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| | Six Months
Ended
June 30, 2007 | | | | For the period
February 28, 20031
through | |
| | | Year Ended December 31, | | |
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| | (unaudited) | | 2006 | | 2005 | | 2004 | | December 31, 2003 | |
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PER COMMON SHARE OPERATING PERFORMANCE: | | | | | | | | | | | |
Net asset value, beginning of period | | | $ | 24.52 | | | $ | 24.43 | | $ | 25.88 | | $ | 25.58 | | | $ | 23.88 | 2 | |
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Investment operations: | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | | 1.01 | | | | 2.05 | | | 2.11 | | | 2.22 | | | | 1.72 | | |
Net realized and unrealized gain (loss) | | | | (0.62 | ) | | | 0.62 | | | (0.82 | ) | | 0.33 | | | | 1.93 | | |
Dividends and distributions to preferred shareholders from: | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | | (0.30 | ) | | | (0.46 | ) | | (0.26 | ) | | (0.16 | ) | | | (0.10 | ) | |
Net realized gains | | | | — | | | | (0.12 | ) | | (0.13 | ) | | (0.02 | ) | | | — | | |
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Net increase from investment operations | | | | 0.09 | | | | 2.09 | | | 0.90 | | | 2.37 | | | | 3.55 | | |
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Dividends and distributions to common shareholders from: | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | | (0.79 | ) 3 | | | (1.58 | ) | | (1.74 | ) | | (2.00 | ) | | | (1.66 | ) | |
Net realized gains | | | | — | | | | (0.42 | ) | | (0.61 | ) | | (0.07 | ) | | | — | | |
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Total dividends and distributions | | | | (0.79 | ) | | | (2.00 | ) | | (2.35 | ) | | (2.07 | ) | | | (1.66 | ) | |
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Capital charges with respect to issuance of: | | | | | | | | | | | | | | | | | | | | |
Common shares | | | | — | | | | — | | | — | | | — | | | | (0.05 | ) | |
Preferred shares | | | | — | | | | — | | | — | | | — | | | | (0.14 | ) | |
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Total capital charges | | | | — | | | | — | | | — | | | — | | | | (0.19 | ) | |
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Net asset value, end of period | | | $ | 23.82 | | | $ | 24.52 | | $ | 24.43 | | $ | 25.88 | | | $ | 25.58 | | |
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Market price, end of period | | | $ | 23.85 | | | $ | 26.31 | | $ | 24.20 | | $ | 25.39 | | | $ | 24.83 | | |
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TOTAL INVESTMENT RETURNS:4 | | | | | | | | | | | | | | | | | | | | |
At net asset value5 | | | | 0.33 | % | | | 8.89 | % | | 3.77 | % | | 10.15 | % | | | 14.65 | % | |
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At market value | | | | (6.42 | )% | | | 17.98 | % | | 4.83 | % | | 11.01 | % | | | 6.28 | % | |
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RATIOS TO AVERAGE NET ASSETS OF COMMON SHAREHOLDERS:6 | | | | | | | | | | | | | | | | | | | | |
Total expenses | | | | 1.57 | %7 | | | 1.62 | % | | 1.51 | % | | 1.44 | % | | | 1.52 | %7 | |
Net expenses | | | | 1.56 | %7 | | | 1.62 | % | | 1.51 | % | | 1.44 | % | | | 1.52 | %7 | |
Net expenses excluding interest expense | | | | 1.22 | %7 | | | 1.25 | % | | 1.22 | % | | 1.19 | % | | | 1.16 | %7 | |
Net investment income after fees waived and paid indirectly and before preferred share dividends | | | | 8.27 | %7 | | | 8.46 | % | | 8.37 | % | | 8.66 | % | | | 8.35 | %7 | |
Preferred share dividends | | | | 2.48 | %7 | | | 1.89 | % | | 1.27 | % | | 0.62 | % | | | 0.48 | %7 | |
Net investment income available to common shareholders | | | | 5.79 | %7 | | | 6.58 | % | | 7.10 | % | | 8.04 | % | | | 7.87 | %7 | |
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SUPPLEMENTAL DATA: | | | | | | | | | | | | | | | | | | | | |
Average net assets of common shareholders (000) | | | $ | 450,936 | | | $ | 444,597 | | $ | 461,868 | | $ | 468,110 | | | $ | 449,345 | | |
Portfolio turnover | | | | 57 | % | | | 91 | % | | 77 | % | | 88 | % | | | 98 | % | |
Net assets applicable to common shareholders, end of period (000) | | | $ | 437,808 | | | $ | 449,995 | | $ | 447,190 | | $ | 473,809 | | | $ | 468,243 | | |
Preferred shares value outstanding, end of period (000) | | | $ | 220,800 | | | $ | 220,800 | | $ | 220,800 | | $ | 220,800 | | | $ | 220,841 | | |
Reverse repurchase agreements outstanding, end of period (000) | | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 3,486 | | |
Reverse repurchase agreements average daily balance (000) | | | $ | 609 | | | $ | 1,303 | | $ | 2,904 | | $ | 782 | | | $ | 19,822 | | |
Reverse repurchase agreements weighted average interest rate | | | | 5.38 | % | | | 4.74 | % | | 3.07 | % | | 1.50 | % | | | 1.44 | % | |
Asset coverage, end of period | | | $ | 74,581 | | | $ | 75,965 | | $ | 75,642 | | $ | 78,650 | | | $ | 78,021 | | |
See Notes to Financial Statements.
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NOTES TO FINANCIAL STATEMENTS (unaudited) |
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Note 1. Organization & Accounting Policies
BlackRock High Income Shares (“High Income”), a Massachusetts business trust, is registered as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). BlackRock Global Floating Rate Income Trust (“Global”) and BlackRock Preferred Opportunity Trust (“Preferred Opportunity”) are organized as Delaware statutory trusts and are registered as non-diversified and diversified, closed-end management investment companies, respectively, under the 1940 Act. Global, High Income and Preferred Opportunity are individually referred to as a “Trust” and collectively as the “Trusts”.
Under the Trusts’ organizational documents, their officers and Trustees (as defined below) are indemnified against certain liabilities arising out of the performance of their duties to the Trusts. In addition, in the normal course of business, the Trusts enter into contracts with their vendors and others that provide for general indemnifications. The Trusts’ maximum exposure under these arrangements are unknown as this would involve future claims that may be made against the Trusts. However, based on experience, the Trusts consider the risk of loss from such claims to be remote.
The following is a summary of significant accounting policies followed by the Trusts.
Investment Valuation: The Trusts value most of their investments on the basis of current market quotations provided by dealers or pricing services selected under the supervision of each Trust’s Board (the “Board”) of Trustees (the “Trustees”). In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, market transactions in comparable investments, various relationships observed in the market between investments, and calculated yield measures based on valuation technology commonly employed in the market for such investments. Exchange-traded options are valued at their last sales price as of the close of options trading on applicable exchanges. In the absence of a last sale price, options are valued at the average of the quoted bid and asked prices as of the close of business. Swap quotations are provided by dealers selected under supervision of the Board. A futures contract is valued at the last sale price as of the close of the commodities exchange on which it trades. Short-term securities may be valued at amortized cost. Investments or other assets for which such current market quotations are not readily available are valued at fair value (“Fair Value Assets”) as determined in good faith under procedures established by, and under the general supervision and responsibility of, each Trust’s Board. The investment advisor and/or sub-advisor will submit its recommendations regarding the valuation and/or valuation methodologies for Fair Value Assets to a valuation committee. The valuation committee may accept, modify or reject any recommendations. The pricing of all Fair Value Assets shall be subsequently reported to the Board.
When determining the price for a Fair Value Asset, the investment advisor and/or sub-advisor shall seek to determine the price that the Trust might reasonably expect to receive from the current sale of that asset in an arm’s-length transaction. Fair value determinations shall be based upon all available factors that BlackRock Advisors deems relevant.
In September 2006, Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”), was issued and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. At this time, management is evaluating the implications of FAS 157 and its impact on the Trusts’ financial statements, if any, has not been determined.
In addition, in February 2007, Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”), was issued and is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FAS 157. FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. At this time, management is evaluating the implications of FAS 159 and its impact on the Trusts’ financial statements, if any, has not been determined.
Investment Transactions and Investment Income: Investment transactions are recorded on trade date. The cost of investments sold and the related gain or loss is determined by use of the specific identification method, generally first-in, first out, for both financial reporting and federal income tax purposes. Each Trust records interest income on an accrual basis and amortizes premium and/or accretes discount on securities purchased using the interest method. Dividend income is recorded on the ex-dividend date.
Reverse Repurchase Agreements: The Trusts may enter into reverse repurchase agreements with qualified third-party broker-dealers as determined by and under the direction of the Trusts’ Board. Interest on the value of reverse repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance. At the time a Trust enters into a reverse repurchase agreement, it will establish and maintain a segregated account with the lender, containing liquid investment grade securities having a value not less than the repurchase price, including accrued interest of the reverse repurchase agreement.
Loan Payable: High Income has an $80 million revolving credit agreement (the “Agreement”), which expires on March 15, 2008. Prior to expiration of the Agreement, principal is repayable in whole or in part at the option of the Trust. Borrowings under this Agreement bear interest at a variable rate tied to the lender’s average daily cost of funds, or at fixed rates, as may be agreed to between the Trust and the lender. The Trust may borrow up to 33 1/3% of its total assets up to the committed amount or 100% of the borrowing base eligible assets, as determined under the terms of the Agreement. In accordance with the terms of the Agreement, the Trust has granted a security interest in portfolio assets as collateral for the borrowing.
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Bank Loans: In the process of buying, selling and holding bank loans, a Trust may receive and/or pay certain fees. These fees are included in the purchase price and may include facility fees, commitment fees, amendment fees, commissions and prepayment penalty fees. These fees are amortized as premium and/or accreted as discount over the term of the loan. When a Trust buys a bank loan it may receive a facility fee and when it sells a bank loan it may pay a facility fee. On an ongoing basis, a Trust may receive a commitment fee based on the undrawn portion of the underlying line of credit portion of a bank loan. In certain circumstances, a Trust may receive a prepayment penalty fee upon the prepayment of a bank loan by a borrower. Other fees received by a Trust may include covenant waiver fees and covenant modification fees.
A Trust may invest in multiple series or tranches of an issuer. A different series or tranche may have varying terms and carry different associated risks.
Credit Default Swaps: Credit default swaps are agreements in which one party pays fixed periodic payments to a counterparty in consideration for a guarantee from the counterparty to make a specific payment should a negative credit event take place. Risks arise from the possible inability of the counterparties to meet the terms of their contracts.
During the term of the swap, changes in the value of the swap are recognized as unrealized gains or losses by “marking-to-market” to reflect the market value of the swap. When the swap is terminated, a Trust will record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Trust’s basis in the contract, if any.
The Trusts are exposed to credit loss in the event of non-performance by the other party to the swap. However, the Trusts closely monitor swaps and do not anticipate non-performance by any counterparty.
Financial Futures Contracts: A futures contract is an agreement between two parties to buy and sell a financial instrument for a set price on a future date. Initial margin deposits are made upon entering into futures contracts and can be either cash or securities. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by “marking-to-market” on a daily basis to reflect the market value of the contract at the end of each day’s trading. Variation margin payments are made or received, depending upon whether unrealized gains or losses are incurred. When the contract is closed, a Trust records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Trust’s basis in the contract.
Financial futures contracts, when used by the Trusts, help in maintaining a targeted duration. Futures contracts can be sold to effectively shorten an otherwise longer duration portfolio. In the same sense, futures contracts can be purchased to lengthen a portfolio that is shorter than its duration target. Thus, by buying or selling futures contracts, the Trusts attempt to manage the duration of positions so that changes in interest rates do not change the duration of the portfolio unexpectedly.
Forward Currency Contracts: The Trusts enter into forward currency contracts primarily to facilitate settlement of purchases and sales of foreign securities and to help manage the overall exposure to foreign currency. A forward contract is a commitment to purchase or sell a foreign currency at a future date (usually the security transaction settlement date) at a negotiated forward rate. In the event that a security fails to settle within the normal settlement period, the forward currency contract is renegotiated at a new rate. The gain or loss arising from the difference between the settlement value of the original and renegotiated forward contracts is isolated and is included in net realized gains (losses) from foreign currency transactions. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contract.
Forward currency contracts, when used by the Trusts, help to manage the overall exposure to the foreign currency backing some of the investments held by the Trusts. Forward currency contracts are not meant to be used to eliminate all of the exposure to the foreign currency, rather they allow the Trusts to limit their exposure to foreign currency within a narrow band to the objectives of the Trusts.
Foreign Currency Translation: Foreign currency amounts are translated into United States dollars on the following basis:
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| (i) | market value of investment securities, assets and liabilities at the current rate of exchange; and |
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| (ii) | purchases and sales of investment securities, income and expenses—at the rates of exchange prevailing on the respective dates of such transactions. |
The Trusts isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of securities held at period end. Similarly, the Trusts isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of portfolio securities sold during the period.
Net realized and unrealized foreign exchange gains and losses including realized foreign exchange gains and losses from sales and maturities of foreign portfolio securities, sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of interest and discount recorded on the Trusts’ books and the U.S. dollar equivalent amounts actually received or paid, and changes in unrealized foreign exchange gains and losses in the value of portfolio securities and other assets and liabilities arising as a result of changes in the exchange rate.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of domestic origin, including unanticipated movements in the value of the foreign currency relative to the U.S. dollar.
Short Sales: The Trusts may make short sales of securities as a method of managing potential price declines in similar securities owned. When a Trust makes a short sale, it may borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Trusts may have to pay a fee to borrow the particular securities and may be obligated to pay over any payments received on such borrowed securities. A gain, limited to the price at which a Trust sold
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the security short, or a loss, unlimited as to dollar amount, will be recognized upon the termination of a short sale if the market price is greater or less than the proceeds originally received.
Bonds Borrowed Agreements: In a bonds borrowed agreement, the Trust borrows securities from a third party, with the commitment that they will be returned to the lender on an agreed-upon date. Bonds borrowed agreements are primarily entered into to settle short positions. In a bonds borrowed agreement, the Trust’s prime broker or third party broker takes possession of the underlying collateral securities or cash to settle such short positions. The value of the underlying collateral securities or cash approximates the principal amount of the bonds borrowed transaction, including accrued interest. To the extent that bonds borrowed transactions exceed one business day, the value of the collateral with any counterparty is marked-to-market on a daily basis to ensure the adequacy of the collateral. If the lender defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the lender of the security, realization of the collateral by the Trust may be delayed or limited.
Segregation: In cases in which the 1940 Act, and the interpretive positions of the Securities and Exchange Commission (“SEC”) require that each Trust segregate assets in connection with certain investments (e.g., when issued securities, reverse repurchase agreements or futures contracts), each Trust will, consistent with certain interpretive letters issued by the SEC, designate on its books and records cash or other liquid debt securities having a market value at least equal to the amount that would otherwise be required to be physically segregated.
Federal Income Taxes: It is each Trust’s intention to continue to be treated as a regulated investment company under the Internal Revenue Code and to distribute sufficient amounts of their taxable income to shareholders. Therefore, no federal income tax provisions have been recorded.
Effective June 29, 2007, the Trusts implemented Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 proscribes the minimum recognition threshold a tax position must meet in connection with accounting for uncertainties in income tax positions taken or expected to be taken by an entity, including investment companies, before bring measured and recognized in the financial statements. Management has evaluated the application of FIN 48 to the Trusts, and has determined that the adoption of FIN 48 does not have a material impact on the Trusts’ financial statements. The Trusts file U.S. and various state tax returns. No income tax returns are currently under examination. The statute of limitations on the Trusts’ tax returns remain open for the years ended December 31, 2003 through December 31, 2006.
Dividends and Distributions: Each Trust declares and pays dividends and distributions to common shareholders monthly from net investment income, net realized short-term capital gains and other sources, if necessary. Net long-term capital gains, if any, in excess of loss carryforwards may be distributed in accordance with the 1940 Act. If the total dividends and distributions made in any tax year exceeds net investment income and accumulated realized capital gains, a portion of the total distribution may be treated as a tax-free return of capital. Dividends and distributions are recorded on the ex-dividend date. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. Dividends and distributions to preferred shareholders are accrued and determined as described in Note 6.
Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities including investment valuations at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and such differences may be material.
Deferred Compensation and BlackRock Closed-End Share Equivalent Investment Plan: Under the deferred compensation plan approved by each Trust’s Board, non-interested Trustees (“Independent Trustees”) are required to 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 other BlackRock Closed-End Funds selected by the Independent Trustees. These amounts are shown on the Statement of Assets and Liabilities as “Investments in Affiliates”. This has approximately the same economic effect for the Independent Trustees as if the Independent Trustees had invested the deferred amounts directly in such Trusts.
The deferred compensation plan is not funded and obligations thereunder represent general unsecured claims against the general assets of the Trust. Each Trust may, however, elect to invest in common shares of those Trusts selected by the Independent Trustees in order to match its deferred compensation obligations.
Other: Expenses that are directly related to one of the Trusts are charged directly to that Trust. Other operating expenses are generally prorated to the Trusts on the basis of relative net assets of all the BlackRock Closed-End Funds.
Note 2. Agreements and Other Transactions with Affiliates and Related Parties
Each Trust has an Investment Management Agreement (the “Agreement”) with BlackRock Advisors, LLC (the “Advisor”), which is a wholly owned subsidiary of BlackRock, Inc. BlackRock Financial Management, Inc. (“BFM”), a wholly owned subsidiary of BlackRock, Inc., serves as sub-advisor to the Trusts. Merrill Lynch & Co., Inc. and The PNC Financial Services Group, Inc. are principal owners of BlackRock, Inc. The Agreements for the Trusts covers both investment advisory and administration services.
The investment advisory fee paid to the Advisor is computed weekly and payable monthly based on an annual rate equal to 0.75% of Global’s and 0.65% of Preferred Opportunity’s average weekly managed assets. “Managed assets” means the total assets of a Trust (including any assets attributable to any borrowing that may be outstanding) minus the sum of accrued liabilities (other than debt representing financial leverage). The investment advisory fee paid to the Advisor is computed weekly and payable monthly based on an annual rate equal to 0.75% of the first $200 million of High Income’s average weekly managed assets and 0.50% thereafter. The Advisor has voluntarily agreed to waive a portion of the investment advisory fees or other expenses on Global as a percentage of its average weekly managed assets as follows: 0.20% for the first five years of the Trust’s operations (through August 30, 2009), 0.15% in year six (through August 30, 2010), 0.10% in year seven (through August 30, 2011) and 0.05% in year eight (through August 30, 2012).
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The Advisor pays BFM fees for its sub-advisory services.
Pursuant to the Agreements, the Advisor provides continuous supervision of the investment portfolio and pays the compensation of officers of each Trust who are affiliated persons of the Advisor, as well as occupancy and certain clerical and accounting costs of each Trust. Each Trust bears all other costs and expenses, which include reimbursements to the Advisor for cost of employees that provide pricing, secondary market support and compliance services provided to each Trust. For the six months ended June 30, 2007, the Trusts reimbursed the Advisor the following amounts, which are included in miscellaneous expenses in the Statements of Operations:
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Trust | | Amount | |
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Global | | $ | 13,560 | |
High Income | | | 5,741 | |
Preferred Opportunity | | | 13,564 | |
Pursuant to the terms of the custody agreements, each Trust may receive earnings credits from its custodian for positive cash balances maintained, which are used to offset custody fees. These credits are shown on the Statements of Operations as “fees paid indirectly”.
During the six months ended June 30, 2007, Merrill Lynch, through its affiliated broker dealer Merrill Lynch, Pierce, Fenner & Smith Incorporated, earned $37,549 in commissions on transactions of securities in Preferred Opportunity.
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments, dollar rolls and U.S. government securities, for the six months ended June 30, 2007 were as follows:
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Trust | | Purchases | | Sales | |
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Global | | $ | 229,563,795 | | $ | 234,579,722 | |
High Income | | | 89,490,907 | | | 83,741,481 | |
Preferred Opportunity | | | 368,496,934 | | | 363,198,283 | |
Purchases and sales of U.S. government securities for the six months ended June 30, 2007 in Preferred Opportunity were $0 and $6,209,311, respectively.
Details of open forward currency contracts held in Global at June 30, 2007 were as follows:
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| | | | | Contract to | | Value at | | Value at | | Unrealized | |
Foreign | | Settlement | | Purchase / | | Settlement | | June 30, | | Appreciation | |
Currency | | Date | | Receive | | Date | | 2007 | | (Depreciation) | |
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Bought: | | | | | | | | | | | | | | | | |
Mexican Peso | | | 7/18/07 | | $ | 2,851,000 | | $ | 263,879 | | $ | 263,612 | | $ | (267 | ) |
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Sold: | | | | | | | | | | | | | | | | |
Swiss Franc | | | 7/18/07 | | $ | 8,369,000 | | $ | 6,930,820 | | $ | 6,861,516 | | $ | 69,304 | |
Euro | | | 7/18/07 | | | 105,852,132 | | | 142,913,020 | | | 143,360,643 | | | (447,623 | ) |
British Pound | | | 7/18/07 | | | 12,342,600 | | | 24,426,768 | | | 24,779,007 | | | (352,239 | ) |
Mexican Peso | | | 7/18/07 | | | 21,517,417 | | | 1,946,156 | | | 1,989,562 | | | (43,406 | ) |
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| | | | | | | | | | | | | | $ | (773,964 | ) |
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Details of open credit default swaps agreements in Global at June 30, 2007 were as follows: |
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Notional
Amount
(000) | | Fixed
Rate | | Counter
Party | | Effective
Date | | Termination
Date | | Unrealized
Depreciation | |
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$1,800 | | 2.000 | %(a) | Deutsche Bank | | 03/01/07 | | 03/20/12 | | $ | 23,096 | |
$2,000 | | 2.100 | %(b) | Lehman Brothers | | 03/03/07 | | 03/20/12 | | | 21,530 | |
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| | | | | | | | | | $ | 44,626 | |
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(a) | The terms were to receive the quarterly notional amount multiplied by the fixed rate and pay the counterparty, upon default event of BAA Ferovial Junior Loan, the par value of the notional amount of BAA Ferovial. |
(b) | The terms were to receive the quarterly notional amount multiplied by the fixed rate and pay the counterparty, upon default event of PagesJaunes Second Lien Loan, the par value of the notional amount of PagesJaunes Groupe SA. |
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Note 4. Borrowings
Details of open reverse repurchase agreements held in Global at June 30, 2007 were as follows (please see corresponding Underlying Collateral chart):
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Counter Party | | Rate | | Trade
Date | | Maturity
Date1 | | Net Closing
Amount | | Par | |
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Barclays | | 5.36 | % | | 06/26/07 | | 07/11/07 | | $ | 2,640,282 | | $ | 2,638,492 | |
| | 5.38 | | | 04/24/07 | | TBD | | | 2,783,536 | | | 2,750,650 | |
| | 5.38 | | | 04/26/07 | | 07/10/07 | | | 1,901,998 | | | 1,883,700 | |
| | 5.38 | | | 05/01/07 | | 07/10/07 | | | 1,819,436 | | | 1,803,000 | |
| | 5.38 | | | 05/01/07 | | TBD | | | 7,076,366 | | | 7,000,000 | |
| | 5.38 | | | 05/31/07 | | TBD | | | 2,388,599 | | | 2,377,584 | |
| | | | | | | | | | | |
|
| |
| | | | | | | | | | | | $ | 18,453,426 | |
| | | | | | | | | | | |
|
| |
Credit Suisse | | 5.37 | | | 04/23/07 | | TBD | | $ | 1,343,175 | | $ | 1,327,140 | |
| | 5.38 | | | 04/23/07 | | TBD | | | 806,261 | | | 796,500 | |
| | 5.50 | | | 06/29/07 | | TBD | | | 3,127,906 | | | 3,120,754 | |
| | 5.55 | | | 06/29/07 | | TBD | | | 1,879,336 | | | 1,875,000 | |
| | | | | | | | | | | |
|
| |
| | | | | | | | | | | | $ | 7,119,394 | |
| | | | | | | | | | | |
|
| |
1 TBD - To be determined
Details of underlying collateral for open reverse repurchase agreements held in Global at June 30, 2007 were as follows:
| | | | | | | | | | | | | | | | | |
Counter Party | | Description | | Rate | | Maturity
Date | | Original
Face | | Current
Face | | Market
Value | |
| |
| |
| |
| |
| |
| |
| |
Barclays | | Federative Republic of Brazil | | 11.110 | % | | 06/29/09 | | $ | 6,910,000 | | $ | 6,910,000 | | $ | 7,635,550 | |
| | Qwest Corp. | | 8.610 | | | 06/15/13 | | | 1,550,000 | | | 1,550,000 | | | 1,681,750 | |
| | Republic of Panama | | 8.250 | | | 04/22/08 | | | 2,000,000 | | | 2,000,000 | | | 2,037,500 | |
| | Reynolds American, Inc. | | 7.625 | | | 06/01/16 | | | 1,200,000 | | | 1,200,000 | | | 1,270,549 | |
| | Turkey | | 7.000 | | | 09/26/16 | | | 1,953,000 | | | 1,953,000 | | | 1,974,971 | |
| | Ukraine | | 8.775 | | | 08/05/09 | | | 3,837,000 | | | 3,837,000 | | | 4,057,628 | |
| | United Mexican States | | 6.055 | | | 01/13/09 | | | 1,180,000 | | | 1,180,000 | | | 1,185,900 | |
| | | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | | $ | 19,843,848 | |
| | | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | | | | |
Credit Suisse | | Malaysia | | 8.750 | % | | 06/01/09 | | $ | 800,000 | | $ | 800,000 | | $ | 846,806 | |
| | Pemex Project Funding Master Trust | | 9.375 | | | 12/02/08 | | | 156,000 | | | 156,000 | | | 164,034 | |
| | Reynolds American, Inc. | | 7.625 | | | 06/01/16 | | | 800,000 | | | 800,000 | | | 847,033 | |
| | Rouse Co. | | 5.375 | | | 11/26/13 | | | 2,120,000 | | | 2,120,000 | | | 1,978,329 | |
| | United Mexican States | | 6.055 | | | 01/13/09 | | | 3,620,000 | | | 3,620,000 | | | 3,638,100 | |
| | | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | | $ | 7,474,302 | |
| | | | | | | | | | | | | | |
|
| |
Note 5. Income Tax Information
The tax character of distributions paid during the year ended December 31, 2006 were as follows:
| | | | | | | | | | |
| | Year Ended December 31, 2006 | |
| |
| |
| | Ordinary | | Long-term | | Total | |
Distributions Paid From: | | Income | | Capital Gains | | Distributions | |
| |
| |
| |
| |
Global | | $ | 45,130,597 | | $ | 640,846 | | $ | 45,771,443 | |
High Income | | | 12,792,689 | | | — | | | 12,792,689 | |
Preferred Opportunity | | | 42,381,795 | | | 4,836,485 | | | 47,218,280 | |
For federal income tax purposes, High Income had the following capital loss carryforwards at December 31, 2006. These amounts may be used to offset future realized capital gains, if any:
| | | | | |
Capital Loss
Carryforward
Amount | | | Expires | |
| | |
| |
$ | 24,744,772 | | | 2007 | |
| 35,363,213 | | | 2008 | |
| 55,878,284 | | | 2009 | |
| 102,576,339 | | | 2010 | |
| 28,467,396 | | | 2011 | |
| 2,339,279 | | | 2012 | |
| 7,060,004 | | | 2014 | |
|
| | | | |
$ | 256,429,287 | | | | |
|
| | | | |
35
Accordingly, no capital gain distributions are expected to be paid to shareholders of a Trust until that Trust has net realized capital gains in excess of its capital loss carryforward amounts.
Note 6. Capital
There are an unlimited number of $0.001 par value common shares authorized for Global and Preferred Opportunity. There are an unlimited number of no par value shares authorized for High Income. At June 30, 2007, the shares owned by affiliates of the Advisor of Global were 7,244.
During the six months ended June 30, 2007 and the year ended December 31, 2006, the Trusts issued the following additional shares under their respective dividend reinvestment plans:
| | | | | | | |
Trust | | June 30, 2007 | | December 31, 2006 | |
| |
| |
| |
Global | | 34,572 | | | 21,644 | | |
High Income | | — | | | 127,532 | | |
Preferred Opportunity | | 26,905 | | | 49,079 | | |
As of June 30, 2007, Global and Preferred Opportunity have the following series of preferred shares outstanding as listed in the table below. The preferred shares have a liquidation value of $25,000 per share plus any accumulated unpaid dividends.
| | | | |
Trust | | Series | | Shares |
| |
| |
|
Global | | T7 | | 3,246 |
| | W7 | | 3,246 |
| | R7 | | 3,246 |
| | | | |
Trust | | Series | | Shares |
| |
| |
|
Preferred Opportunity | | T7 | | 2,944 |
| | W7 | | 2,944 |
| | R7 | | 2,944 |
Dividends on seven-day preferred shares are cumulative at a rate which is reset every seven days based on the results of an auction. The dividend ranges on the preferred shares for Global and Preferred Opportunity for the six months ended June 30, 2007 were as follows:
| | | | | | | | | | | | |
Trust | | Series | | Low | | High | | Average | |
| |
| |
| |
| |
| |
Global | | T7 | | 4.85 | % | | 5.25 | % | | 5.00 | % | |
| | W7 | | 4.75 | | | 5.25 | | | 4.98 | | |
| | R7 | | 4.80 | | | 5.25 | | | 5.01 | | |
| | | | | | | | | | |
Trust | | Series | | Low | | High | | Average | |
| |
| |
| |
| |
| |
Preferred Opportunity | | T7 | | 4.85 | % | | 5.25 | % | | 5.06 | % | |
| | W7 | | 4.85 | | | 5.25 | | | 5.06 | | |
| | R7 | | 4.90 | | | 5.27 | | | 5.08 | | |
Global and Preferred Opportunity may not declare dividends or make other distributions on common shares or purchase any such shares if, at the time of the declaration, distribution or purchase, asset coverage with respect to the outstanding preferred shares and any other borrowings would be less than 200%.
The preferred shares are redeemable at the option of Global and Preferred Opportunity, in whole or in part, on any dividend payment date at $25,000 per share plus any accumulated or unpaid dividends whether or not declared. The preferred shares are also subject to mandatory redemption at $25,000 per share plus any accumulated or unpaid dividends, whether or not declared, if certain requirements relating to the composition of the assets and liabilities of Global and Preferred Opportunity, as set forth in Global’s and Preferred Opportunity’s Declaration of Trust, are not satisfied.
The holders of preferred shares have voting rights equal to the holders of common shares (one vote per share) and will vote together with holders of common shares as a single class. However, holders of preferred shares, voting as a separate class, are also entitled to elect two Trustees for Global and Preferred Opportunity. In addition, the 1940 Act requires that along with approval by shareholders that might otherwise be required, the approval of the holders of a majority of any outstanding preferred shares, voting separately as a class would be required to (a) adopt any plan of reorganization that would adversely affect the preferred shares, (b) change a Trust’s sub- classification as a closed-end investment company or change its fundamental investment restrictions and (c) change the nature of its business so as to cease to be an investment company.
Note 7. Subsequent Events
Subsequent to June 30, 2007, the Boards declared dividends from undistributed earning per common share payable July 31, 2007 to shareholders of record on July 16, 2007. The per share common dividends declared were as follows:
| | | | | | |
| | Common Dividend | |
Trust | | Per Share | |
| |
| |
Global | | | $ | 0.1250 | | |
High Income | | | | 0.0182 | | |
Preferred Opportunity | | | | 0.1450 | | |
The dividends declared on preferred shares for the period July 1, 2007 to July 31, 2007 for Global and Preferred Opportunity were as follows:
| | | | | | |
| | | | Dividends | |
Trust | | Series | | Declared | |
| |
| |
| |
Global | | T7 | | $ | 322,263 | |
| | W7 | | | 317,167 | |
| | R7 | | | 319,861 | |
| | | | | | |
| | | | Dividends | |
Trust | | Series | | Declared | |
| |
| |
| |
Preferred Opportunity | | T7 | | $ | 287,482 | |
| | W7 | | | 287,364 | |
| | R7 | | | 294,116 | |
36
|
DIVIDEND REINVESTMENT PLANS |
|
Pursuant to each Trust’s respective Dividend Reinvestment Plan (the “Plan”), shareholders of High Income may elect, while shareholders of Global and Preferred Opportunity are automatically enrolled, to have all distributions of dividends and capital gains reinvested by Computershare Trust Company, N.A. (the “Plan Agent”) in the respective Trust’s shares pursuant to the Plan. Shareholders who do not participate in the Plan will receive all distributions in cash paid by check and mailed directly to the shareholders of record (or if the shares are held in street or other nominee name, then to the nominee) by the Plan Agent, which serves as agent for the shareholders in administering the Plan.
After each Trust declares a dividend or determines to make a capital gain distribution, the Plan Agent will acquire shares for the participant’s account, depending upon the circumstances described below, either (i) through receipt of unissued but authorized shares from the Trust (“newly issued shares”) or (ii) by open market purchases. If, on the dividend payment date, the NAV is equal to or less than the market price per share plus estimated brokerage commissions (such condition being referred to herein as “market premium”), the Plan Agent will invest the dividend amount in newly issued shares on behalf of the participants. The number of newly issued shares to be credited to each participant’s account will be determined by dividing the dollar amount of the dividend by the NAV on the date the shares are issued. However, if the NAV is less than 95% of the market price on the payment date, the dollar amount of the dividend will be divided by 95% of the market price on the payment date. If, on the dividend payment date, the NAV is greater than the market value per share plus estimated brokerage commissions (such condition being referred to herein as “market discount”), the Plan Agent will invest the dividend amount in shares acquired on behalf of the participants in open-market purchases.
Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by notice if received and processed by the Plan Administrator prior to the dividend record date; otherwise such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution.
The Plan Agent’s fees for the handling of the reinvestment of dividends and distributions will be paid by each Trust. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent’s open market purchases in connection with the reinvestment of dividends and distributions. The automatic reinvestment of dividends and distributions will not relieve participants of any Federal income tax that may be payable on such dividends or distributions.
Each Trust reserves the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, each Trust reserves the right to amend the Plan to include a service charge payable by the participants. Participants who request a sale of shares through the Plan Agent are subject to a $2.50 sales fee and a $0.15 per share sold brokerage commission. All correspondence concerning the Plan should be directed to the Plan Agent at 250 Royall Street, Canton, MA 02021 or (800) 699-1BFM.
37
Each Trust listed for trading on the NewYork Stock Exchange (“NYSE”) has filed with the NYSE its chief executive officer certification regarding compliance with the NYSE’s listing standards and have filed with the Securities and Exchange Commission the certification of its chief executive officer and chief financial officer required by section 302 of the Sarbanes-Oxley Act.
The Trusts do not make available copies of their respective Statements of Additional Information because the Trusts’ shares are not continuously offered, which means that the Statement of Additional Information of each Trust has not been updated after completion of such Trust’s offering and the information contained in each Trust’s Statement of Additional Information may have become outdated.
During the period, there were no material changes in any Trust’s investment objective or policies or to any Trust’s charters or by-laws that were not been approved by the shareholders or in the principal risk factors associated with investment in the Trusts. There have been no changes in the persons who are primarily responsible for the day-to-day management of the Trusts’ portfolios.
Quarterly performance, semi-annual and annual reports and other information regarding the Trusts may be found on BlackRock’s website, which can be accessed at http://www.blackrock.com. This reference to BlackRock’s website is intended to allow investors public access to information regarding the Trusts and does not, and is not intended, to incorporate BlackRock’s website into this report.
Certain of the officers of the Trusts listed on the inside back cover of this Report to Shareholders are also officers of the Advisor or Sub-Advisor. They serve in the following capacities for the Advisor or Sub-Advisor: Robert S. Kapito—Director and Vice Chairman of the Advisor and the Sub-Advisor, Donald Burke, Anne Ackerley, Bartholomew Battista, Vincent Tritto and Brian Kindelan—Managing Directors of the Advisor and the Sub-Advisor, Neal Andrews and Jay Fife—Managing Directors of the Sub-Advisor, Spencer Fleming—Director of the Advisor and the Sub-Advisor and Robert Mahar—Director of the Sub-Advisor.
Important Information Regarding the BlackRock Closed-End Funds Semi-Annual Investor Update
The Semi-Annual Investor Update (“Update”) is available on the Internet and may be accessed through BlackRock’s website at http://www.blackrock.com. The Update provides information on the fixed income markets and summaries of BlackRock Closed-End Funds’ investment objectives and strategies. It also contains recent news regarding certain BlackRock Closed-End Funds.
If you would like to receive a hard copy of the BlackRock Closed-End Funds Semi-Annual Investor Update, please call (800) 699-1BFM.
The amounts and sources of distributions reported are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources for tax reporting purposes will depend upon the Trust’s investment experience during the remainder of its fiscal year and may be subject to changes based on the tax regulations. The Trust will send you a Form 1099-DIV for the calendar year that will tell you how to report these distributions for federal income tax purposes.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Fiscal Year to Date Cumulative | | Percentage of Fiscal Year to Date Cumulative | |
| | Distributions by Character | | Distributions by Character | |
| |
| |
| |
| | | | | Net | | | | | | | | | | | Net | | | | | | | |
| | Net | | Realized | | Return | | Total Per | | Net | | Realized | | Return | | Total Per | |
| | Investment | | Capital | | of | | Common | | Investment | | Capital | | of | | Common | |
Trust | | Income | | Gains | | Capital | | Share | | Income | | Gains | | Capital | | Share | |
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| |
Preferred
Opportunity | | $0.70 | | $0.09 | | $— | | $0.79 | | 89% | | 11% | | —% | | 100% | |
38
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39
[This Page Intentionally Left Blank]
40
BlackRock Closed-End Funds
| | |
Directors/Trustees | | Accounting Agent and Custodian |
Ralph L. Schlosstein, Chairman | | State Street Bank and Trust Company |
Richard E. Cavanagh, Lead Trustee | | 2 Avenue De Lafayette |
Kent Dixon | | Boston, MA 02111 |
Frank J. Fabozzi | | |
Kathleen Feldstein | | Transfer Agent |
R. Glenn Hubbard | | Computershare Trust Company, N.A. |
| | 250 Royall Street |
Officers | | Canton, MA 02021 |
Robert S. Kapito, President | | (800) 699-1BFM |
Donald C. Burke, Treasurer | | Auction Agent1 |
Bartholomew Battista, Chief Compliance Officer | |
Anne Ackerley, Vice President | | Bank of New York |
Neal Andrews, Assistant Treasurer | | 101 Barclay Street, 7 West |
Jay Fife, Assistant Treasurer | | New York, NY 10286 |
Spencer Fleming, Assistant Treasurer | | |
Robert Mahar, Assistant Treasurer | | Independent Registered Public Accounting Firm |
Vincent B. Tritto, Secretary | | Deloitte & Touche LLP |
Brian P. Kindelan, Assistant Secretary | | 200 Berkeley Street |
| | Boston, MA 02116 |
Investment Advisor | | |
BlackRock Advisors, LLC | | Legal Counsel |
100 Bellevue Parkway | | Skadden, Arps, Slate, Meagher & Flom LLP |
Wilmington, DE 19809 | | 4 Times Square |
(800) 227-7BFM | | New York, NY 10036 |
| | |
Sub-Advisor | | Legal Counsel – Independent Directors/Trustees |
BlackRock Financial Management, Inc. | | Debevoise & Plimpton LLP |
40 East 52nd Street | | 919 Third Avenue |
New York, NY 10022 | | New York, NY 10022 |
| | |
1 For Global and Preferred Opportunity. | | This report is for shareholder information. This is not a prospectus intended for use in the purchase or sale of Trust shares. Statements and other information contained in this report are as dated and are subject to change. |
| | | |
| | BlackRock Closed-End Funds |
| | c/o BlackRock Advisors, LLC |
| | 100 Bellevue Parkway |
| | Wilmington, DE 19809 |
| | (800) 227-7BFM |
The Trusts will mail only one copy of shareholder documents, including annual and semi-annual reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is commonly called “householding” and is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your household, please contact the Trusts at (800) 699-1BFM.
The Trusts have delegated to the Advisor the voting of proxies relating to their voting securities pursuant to the Advisor’s proxy voting policies and procedures. You may obtain a copy of these proxy voting policies and procedures, without charge, by calling (800) 699-1BFM. These policies and procedures are also available on the website of the Securities and Exchange Commission (the “Commission”) at http://www.sec.gov.
Information on how proxies relating to the Trusts’ voting securities were voted (if any) by the Advisor during the most recent 12-month period ended June 30th is available without charge, upon request, by calling (800) 699-1BFM or on the website of the Commission at http://www.sec.gov.
The Trusts file their complete schedule of portfolio holdings for the first and third quarters of their respective fiscal years with the Commission on Form N-Q. Each Trust’s Form N-Q will be available on the Commission’s website at http://www.sec.gov. Each Trust’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. Each Trust’s Form N-Q may also be obtained, upon request, by calling (800) 699-1BFM.
This report is for shareholder information. This is not a prospectus intended for
use in the purchase or sale of Trust shares. Statements and other information
contained in this report are as dated and are subject to change.
CEF-SEMI-5-0607
Item 2 – Code of Ethics – Not Applicable to this semi-annual report
Item 3 – Audit Committee Financial Expert – Not Applicable to this semi-annual report
Item 4 – Principal Accountant Fees and Services – Not Applicable to this semi-annual report
Item 5 – Audit Committee of Listed Registrants – Not Applicable to this semi-annual report
Item 6 – Schedule of Investments – The registrant’s Schedule of Investments is included as part of the Report to Stockholders filed under Item 1 of this form.
Item 7 – Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies – Not Applicable to this semi-annual report
Item 8 – Portfolio Managers of Closed-End Management Investment Companies – June 30, 2007
(b) Effective June 30, 2007, Mr. John D. Burger has joined the Registrant’s portfolio management team. Mr. Robert S. Kapito, previously identified as a member of the portfolio management team in the Registrant’s most recent annual report, is no longer responsible for the day-to-day management of the portfolio. Messrs. Amero and Chen, previously identified in response to paragraph (a) of this item in the Registrant’s most recent annual report, continue as members of the Registrant’s portfolio management team.
As of June 30, 2007, the Fund is managed by a team of investment professionals led by Scott Amero, Daniel Chen and John D. Burger, who have day-to-day responsibility.
John D. Burger, CFA, is a Managing Director at BlackRock and is a member of BlackRock’s fixed income portfolio management group. His primary responsibility is managing client portfolios, with a sector emphasis on corporate securities. Together with Mr. Chen, he is primarily responsible for selecting the preferred securities in which the Trust invests. Mr. Burger joined BlackRock following the merger with Merrill Lynch Investment Managers (MLIM) in September 2006. Mr. Burger was a portfolio manager for core fixed income portfolios for the prior five years at MLIM. Mr. Burger began his career at Merrill Lynch & Co., Inc. in 1986.
(a)(2) As of June 30, 2007:
| | | | | (iii) Number of Other Accounts and |
| | (ii) Number of Other Accounts Managed | Assets for Which Advisory Fee is |
| | and Assets by Account Type | Performance-Based |
| | Other | | | Other | | |
| (i) Name of | Registered | Other Pooled | | Registered | Other Pooled | |
| Portfolio | Investment | Investment | Other | Investment | Investment | Other |
| Manager | Companies | Vehicles | Accounts | Companies | Vehicles | Accounts |
| | | |
| John D. Burger | 3 | 0 | 55 | 0 | 0 | 0 |
| | $2,990,586,916 | $0 | $13,764,957,935 | $0 | $0 | $0 |
(iv) Potential Material Conflicts of Interest
BlackRock has built a professional working environment, firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor
one account over another. BlackRock has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, BlackRock furnishes investment management and advisory services to numerous clients in addition to the Fund, and BlackRock may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts which are hedge funds or have performance or higher fees paid to BlackRock, or in which portfolio managers have a personal interest in the receipt of such fees), which may be the same as or different from those made to the Fund. In addition, BlackRock, its affiliates and any officer, director, stockholder or employee may or may not have an interest in the securities whose purchase and sale BlackRock recommends to the Fund. BlackRock, or any of its affiliates, or any officer, director, stockholder, employee or any member of their families may take different actions than those recommended to the Fund by BlackRock with respect to the same securities. Moreover, BlackRock may refrain from rendering any advice or services concerning securities of companies of which any of BlackRock’s (or its affiliates’) officers, directors or employees are directors or officers, or companies as to which BlackRock or any of its affiliates or the officers, directors and employees of any of them has any substantial economic interest or possesses material non-public information. Each portfolio manager also may manage accounts whose investment strategies may at times be opposed to the strategy utilized for the Fund. In this connection, it should be noted that certain portfolio managers currently manage certain accounts that are subject to performance fees. In addition, certain portfolio managers assist in managing certain hedge funds and may be entitled to receive a portion of any incentive fees earned on such funds and a portion of such incentive fees may be voluntarily or involuntarily deferred. Additional portfolio managers may in the future manage other such accounts or funds and may be entitled to receive incentive fees.
As a fiduciary, BlackRock owes a duty of loyalty to its clients and must treat each client fairly. When BlackRock purchases or sells securities for more than one account, the trades must be allocated in a manner consistent with its fiduciary duties. BlackRock attempts to allocate investments in a fair and equitable manner among client accounts, with no account receiving preferential treatment. To this end, BlackRock has adopted a policy that is intended to ensure that investment opportunities are allocated fairly and equitably among client accounts over time. This policy also seeks to achieve reasonable efficiency in client transactions and provide BlackRock with sufficient flexibility to allocate investments in a manner that is consistent with the particular investment discipline and client base.
(a)(3) As of June 30, 2007:
Portfolio Manager Compensation
Portfolio Manager Compensation
BlackRock’s financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary, a discretionary bonus, participation in various benefits programs and one or more of the incentive compensation programs established by BlackRock such as its Long-Term Retention and Incentive Plan and Restricted Stock Program.
Base compensation
Generally, portfolio managers receive base compensation based on their seniority and/or their position with the firm.
Discretionary compensation
In addition to base compensation, portfolio managers may receive discretionary compensation, which can be a substantial portion of total compensation. Discretionary compensation can include a discretionary cash bonus as well as one or more of the following:
Long-Term Retention and Incentive Plan (LTIP)
The LTIP is a long-term incentive plan that seeks to reward certain key employees. The plan provides for the grant of awards that are expressed as an amount of cash that, if properly vested and subject to the attainment of certain performance goals, will be settled in cash and/or in BlackRock, Inc. common stock.
Deferred Compensation Program
A portion of the compensation paid to each portfolio manager may be voluntarily deferred by the portfolio manager into an account that tracks the performance of certain of the firm’s investment products. Each portfolio manager is permitted to allocate his deferred amounts among various options, including to certain of the firm’s hedge funds and other unregistered products. In addition, prior to 2005, a portion of the annual compensation of certain senior managers was mandatorily deferred in a similar manner for a number of years. Beginning in 2005, a portion of the annual compensation of certain senior managers was paid in the form of BlackRock, Inc. restricted stock units which vest ratably over a number of years.
Options and Restricted Stock Awards
While incentive stock options are not currently being awarded to BlackRock employees, BlackRock, Inc. previously granted stock options to key employees, including certain portfolio managers who may still hold unexercised or unvested options. BlackRock, Inc. also has a restricted stock award program designed to reward certain key employees as an incentive to contribute to the long-term success of BlackRock. These awards vest over a period of years.
Incentive Savings Plans
BlackRock, Inc. has created a variety of incentive savings plans in which BlackRock employees are eligible to participate, including an Employee Stock Purchase Plan (ESPP) and a 401(k) plan. The 401(k) plan may involve a company match of the 50% employee’s pre-tax contribution of up to 6% of the employee’s salary, limited to $4,000 per year. BlackRock also offers a Company Retirement Contribution equal to 3% to 5% of eligible compensation, depending on BlackRock, Inc.’s overall net operating income. The company match is made in cash. The firm’s 401(k) plan offers a range of investment options, including registered investment companies managed by the firm. Each portfolio manager is eligible to participate in these plans.
Annual incentive compensation for each portfolio manager is a function of several components: the performance of BlackRock, Inc., the performance of the portfolio manager’s group within BlackRock, the investment performance, including risk-adjusted returns and income generation, of the firm’s assets under management or supervision by that portfolio manager relative to
predetermined benchmarks, and the individual’s teamwork and contribution to the overall performance of these portfolios and BlackRock. Unlike many other firms, portfolio managers at BlackRock compete against benchmarks rather than each other. In most cases, including for the portfolio managers of the Registrant, these benchmarks are the same as the benchmark or benchmarks against which the investment performance, including risk-adjusted returns and income generation, of the Registrant or other accounts are measured. These benchmarks include customized benchmarks, Lipper peer groups and a subset of other closed-end taxable debt funds. A group of BlackRock, Inc.’s officers determines which benchmarks against which to compare the performance of funds and other accounts managed by each portfolio manager. With respect to the Registrant, such benchmarks include the Merrill Lynch Fixed Rate Preferred Index, the 10-year United States Treasury Note and certain customized indices and fund industry peer groups.
The group of BlackRock, Inc.’s officers then makes a subjective determination with respect to the portfolio manager’s compensation based on the performance of the funds and other accounts managed by each portfolio manager relative to the various benchmarks. This determination may take into consideration the fact that a benchmark may not perfectly correlate to the way the Registrant or other accounts are managed, even if it is the benchmark that is most appropriate for the Registrant or other account. For example, a benchmark’s return may be based on the total return of the securities comprising the benchmark, but the Registrant or other account may be managed to maximize income and not total return. Senior portfolio managers who perform additional management functions within BlackRock may receive additional compensation for serving in these other capacities.
(a)(4) Beneficial Ownership of Securities. As of June 30, 2007, Mr. Burger did not beneficially own any stock issued by the Fund.
Item 9 – Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers – Not Applicable
Item 10 – Submission of Matters to a Vote of Security Holders – The registrant’s Nominating Committee will consider nominees to the Board recommended by shareholders when a vacancy becomes available. Shareholders who wish to recommend a nominee should send nominations which include biographical information and set forth the qualifications of the proposed nominee to the registrant’s Secretary. There have been no material changes to these procedures.
Item 11 – Controls and Procedures
11(a) – The registrant’s principal executive and principal financial officers or persons performing similar functions have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing of this report based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rule 13a-15(b) under the Securities and Exchange Act of 1934, as amended.
11(b) – There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a -3(d)) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12 – Exhibits attached hereto
12(a)(1) – Code of Ethics – Not Applicable to this semi-annual report
12(a)(2) – Certifications – Attached hereto
12(a)(3) – Not Applicable
12(b) – Certifications – Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BlackRock Preferred Opportunity Trust
| By: | /s/ Donald C. Burke | |
| | Donald C. Burke, |
| | Treasurer of |
| | BlackRock Preferred Opportunity Trust |
Date: August 20, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Robert S. Kapito | |
| | Robert S. Kapito, |
| | President (principal executive officer) of |
| | BlackRock Preferred Opportunity Trust |
Date: August 20, 2007
| By: | /s/ Donald C. Burke | |
| | Donald C. Burke, |
| | Treasurer (principal financial officer) of |
| | BlackRock Preferred Opportunity Trust |
Date: August 20, 2007
