bonds
may experience greater volatility in market value than other debt obligations of similar maturity which provide for regular interest payments.
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 funds maximum amount of
loss is the unrealized appreciation of unsettled when-issued transactions.
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NOTES TO FINANCIAL STATEMENTS
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47
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Notes to Financial Statements (unaudited) (continued)
Municipal Bonds Transferred to TOB
Trusts: Certain funds leverage their assets through the use of TOB Trust transactions. The funds transfer municipal bonds into a special purpose trust (a TOB Trust). A TOB Trust issues two classes of beneficial interests:
short-term floating rate interests (TOB Trust Certificates), which are sold to third party investors, and residual inverse floating rate interests (TOB Residuals), which are issued to the participating funds that contributed
the municipal bonds to the TOB Trust. The TOB Trust Certificates have interest rates that reset weekly and their holders have the option to tender such certificates to the TOB Trust for redemption at par and any accrued interest at each reset date.
The TOB Residuals held by a fund provide the fund with the right to cause the holders of a proportional share of the TOB Trust Certificates to tender their certificates to the TOB Trust at par plus accrued interest. The funds may withdraw a
corresponding share of the municipal bonds from the TOB Trust. Other funds managed by the investment adviser may also contribute municipal bonds to a TOB Trust into which a fund has contributed bonds. If multiple BlackRock-advised funds participate
in the same TOB Trust, the economic rights and obligations under the TOB Residuals will be shared among the funds ratably in proportion to their participation in the TOB Trust.
TOB Trusts are supported by a liquidity facility provided by a third party bank or other financial institution (the Liquidity Provider) that allows the
holders of the TOB Trust Certificates to tender their certificates in exchange for payment of par plus accrued interest on any business day. The tendered TOB Trust Certificates are remarketed by a Remarketing Agent. In the event of a failed
remarketing, the TOB Trust may draw upon a loan from the Liquidity Provider to purchase the tendered TOB Trust Certificates. Any loans made by the Liquidity Provider will be secured by the purchased TOB Trust Certificates held by the TOB Trust and
will be subject to an increased interest rate based on number of days the loan is outstanding.
The TOB Trust may be collapsed without the consent of a fund, upon the
occurrence of a termination event as defined in the TOB Trust agreement. Upon the occurrence of a termination event, a TOB Trust would be liquidated with the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the
Remarketing Agent and the Liquidity Provider. Upon certain termination events, TOB Trust Certificates holders will be paid before the TOB Residuals holders (i.e., the Funds) whereas in other termination events, TOB Trust Certificates holders and TOB
Residuals holders will be paid pro rata.
While a funds investment policies and restrictions expressly permit investments in inverse floating rate securities,
such as TOB Residuals, they restrict the ability of a fund to borrow money for purposes of making investments. The funds management believes that a funds restrictions on borrowings do not apply to the funds TOB Trust transactions.
Each funds transfer of the municipal bonds to a TOB Trust is considered a secured borrowing for financial reporting purposes. The cash received by the TOB Trust from the sale of the TOB Trust Certificates, less certain transaction expenses, is
paid to a fund. A fund typically invests the cash received in additional municipal bonds.
Accounting for TOB Trusts: The municipal bonds deposited into a TOB
Trust are presented in a funds Schedules of Investments and the TOB Trust Certificates are shown in Other Liabilities in the Statements of Assets and Liabilities. Any loans drawn by the TOB Trust pursuant to the liquidity facility to purchase
tendered TOB Trust Certificates are shown as Loan for TOB Trust Certificates. The carrying amount of a funds payable to the holder of the TOB Trust Certificates, as reported in the Statements of Assets and Liabilities as TOB Trust
Certificates, approximates its fair value.
Interest income, including amortization and accretion of premiums and discounts, from the underlying municipal bonds is
recorded by a fund on an accrual basis. Interest expense incurred on the TOB Trust transaction and other expenses related to remarketing, administration, trustee, liquidity and other services to a TOB Trust are shown as interest expense, fees and
amortization of offering costs in the Statements of Operations. Fees paid upon creation of the TOB Trust are recorded as debt issuance costs and are amortized to interest expense, fees and amortization of offering costs in the Statements of
Operations to the expected maturity of the TOB Trust. In connection with the restructurings of the TOB Trusts to non-bank sponsored TOB Trusts, a fund incurred
non-recurring, legal and restructuring fees, which are recorded as interest expense, fees and amortization of deferred offering costs in the Statements of Operations. Amounts recorded within interest expense,
fees and amortization of offering costs in the Statements of Operations are:
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Interest Expense
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Liquidity Fees
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Other Expenses
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Total
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MYD
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$
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996,989
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$
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281,885
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$
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93,598
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$
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1,372,472
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MQY
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1,009,592
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282,688
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94,356
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1,386,636
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MQT
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684,759
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193,053
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63,315
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941,127
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For the six months ended October 31, 2019, the following table is a summary of each funds TOB Trusts:
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Underlying
Municipal Bonds
Transferred to
TOB
Trusts (a)
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Liability for
TOB Trust
Certificates
(b)
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Range of
Interest Rates
on TOB Trust
Certificates at
Period End
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Average
TOB Trust
Certificates
Outstanding
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Daily Weighted
Average Rate
of Interest and
Other Expenses
on TOB Trusts
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MYD
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$
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217,719,563
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$
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126,343,870
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1.10% 1.30%
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$
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131,800,077
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2.07
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%
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MQY
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241,175,329
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136,008,048
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1.12 1.32
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132,195,377
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2.09
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MQT
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157,577,349
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89,662,750
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1.12 1.44
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89,247,246
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2.10
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(a)
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The municipal bonds transferred to a TOB Trust are generally high grade municipal bonds. In certain cases, when municipal
bonds transferred are lower grade municipal bonds, the TOB Trust transaction may include a credit enhancement feature that provides for the timely payment of principal and interest on the bonds to the TOB Trust by a credit enhancement provider in
the event of default of the municipal bond. The TOB Trust would be responsible for the payment of the credit enhancement fee and the funds, as TOB Residuals holders, would be responsible for reimbursement of any payments of principal and interest
made by the credit enhancement provider. The maximum potential amounts owed by the funds, for such reimbursements, as applicable, are included in the maximum potential amounts disclosed for recourse TOB Trusts.
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(b)
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TOB Trusts may be structured on a non-recourse or recourse basis. When a Fund
invests in TOB Trusts on a non-recourse basis, the Liquidity Provider may be required to make a payment under the liquidity facility to allow the TOB Trust to repurchase TOB Trust Certificates. The Liquidity
Provider will be reimbursed from the liquidation of bonds held in the TOB Trust. If a fund invests in a TOB Trust on a recourse basis, a fund enters into a reimbursement agreement with the Liquidity Provider where a fund is required to reimburse the
Liquidity Provider for any shortfall between the amount paid by the Liquidity Provider and proceeds received from liquidation of municipal bonds held in the TOB Trust (the Liquidation Shortfall). As a result, if a fund invests in a
recourse TOB Trust, the fund will bear the risk of loss with respect to any Liquidation Shortfall. If multiple funds participate in any such TOB Trust, these losses will be shared ratably, including the maximum potential amounts owed by a fund at
October 31, 2019, in proportion to their participation in the TOB Trust. The recourse TOB Trusts are identified in the Schedules of Investments including the maximum potential amounts owed by a fund at October 31, 2019.
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48
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2019 BLACKROCK SEMI-ANNUAL REPORT TO SHAREHOLDERS
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Notes to Financial Statements (unaudited) (continued)
For the six months ended October 31,
2019, the following table is a summary of each funds Loan for TOB Trust Certificates:
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Loans
Outstanding
at Period End
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Range of
Interest Rates
on Loans at
Period End
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Average
Loans
Outstanding
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Daily Weighted
Average Rate
of Interest and
Other Expenses
on Loans
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MQY
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$
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%
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$
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612
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0.71
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%
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MQT
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395
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0.71
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5.
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DERIVATIVE FINANCIAL INSTRUMENTS
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The Funds engage in various portfolio investment strategies using derivative contracts both to increase the returns of the Funds 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 over-the-counter (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 Funds 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 Funds are required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on a
contracts size and risk profile. The initial margin deposit must then be maintained at an established level over the life of the contract. 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 Funds 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.
6.
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INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
|
Investment Advisory: Each Fund entered into an Investment Advisory Agreement with the Manager, the Funds 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 Funds portfolio and provides the personnel, facilities, equipment and
certain other services necessary to the operations of each Fund.
For such services, each Fund pays the Manager a monthly fee at an annual rate equal to 0.50% of the
average daily value of each Funds net assets.
For purposes of calculating these fees, net assets mean the total assets of the Fund minus the sum of
its accrued liabilities (which does not include liabilities represented by TOB Trusts and the liquidation preference of any outstanding preferred shares). It is understood that the liquidation preference of any outstanding preferred stock (other
than accumulated dividends) and TOB Trusts is not considered a liability in determining a Funds net asset value.
Waivers: With respect to each Fund, the
Manager voluntarily agreed to waive its investment advisory fees by the amount of investment advisory fees each Fund pays to the Manager indirectly through its investment in affiliated money market funds (the affiliated money market fund
waiver). These amounts are included in fees waived and/or reimbursed by the Manager in the Statements of Operations. For the six months ended October 31, 2019, the amounts waived were as follows:
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MYD
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|
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MQY
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MQT
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Amounts waived
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|
$
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11,376
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$
|
723
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|
$
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585
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The Manager contractually agreed to waive its investment advisory fee with respect to any portion of each Funds assets invested in
affiliated equity and fixed-income mutual funds and affiliated exchange-traded funds that have a contractual management fee through June 30, 2020. 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 Funds Independent Directors. For the six months ended October 31, 2019, there were no fees waived and/or reimbursed by the Manager pursuant to this agreement.
Directors and Officers: Certain directors and/or officers of the Funds are directors and/or officers of BlackRock or its affiliates. The Funds reimburse the
Manager for a portion of the compensation paid to the Funds Chief Compliance Officer, which is included in Directors and Officer in the Statements of Operations.
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|
NOTES TO FINANCIAL STATEMENTS
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49
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Notes to Financial Statements (unaudited) (continued)
For the six months ended October 31, 2019, purchases and sales of investments, excluding short-term securities, were as follows:
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MYD
|
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MQY
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|
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MQT
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Purchases
|
|
$
|
84,309,243
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$
|
79,469,536
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|
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$
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50,886,631
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|
Sales
|
|
|
84,783,101
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|
|
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80,768,422
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|
|
|
52,072,150
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8.
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INCOME TAX INFORMATION
|
It is each Funds 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 Fund 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 Funds U.S. federal tax returns generally remains open for each of the four years ended April 30, 2019. The
statutes of limitations on each Funds 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 Funds as of October 31, 2019, 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 Funds financial statements.
As of April 30, 2019, the Funds had non-expiring capital loss carry forwards available to offset future realized capital gains
as follows:
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MYD
|
|
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MQT
|
|
|
|
$
|
7,915,483
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|
|
$
|
1,746,813
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|
As of October 31, 2019, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal
income tax purposes were as follows:
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|
|
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|
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MYD
|
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MQY
|
|
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MQT
|
|
Tax cost
|
|
$
|
860,197,089
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|
|
$
|
598,845,149
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|
|
$
|
390,982,837
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|
|
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|
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Gross unrealized appreciation
|
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$
|
88,616,808
|
|
|
$
|
71,750,946
|
|
|
$
|
44,720,092
|
|
Gross unrealized depreciation
|
|
|
(4,117,560
|
)
|
|
|
(662,310
|
)
|
|
|
(970,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation
|
|
$
|
84,499,248
|
|
|
$
|
71,088,636
|
|
|
$
|
43,749,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Funds ability to buy or sell bonds. As a result, a
Fund 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 Fund needed to sell large blocks of bonds, those sales could further
reduce the bonds prices and impact performance.
In the normal course of business, certain Funds invest in securities or other instruments and may enter into
certain transactions, and such activities subject each Fund 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.
Each Fund 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 Fund to reinvest in lower yielding securities. Each Fund may also be exposed to reinvestment
risk, which is the risk that income from each Funds portfolio will decline if each Fund invests the proceeds from matured, traded or called fixed-income securities at market interest rates that are below each Fund portfolios current
earnings rate.
The Funds may hold a significant amount of bonds subject to calls by the issuers at defined dates and prices. When bonds are called by issuers and the
Funds reinvest the proceeds received, such investments may be in securities with lower yields than the bonds originally held, and correspondingly, could adversely impact the yield and total return performance of a Fund.
A Fund structures and sponsors the TOB Trusts in which it holds TOB Residuals and has certain duties and responsibilities, which may give rise to certain
additional risks including, but not limited to, compliance, securities law and operational risks.
Should short-term interest rates rise, the Funds investments
in the TOB Trusts may adversely affect the Funds net investment income and dividends to Common Shareholders. Also, fluctuations in the market value of municipal bonds deposited into the TOB Trust may adversely affect the Funds NAVs per
share.
The U.S. Securities and Exchange Commission (SEC) and various federal banking and housing agencies have adopted credit risk retention rules for
securitizations (the Risk Retention Rules). The Risk Retention Rules would require the sponsor of a TOB Trust to retain at least 5% of the credit risk of the underlying assets supporting the TOB Trusts municipal bonds. The Risk
Retention Rules may adversely affect the Funds ability to engage in TOB Trust transactions or increase the costs of such transactions in certain circumstances.
|
|
|
50
|
|
2019 BLACKROCK SEMI-ANNUAL REPORT TO SHAREHOLDERS
|
Notes to Financial Statements (unaudited) (continued)
TOB Trusts constitute an important component
of the municipal bond market. Any modifications or changes to rules governing TOB Trusts may adversely impact the municipal market and the Funds, including through reduced demand for and liquidity of municipal bonds and increased financing
costs for municipal issuers. The ultimate impact of any potential modifications on the TOB Trust market and the overall municipal market is not yet certain.
Each Fund 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 Fund may not be able to readily dispose of such investments at prices that approximate those at which a Fund could sell such investments if they were more widely traded and, as a result of such
illiquidity, a Fund 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
Funds 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.
Counterparty Credit Risk: The Funds 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 Funds 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 Funds to market, issuer and counterparty credit risks, consist principally of financial instruments and receivables due from
counterparties. The extent of the Funds 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 Funds.
A derivative contract may suffer a mark-to-market loss if the value of
the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument. Losses can also occur if the counterparty does not perform under the contract.
With exchange-traded futures, there is less counterparty credit risk to the Funds 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 Fund 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 with respect to initial and variation
margin that is held in a clearing brokers customer accounts. While clearing brokers are required to segregate customer margin from their own assets, in the event that a clearing broker becomes insolvent or goes into bankruptcy and at that time
there is a shortfall in the aggregate amount of margin held by the clearing broker for all its clients, typically the shortfall would be allocated on a pro rata basis across all the clearing brokers customers, potentially resulting in losses
to the Funds.
Concentration Risk: As of period end, the Funds have invested a significant portion of their assets in securities in the transportation sector.
Changes in economic conditions affecting such sector would have a greater impact on Funds and could affect the value, income and/or liquidity of positions in such securities.
The Funds 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 Funds may be subject to a greater risk of rising interest rates due to the current period of historically low rates.
10.
|
CAPITAL SHARE TRANSACTIONS
|
Each Fund is authorized to issue 200 million shares, all of which were initially classified as Common Shares. The par value for each Funds Common Shares is
$0.10. The par value for each Funds Preferred Shares outstanding is $0.10. The Board is authorized, however, to reclassify any unissued Common Shares to Preferred Shares without the approval of Common Shareholders.
Common Shares
For the period shown, shares issued and outstanding increased
by the following amounts as a result of dividend reinvestment:
|
|
|
|
|
|
|
MYD
|
|
For the Six Months Ended October 31, 2019
|
|
|
28,844
|
|
Year Ended April 30, 2019
|
|
|
|
|
For the six months ended October 31, 2019 and the year ended April 30, 2019, shares issued and outstanding remained constant for
MQY and MQT.
On November 15, 2018, the Board of Directors authorized the Funds to participate in an open market share repurchase program (the Repurchase
Program). Under the Repurchase Program, each Fund may repurchase up to 5% of its outstanding common shares through November 30, 2019, based on common shares outstanding as of the close of business on November 30, 2018, subject to
certain conditions. There is no assurance that the Funds will purchase shares in any particular amounts. For the six months ended October 31, 2019, the Funds did not repurchase any shares.
On September 5, 2019, the Funds announced a continuation of their Repurchase Program. Commencing on December 1, 2019, each Fund may repurchase through November 30, 2020,
up to 5% of its common shares outstanding as of the close of business on November 30, 2019, subject to certain conditions. There is no assurance that the Funds will purchase shares in any particular amounts.
Preferred Shares
A Funds Preferred Shares rank prior to its Common
Shares as to the payment of dividends by the Fund and distribution of assets upon dissolution or liquidation of the Fund. The 1940 Act prohibits the declaration of any dividend on Common Shares or the repurchase of Common Shares if the Fund fails to
maintain asset coverage of at
|
|
|
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
|
51
|
|
Notes to Financial Statements (unaudited) (continued)
least 200% of the liquidation preference of
the Funds outstanding Preferred Shares. In addition, pursuant to the Preferred Shares governing instruments, a Fund is restricted from declaring and paying dividends on classes of shares ranking junior to or on parity with its Preferred
Shares or repurchasing such shares if the Fund fails to declare and pay dividends on the Preferred Shares, redeem any Preferred Shares required to be redeemed under the Preferred Shares governing instruments or comply with the basic
maintenance amount requirement of the ratings agencies rating the Preferred Shares.
Holders of Preferred Shares have voting rights equal to the voting rights of
holders of Common Shares (one vote per share) and vote together with holders of Common Shares (one vote per share) as a single class on certain matters. Holders of Preferred Shares, voting as a separate class, are also entitled to (i) elect two
members of the Board, (ii) elect the full Board if dividends on the Preferred Shares are not paid for a period of two years and (iii) a separate class vote to amend the Preferred Share governing documents. In addition, the 1940 Act
requires the approval of the holders of a majority of any outstanding Preferred Shares, voting as a separate class, to (a) adopt any plan of reorganization that would adversely affect the Preferred Shares, (b) change a Funds sub-classification as a closed-end investment company or change its fundamental investment restrictions or (c) change its business so as to cease to be an investment
company.
VRDP Shares
MYD and MQY (for purposes of this section, a
VRDP Fund), have issued Series W-7 VRDP Shares, $100,000 liquidation preference per share, in one or more privately negotiated offerings to qualified institutional buyers as defined pursuant to
Rule 144A under the Securities Act of 1933, as amended (the Securities Act). The VRDP Shares include a liquidity feature and may be subject to a special rate period. As of period end, the VRDP Shares outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue
Date
|
|
|
Shares
Issued
|
|
|
Aggregate
Principal
|
|
|
Maturity
Date
|
|
MYD
|
|
|
06/30/11
|
|
|
|
2,514
|
|
|
$
|
251,400,000
|
|
|
|
07/01/41
|
|
MQY
|
|
|
09/15/11
|
|
|
|
1,766
|
|
|
|
176,600,000
|
|
|
|
10/01/41
|
|
Redemption Terms: A VRDP Fund is required to redeem its VRDP Shares on the maturity date, unless earlier redeemed or repurchased.
Six months prior to the maturity date, a VRDP Fund is required to begin to segregate liquid assets with the Funds custodian to fund the redemption. In addition, a VRDP Fund is required to redeem certain of its outstanding VRDP Shares if it
fails to comply with certain asset coverage, basic maintenance amount or leverage requirements.
Subject to certain conditions, the VRDP Shares may also be redeemed,
in whole or in part, at any time at the option of a VRDP Fund. The redemption price per VRDP Share is equal to the liquidation preference per share plus any outstanding unpaid dividends.
Liquidity Feature: VRDP Shares are subject to a fee agreement between the VRDP Fund and the liquidity provider that requires a per annum liquidity fee and, in some
cases, an upfront or initial commitment fee, payable to the liquidity provider. These fees, if applicable, are shown as liquidity fees in the Statements of Operations. As of period end, the fee agreement is set to expire, unless renewed or
terminated in advance, as follows:
|
|
|
|
|
|
|
|
|
|
|
MYD
|
|
|
MQY
|
|
Expiration Date
|
|
|
04/15/20
|
|
|
|
04/15/20
|
|
The VRDP Shares are also subject to a purchase agreement in connection with the liquidity feature. In the event a purchase agreement is
not renewed or is terminated in advance, and the VRDP Shares do not become subject to a purchase agreement with an alternate liquidity provider, the VRDP Shares will be subject to mandatory purchase by the liquidity provider prior to the termination
of the purchase agreement. In the event of such mandatory purchase, a VRDP Fund is required to redeem the VRDP Shares six months after the purchase date. Immediately after such mandatory purchase, the VRDP Fund is required to begin to segregate
liquid assets with its custodian to fund the redemption. There is no assurance that a VRDP Fund will replace such redeemed VRDP Shares with any other preferred shares or other form of leverage.
Remarketing: A VRDP Fund may incur remarketing fees on the aggregate principal amount of all its VRDP Shares, which, if any, are included in remarketing fees on
Preferred Shares in the Statements of Operations. During any special rate period (as described below), a VRDP Fund may incur nominal or no remarketing fees.
Ratings: As of period end, the VRDP Shares were assigned the following assigned ratings:
|
|
|
|
|
|
|
|
|
|
|
Moodys
Long-Term
Rating
|
|
|
Fitch
Long-Term
Rating
|
|
MYD
|
|
|
Aa1
|
|
|
|
AAA
|
|
MQY
|
|
|
Aa1
|
|
|
|
AAA
|
|
Any short-term ratings on VRDP Shares are directly related to the short-term ratings of the liquidity provider for such VRDP Shares.
Changes in the credit quality of the liquidity provider could cause a change in the short-term credit ratings of the VRDP Shares as rated by Moodys and Fitch. The liquidity provider may be terminated prior to the scheduled termination date if
the liquidity provider fails to maintain short-term debt ratings in one of the two highest rating categories.
Special Rate Period: A VRDP Fund may commence a
special rate period with respect to its VRDP Shares, during which the VRDP Shares will not be subject to any remarketing and the dividend rate will be based on a predetermined methodology. During a special rate period, short-term ratings
on VRDP Shares are withdrawn. As of period end, the following VRDP Funds have commenced or are set to commence a special rate period:
|
|
|
|
|
|
|
|
|
|
|
Commencement Date
|
|
|
Expiration Date as of Period
Ended October 31, 2019
|
|
MYD
|
|
|
04/17/14
|
|
|
|
04/15/20
|
|
MQY
|
|
|
10/22/15
|
|
|
|
04/15/20
|
|
|
|
|
52
|
|
2019 BLACKROCK SEMI-ANNUAL REPORT TO SHAREHOLDERS
|
Notes to Financial Statements (unaudited) (continued)
Prior to the expiration date, the VRDP Fund
and the VRDP Shares holder may mutually agree to extend the special rate period. If a special rate period is not extended, the VRDP Shares will revert to remarketable securities upon the termination of the special rate period and will be remarketed
and available for purchase by qualified institutional investors.
During the special rate period: (i) the liquidity and fee agreements remain in effect,
(ii) VRDP Shares remain subject to mandatory redemption by the VRDP Fund on the maturity date, (iii) VRDP Shares will not be remarketed or subject to optional or mandatory tender events, (iv) the VRDP Fund is required to comply with
the same asset coverage, basic maintenance amount and leverage requirements for the VRDP Shares as is required when the VRDP Shares are not in a special rate period, (v) the VRDP Fund will pay dividends monthly based on the sum of an agreed
upon reference rate and a percentage per annum based on the long-term ratings assigned to the VRDP Shares and (vi) the VRDP Fund will pay nominal or no fees to the liquidity provider and remarketing agent.
If a VRDP Fund redeems its VRDP Shares prior to end of the special rate period and the VRDP Shares have long-term ratings above A1/A+ and its equivalent by all
ratings agencies then rating the VRDP Shares, then such redemption may be subject to a redemption premium payable to the holder of the VRDP Shares based on the time remaining in the special rate period, subject to certain exceptions for redemptions
that are required to comply with minimum asset coverage requirements.
Dividends: Except during the Special Rate Period as described above, dividends on the
VRDP Shares are payable monthly at a variable rate set weekly by the remarketing agent. Such dividend rates are generally based upon a spread over a base rate and cannot exceed a maximum rate. A change in the short-term credit rating of the
liquidity provider or the VRDP Shares may adversely affect the dividend rate paid on such shares, although the dividend rate paid on the VRDP Shares is not directly based upon either short-term rating. In the event of a failed remarketing, the
dividend rate of the VRDP Shares will be reset to a maximum rate. The maximum rate is determined based on, among other things, the long-term preferred share rating assigned to the VRDP Shares and the length of time that the VRDP Shares fail to be
remarketed.
For the six months ended October 31, 2019 the annualized dividend rates for the VRDP Shares were as follows:
|
|
|
|
|
|
|
|
|
|
|
MYD
|
|
|
MQY
|
|
Rate
|
|
|
2.34
|
%
|
|
|
2.35
|
%
|
VMTP Shares
MQT (for purposes of this
section, a VMTP Fund) has issued Series W-7 VMTP Shares, $100,000 liquidation preference per share, in one or more privately negotiated offerings to qualified institutional buyers as defined
pursuant to Rule 144A under the Securities Act. The VMTP Shares are subject to certain restrictions on transfer, and MQT may also be required to register its VMTP Shares for sale under the Securities Act under certain circumstances. As of period
end, the VMTP Shares outstanding and assigned long-term ratings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue
Date
|
|
|
Shares
Issued
|
|
|
Aggregate
Principal
|
|
|
Term
Redemption
Date
|
|
|
Moodys
Rating
|
|
|
Fitch
Rating
|
|
MQT
|
|
|
12/16/2011
|
|
|
|
1,165
|
|
|
$
|
116,500,000
|
|
|
|
7/2/2020
|
|
|
|
Aa1
|
|
|
|
AAA
|
|
Redemption Terms: A VMTP Fund is required to redeem its VMTP Shares on the term redemption date, unless earlier redeemed or
repurchased or unless extended. There is no assurance that a term will be extended further or that any VMTP Shares will be replaced with any other preferred shares or other form of leverage upon the redemption or repurchase of the VMTP Shares. Six
months prior to the term redemption date, a VMTP Fund is required to begin to segregate liquid assets with its custodian to fund the redemption. In addition, a VMTP Fund is required to redeem certain of its outstanding VMTP Shares if it fails to
comply with certain asset coverage, basic maintenance amount or leverage requirements.
Subject to certain conditions, VMTP Shares may be redeemed, in whole or in
part, at any time at the option of the VMTP Fund. The redemption price per VMTP Share is equal to the liquidation preference per share plus any outstanding unpaid dividends and applicable redemption premium. If a VMTP Fund redeems its VMTP Shares
prior to the term redemption date and the VMTP Shares have long-term ratings above A1/A+ or its equivalent by the ratings agencies then rating the VMTP Shares, then such redemption may be subject to a prescribed redemption premium (up to 3% of
the liquidation preference) payable to the holder of the VMTP Shares based on the time remaining until the term redemption date, subject to certain exceptions for redemptions that are required to comply with minimum asset coverage requirements.
Dividends: Dividends on the VMTP Shares are declared daily and payable monthly at a variable rate set weekly at a fixed rate spread to the Securities Industry and
Financial Markets Association (SIFMA) Municipal Swap Index or to a percentage of the one-month LIBOR rate, as set forth in the VMTP Shares governing instrument. The fixed spread is determined based
on the long-term preferred share rating assigned to the VMTP Shares by the ratings agencies then rating the VMTP Shares.
The dividend rate on VMTP Shares is subject
to a step-up spread if the VMTP Fund fails to comply with certain provisions, including, among other things, the timely payment of dividends, redemptions or gross-up
payments, and complying with certain asset coverage and leverage requirements.
For the six months ended October 31, 2019, the average annualized dividend rate
for the VMTP Shares was 2.46%.
For the six months ended October 31, 2019, VMTP Shares issued and outstanding of MQT remained constant.
Offering Costs: The Funds incurred costs in connection with the issuance of VRDP and VMTP Shares, which were recorded as a direct deduction from the carrying value
of the related debt liability and will be amortized over the life of the VRDP and VMTP Shares with the exception of any upfront fees paid by a VRDP Fund to the liquidity provider which, if any, were amortized over the life of the liquidity
agreement. Amortization of these costs is included in interest expense, fees and amortization of offering costs in the Statements of Operations.
|
|
|
|
|
NOTES TO FINANCIAL STATEMENTS
|
|
|
53
|
|
Notes to Financial Statements (unaudited) (continued)
Financial Reporting: The VRDP and
VMTP Shares are considered debt of the issuer; therefore, the liquidation preference, which approximates fair value of the VRDP and VMTP Shares, is recorded as a liability in the Statements of Assets and Liabilities net of deferred offering costs.
Unpaid dividends are included in interest expense and fees payable in the Statements of Assets and Liabilities, and the dividends accrued and paid on the VRDP and VMTP Shares are included as a component of interest expense, fees and amortization of
offering costs in the Statements of Operations. The VRDP and VMTP Shares are treated as equity for tax purposes. Dividends paid to holders of the VRDP and VMTP Shares are generally classified as tax-exempt
income for tax-reporting purposes. Dividends and amortization of deferred offering costs on VRDP and VMTP Shares are included in interest expense, fees and amortization of offering costs in the Statements of
Operations:
|
|
|
|
|
|
|
|
|
|
|
Dividends
Accrued
|
|
|
Deferred Offering
Costs Amortization
|
|
MYD
|
|
$
|
2,963,214
|
|
|
$
|
7,995
|
|
MQY
|
|
|
2,091,979
|
|
|
|
5,077
|
|
MQT
|
|
|
1,445,477
|
|
|
|
|
|
Managements evaluation of the impact of all subsequent events on the Funds financial statements was completed through the date the financial statements were
issued and the following items were noted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Dividend Per Share
|
|
|
|
|
|
Preferred Shares (d)
|
|
|
|
Paid (a)
|
|
|
Declared (b)
|
|
|
Declared (c)
|
|
|
|
|
|
Shares
|
|
|
Series
|
|
|
Declared
|
|
MYD
|
|
$
|
0.056000
|
|
|
$
|
0.056000
|
|
|
$
|
0.000231
|
|
|
|
|
|
|
|
VRDP
|
|
|
|
W-7
|
|
|
$
|
422,628
|
|
MQY
|
|
|
0.053000
|
|
|
|
0.053000
|
|
|
|
0.001509
|
|
|
|
|
|
|
|
VRDP
|
|
|
|
W-7
|
|
|
|
302,376
|
|
MQT
|
|
|
0.044000
|
|
|
|
0.044000
|
|
|
|
|
|
|
|
|
|
|
|
VMTP
|
|
|
|
W-7
|
|
|
|
201,542
|
|
|
(a)
|
Net investment income dividend paid on December 2, 2019 to Common Shareholders of record on November 15, 2019.
|
|
|
(b)
|
Net investment income dividend declared on December 6, 2019 payable to Common Shareholders of record on December 16, 2019.
|
|
|
(c)
|
Net investment income special dividend declared amounts per share on December 6, 2019, payable to Common Shareholders of
record on December 16, 2019.
|
|
|
(d)
|
Dividends declared for period November 1, 2019 to November 30, 2019.
|
|
|
|
|
54
|
|
2019 BLACKROCK SEMI-ANNUAL REPORT TO SHAREHOLDERS
|
Disclosure of Investment Advisory Agreement
The Board of Directors (each, a Board, collectively, the Boards, and the
members of which are referred to as Board Members) of BlackRock MuniYield Fund, Inc. (MYD), BlackRock MuniYield Quality Fund, Inc. (MQY), and BlackRock MuniYield Fund II, Inc. (MQT and together with
MYD and MQY, the Funds and each, a Fund) met in person on May 1, 2019 (the May Meeting) and June 5-6, 2019 (the June Meeting) to consider the approval of
each Funds investment advisory agreement (the Advisory Agreements or the Agreements) with BlackRock Advisors, LLC (the Manager or BlackRock), each Funds investment advisor.
Activities and Composition of each Board
On the date of the June Meeting,
each Board consisted of eleven individuals, nine 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 each Board are Independent Board Members. Each 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, each Board considers the continuation of the Agreements on an annual basis. Each 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 each Board also has a fifth one-day meeting to consider specific information surrounding the
renewal of the Agreements, each Boards consideration entails a year-long deliberative process whereby each Board and its committees assess BlackRocks services to each Fund. In particular, each Board assessed, among other things, the
nature, extent and quality of the services provided to each Fund by BlackRock, BlackRocks personnel and affiliates, including (as applicable): investment management; accounting, administrative and shareholder services; oversight of each
Funds service providers; risk management and oversight; legal and compliance services; and ability to meet applicable legal and regulatory requirements. 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 management.
During
the year, each 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 each Board in response to specific questions from each Board. This additional information is discussed further below in the section titled Board Considerations in Approving the
Agreements. Among the matters each Board considered were: (a) investment performance for one-year, three-year, five-year, ten-year, and/or since inception
periods, as applicable, against peer funds, applicable benchmarks, and performance metrics, as applicable, as well as senior managements and portfolio managers analyses of the reasons for any over-performance 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 Funds investment objective,
policies and restrictions, and meeting regulatory requirements; (f) BlackRock and each Funds 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) BlackRocks and other service providers internal controls and risk and
compliance oversight mechanisms; (i) BlackRocks implementation of the proxy voting policies approved by each Board; (j) execution quality of portfolio transactions; (k) BlackRocks implementation of each Funds
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) BlackRocks 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 BlackRocks business; and (o) each Funds market discount/premium compared to peer funds.
Board Considerations in
Approving the Agreements
The Approval Process: Prior to the May Meeting, each 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 better assist its deliberations. The materials provided
in connection with the May Meeting included, among other things: (a) information independently compiled and prepared by Broadridge Financial Solutions, Inc. (Broadridge), based on Lipper classifications, regarding each Funds
fees and expenses as compared with a peer group of funds as determined by Broadridge (Expense Peers), the investment performance of each Fund as compared with a peer group of funds (Performance Peers) and other metrics, as
applicable; (b) information on the composition of the Expense Peers and Performance Peers, and a description of Broadridges 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) 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 each Board as appropriate regarding BlackRocks and each Funds operations.
At the May Meeting, each Board reviewed materials relating to its consideration of the Agreements. As a result of the discussions that occurred during the May Meeting,
and as a culmination of each Boards year-long deliberative process, each Board presented BlackRock with questions and requests for additional information. BlackRock responded to these requests with additional written information in advance of
the June 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) BlackRocks option overwrite strategy.
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Disclosure of Investment Advisory Agreement (continued)
At the June Meeting, each 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 with Performance Peers and 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 Funds fees and expenses compared to Expense Peers; (e) the sharing of
potential economies of scale; (f) fall-out benefits to BlackRock and its affiliates as a result of BlackRocks relationship with each Fund; and (g) other factors deemed relevant by the Board
Members.
Each 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 BlackRocks services related to the valuation and pricing of Fund portfolio holdings. Each Board noted the willingness of BlackRock personnel to engage in open, candid discussions with each Board.
Each 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: Each 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, each Board compared Fund performance to the performance of a comparable group of closed-end funds, relevant benchmarks, and performance metrics, as applicable. Each Board met with BlackRocks senior management personnel responsible for investment activities, including the senior investment
officers. Each Board also reviewed the materials provided by each Funds portfolio management team discussing each Funds performance and each Funds investment objective, strategies and outlook.
Each Board considered, among other factors, with respect to BlackRock: the number, education and experience of investment personnel generally and each Funds
portfolio management team; BlackRocks 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. Each Board also considered BlackRocks overall risk management program, including the continued
efforts of BlackRock and its affiliates to address cybersecurity risks and the role of BlackRocks Risk & Quantitative Analysis Group. Each Board engaged in a review of BlackRocks compensation structure with respect to each
Funds portfolio management team and BlackRocks ability to attract and retain high-quality talent and create performance incentives.
In addition to
investment advisory services, each 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 other service providers including, among others, each Funds 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 each 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. Each Board reviewed the structure and duties of BlackRocks fund administration, shareholder services, and legal & compliance departments and considered
BlackRocks policies and procedures for assuring compliance with applicable laws and regulations.
B. The Investment Performance of each Fund and
BlackRock: Each Board, including the Independent Board Members, also reviewed and considered the performance history of each Fund. In preparation for the May Meeting, each Board was provided with reports independently prepared by Broadridge,
which included a comprehensive analysis of each Funds performance as of December 31, 2018. The performance information is based on net asset value (NAV), and utilizes Lipper data. Lippers methodology calculates a funds total
return assuming distributions are reinvested on the ex-date at a funds 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, each Board received and reviewed information regarding the investment performance of each Fund as compared to its Performance Peers, a custom
peer group of funds as defined by BlackRock (Customized Peer Group), and a composite measuring a blend of total return and yield (Composite). Each 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, each Board focused particular attention on funds with less
favorable performance records. Each 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 the
Performance Peer funds (for example, the investment objective(s) and investment strategies). Further, each 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. Each 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 affect long-term performance disproportionately.
The Board noted that for each of the one-, three- and five-year
periods reported, MYD ranked in the first quartile against its Customized Peer Group Composite. The Board noted that BlackRock believes that the Customized Peer Group Composite is an appropriate performance metric for MYD, 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, MQY ranked second of two funds, first out of two funds, and first out of two funds, respectively, against its Customized Peer Group Composite. The Board noted that BlackRock believes that the Customized Peer Group Composite is an
appropriate performance metric for MQY, and that BlackRock has explained its rationale for this belief to the Board. The Board and BlackRock reviewed MQYs underperformance during the applicable periods.
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Disclosure of Investment Advisory Agreement (continued)
The Board noted that for the one-, three- and five-year periods reported, MQT ranked second out of two funds, first out of two funds, and first out of two funds, respectively, against its Customized Peer Group Composite. The Board noted that
BlackRock believes that the Customized Peer Group Composite is an appropriate performance metric for MQT, and that BlackRock has explained its rationale for this belief to the Board. The Board and BlackRock reviewed MQTs underperformance
during the applicable periods.
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: Each Board, including the Independent Board Members, reviewed each Funds contractual management fee rate compared with 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. Each Board also compared each Funds total expense ratio, as well as its actual management fee rate as
a percentage of total assets, to those of its Expense Peers. The total expense ratio represents a funds total net operating expenses, excluding any investment related expenses. The total expense ratio gives effect to any expense reimbursements
or fee waivers that benefit a fund, and the actual management fee rate gives effect to any management fee reimbursements or waivers that benefit a fund. Each 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).
Each Board received and reviewed statements relating to BlackRocks financial condition. Each Board reviewed BlackRocks 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. Each Board reviewed BlackRocks estimated profitability with respect to each Fund and
other funds each Board currently oversees for the year ended December 31, 2018 compared to available aggregate estimated profitability data provided for the prior two years. Each Board reviewed BlackRocks estimated profitability with
respect to certain other U.S. fund complexes managed by the Manager and/or its affiliates. Each Board reviewed BlackRocks assumptions and methodology of allocating expenses in the estimated profitability analysis, noting the inherent
limitations in allocating costs among various advisory products. Each 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. Each Board thus recognized that calculating and comparing profitability at individual fund levels is difficult.
Each Board noted that, in general, individual fund or product line profitability of other advisors is not publicly available. Each Board reviewed BlackRocks overall
operating margin, in general, compared to that of certain other publicly-traded asset management firms. Each Board considered the differences between BlackRock and these other firms, including the contribution of technology at BlackRock,
BlackRocks expense management, and the relative product mix.
In addition, each Board considered the estimated cost of the services provided to each Fund by
BlackRock, and BlackRocks and its affiliates estimated profits relating to the management of each Fund and the other funds advised by BlackRock and its affiliates. As part of its analysis, each Board reviewed BlackRocks methodology
in allocating its costs of managing the Funds, to each Fund. Each 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 each Board. Each Board further considered factors including but not limited to BlackRocks 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 MYDs 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.
The Board noted that MQYs contractual management fee rate ranked in the first quartile, and that the
actual management fee rate and total expense ratio ranked in the first and second quartiles, respectively, relative to the Expense Peers.
The Board noted that
MQTs 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: Each Board, including the Independent Board Members, considered the extent to which economies of scale might be realized as the assets of
each Fund increase. Each Board also considered the extent to which each Fund benefits from such economies 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. Each Board considered each Funds asset levels and whether the current fee was appropriate.
Based on each
Boards review and consideration of the issue, each 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. They are typically priced at scale at a funds inception.
E. Other Factors Deemed
Relevant by the Board Members: Each Board, including the Independent Board Members, also took into account other ancillary or fall-out benefits that BlackRock or its affiliates may derive from
BlackRocks respective relationships with each Fund, both tangible and intangible, such as BlackRocks ability to leverage its investment professionals who manage other portfolios and risk management personnel, an increase in
BlackRocks profile in the investment advisory community, and the engagement of BlackRocks affiliates as service providers to each Fund, including for administrative, securities lending and cash management services. Each Board also
considered BlackRocks overall operations and its efforts to expand the scale of, and improve the quality of, its operations. Each 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, each Board also received information regarding BlackRocks brokerage and soft dollar practices. Each Board received reports from BlackRock which included information on brokerage commissions and trade execution
practices throughout the year.
Each 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 Funds fees and expenses are too high or if they are dissatisfied with the performance of each Fund.
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Disclosure of Investment Advisory Agreement (continued)
Each 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 communications efforts with shareholders, fund
analysts and financial advisers. With respect to the latter, the Independent Board Members noted BlackRocks continued commitment to supporting the secondary market for the common shares of its closed-end
funds through a comprehensive secondary market communication program designed to raise investor and analyst awareness and understanding of closed-end funds. BlackRocks support services included, among
other things: sponsoring and participating in conferences; communicating with closed-end fund analysts covering the BlackRock funds throughout the year; providing marketing and product updates for the closed-end funds; and maintaining and enhancing its closed-end fund website.
Conclusion
Each Board, including the Independent Board Members, approved
the continuation of the Advisory Agreements between the Manager and each Fund for a one-year term ending June 30, 2020. Based upon its evaluation of all of the aforementioned factors in their totality, as
well as other information, each 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, each 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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