A Trust earns and/or pays facility and other fees on floating rate loans. Other fees earned/paid include commitment, amendment, consent, commissions and prepayment penalty fees. Facility, amendment and consent fees are typically amortized as premium and/or accreted as discount over the term of the loan. Commitment, commission and various other fees are recorded as income. Prepayment penalty fees are recorded as gains or losses. When the Trust buys a floating rate loan it may receive a facility fee and when it sells a floating rate loan it may pay a facility fee. On an ongoing basis, the Trust may receive a commitment fee based on the undrawn portion of the underlying line of credit portion of a floating rate loan. In certain circumstances, the Trust may receive a prepayment penalty fee upon the prepayment of a floating rate loan by a borrower. Other fees received by the Trust may include covenant waiver fees and covenant modification fees.
A Trust may invest in multiple series or tranches of a loan. A different series or tranche may have varying terms and carry different associated risks.
Floating rate loans are usually freely callable at the issuer’s option. The Trusts may invest in such loans in the form of participations in loans (“Participations”) and assignments of all or a portion of loans from third parties. Participations typically will result in the Trust having a contractual relationship only with the lender, not with the borrower. The Trust will have the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the Participation and only upon receipt by the lender of the payments from the borrower.
In connection with purchasing Participations, the Trust generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loans, nor any rights of offset against the borrower, and the Trust may not benefit directly from any collateral supporting the loan in which it has purchased the Participation.
As a result, the Trust will assume the credit risk of both the borrower and the lender that is selling the Participation. The Trust’s investments in loan participation interests involve the risk of insolvency of the financial intermediaries who are parties to the transactions. In the event of the insolvency of the lender selling the Participation, the Trust may be treated as a general creditor of the lender and may not benefit from any offset between the lender and the borrower.
If such income does not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of the Trusts compared with what the performance would have been without the use of dollar rolls.
| |
|
|
Notes to Financial Statements (continued) |
declared by the issuer’s Board of Directors or Trustees. Preferred Shares also may be subject to optional or mandatory redemption provisions.
Reverse Repurchase Agreements: The Trusts may enter into reverse repurchase agreements with qualified third party broker-dealers. Interest on the value of the reverse repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance and is included within the related liability on the Statements of Assets and Liabilities. At the time the Trust enters into a reverse repurchase agreement, it identifies for segregation certain liquid securities having a value not less than the repurchase price, including accrued interest, of the reverse repurchase agreement. The Trust may utilize reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction.
Borrowed Bonds: Each Trust may engage in short selling of securities as a method of managing potential price declines in similar securities owned by the Trust. When a Trust engages in short selling, it may enter into a borrowed bond agreement to borrow the security sold short and deliver it to the broker-dealer with which it engaged in the short sale. A gain, limited to the price at which a Trust sold the security short or pursuant to the borrowed bond agreement, or a loss, unlimited as to dollar amount, will be recognized upon the termination of a short sale or borrowed bond agreement if the market price is greater or less than the proceeds originally received.
TBA Commitments: The Trusts may enter into to-be-announced (“TBA”) commitments to purchase or sell securities for a fixed price at a future date. TBA commitments are considered securities in themselves, and involve a risk of loss if the value of the security to be purchased or sold declines or increases prior to settlement date, which is in addition to the risk of decline in the value of the Trust’s other assets. Unsettled TBA commitments are valued at the current market value of the underlying securities, according to the procedures described under “Valuation of Investments.”
Foreign Currency Transactions: Foreign currency amounts are translated into United States dollars on the following basis: (i) market value of investment securities, assets and liabilities at the current rate of exchange; and (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 report foreign currency related transactions as components of realized gains for financial reporting purposes, whereas such components are treated as ordinary income for federal income tax purposes.
Zero Coupon Bonds: The Trusts may invest in zero-coupon bonds, which are normally issued at a significant discount from face value and do not provide for periodic interest payments. Zero-coupon bonds may experience greater volatility in market value than similar maturity debt obligations which provide for regular interest payments.
Segregation: In cases in which the 1940 Act and the interpretive positions of the Securities and Exchange Commission (“SEC”) require that the Trust segregate assets in connection with certain investments (e.g., reverse repurchase agreements, swaps 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.
Investment Transactions and Investment Income: Investment transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the Trust has determined the ex-dividend date. Interest income is recognized on the accrual basis.
Dividends and Distributions: Dividends from net investment income are declared and paid daily. Distributions of capital gains are recorded on the ex-dividend dates. If the total dividends and distributions made in any tax year exceed net investment income and accumulated realized capital gains, a portion of the total distribution may be treated as a tax return of capital.
Income Taxes: It is each of the Trust’s policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required.
Effective April 30, 2008, each Trust 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 prescribes 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 being measured and recognized in the financial statements. The investment advisor has evaluated the application of FIN 48 to each Trust, and has determined that the adoption of FIN 48 does not have a material impact on each Trust’s financial statements. Each Trust files U.S. and various state tax returns. No income tax returns are currently under examination. The statute of limitations on each Trust’s tax returns remains open for the years ended October 31, 2004 through October 31, 2006.The statutes of limitations on each Trust’s state and local tax returns may remain open for an additional year depending upon the jurisdiction.
Recent Accounting Pronouncements: 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. The impact on each of the Trust’s financial statement disclosures, if any, is currently being assessed.
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
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| SEMI-ANNUAL REPORT | APRIL 30, 2008 | 85 |
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|
|
Notes to Financial Statements (continued) |
facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The impact on each of the Trust’s financial statement disclosures, if any, is currently being assessed.
In March 2008, Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“FAS 161”) was issued and is effective for fiscal years beginning after November 15, 2008. FAS 161 is intended to improve financial reporting for derivative instruments by requiring enhanced disclosure that enables investors to understand how and why an entity uses derivatives, how derivatives are accounted for, and how derivative instruments affect an entity’s results of operations and financial position. The investment advisor is currently evaluating the implications of FAS 161 and the impact on each of the Trust’s financial statement disclosures, if any, is currently being assessed.
Deferred Compensation and BlackRock Closed-End Share Equivalent Investment Plan: Under the deferred compensation plan approved by each Trust’s Board, non-interested Directors or Trustees (“Independent Directors or Trustees”) may defer a portion of their annual complex-wide compensation. Deferred amounts earn an approximate return as though equivalent dollar amounts have been invested in common shares of other certain BlackRock Closed-End Funds selected by the Independent Directors or Trustees. This has approximately the same economic effect for the Independent Directors or Trustees as if the Independent Directors or Trustees had invested the deferred amounts directly in other certain BlackRock Closed-End Funds.
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 other certain BlackRock Closed-End Funds selected by the Independent Directors or Trustees in order to match its deferred compensation obligations. Investments to cover each Trust’s deferred compensation liability are included in other assets on the Statement of Assets and Liabilities.
Other: Expenses directly related to one of the Trusts are charged to that Trust. Other operating expenses shared by several Trusts are pro-rated among those Trusts on the basis of relative net assets or other appropriate methods.
2. Investment Advisory Agreement and Other Transactions with Affiliates:
Each Trust has entered into an Investment Advisory Agreement with BlackRock Advisors, LLC (the “Advisor”), an indirect, wholly owned subsidiary of BlackRock, Inc., to provide investment and administration services. Merrill Lynch & Co., Inc. and The PNC Financial Services Group, Inc. are principal owners of BlackRock, Inc.
Each Trust’s investment advisory fee paid to the Advisor is computed weekly and payable monthly based on an annual rate, 0.55% for Broad Investment Grade, 0.60% for Income Opportunity and 0.65% for Income Trust, of each Trust’s average net assets and 0.55% for Core Bond and Limited Duration, 0.65% for Preferred and Equity, 1.05% for High Yield and 0.75% for Strategic Bond, of each Trust’s average total assets (including any assets attributable to Preferred Shares) minus the sum of accrued liabilities (other than debt representing financial leverage). The Advisor has voluntarily agreed to waive a portion of the investment advisory fees or other expenses on Strategic Bond as a percentage of its average weekly managed assets as follows: 0.20% for the first five years of the Trust’s operations from 2002 through February 28, 2007, 0.15% through February 28, 2008, 0.10% through February 28, 2009 and 0.05% through February 28, 2010. In addition, effective November 1, 2007, the Advisor agreed to waive the advisory and administration fees for Broad Investment Grade for the period November 1, 2007 to the Trust’s termination in 2009.
Broad Investment Grade, High Yield, Income Opportunity and Income Trust each have an Administration Agreement with the Advisor. The Investment Advisory Agreement for Core Bond, Limited Duration, Preferred and Equity and Strategic Bond covers both investment advisory and administration services. The administration fee paid to the Advisor is computed weekly and payable monthly based on an annual rate, 0.15% for Broad Investment Grade, 0.10% for Income Opportunity, and 0.15% for Income Trust, of each Trust’s average net assets and 0.10% for High Yield of the Trust’s average managed assets.
Effective January 1, 2008, certain Trusts reimbursed the Advisor the following amounts for certain accounting services, which are included in accounting services expenses in the Statements of Operations:
| | | | |
| |
| | Reimbursement | |
| |
Core Bond | | $ | 1,519 | |
Limited Duration | | $ | 2,617 | |
Preferred and Equity | | $ | 5,893 | |
Strategic Bond | | $ | 389 | |
| |
BlackRock Financial Management, Inc. (“BFM”), a wholly owned subsidiary of BlackRock, Inc., serves as sub-advisor to Core Bond, Limited Duration, Preferred and Equity and Strategic Bond. BlackRock Investment Management, LLC (“BIM”), a wholly owned subsidiary of BlackRock, Inc., also serves as sub-advisor to Preferred and Equity. The Advisor pays BFM and BIM for services they provide, a monthly fee that is a percentage of the investment advisory fee paid by each Trust to the Advisor.
During the six months ended, Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a wholly owned subsidiary of Merrill Lynch, earned commissions on transactions of securities as follows:
| | | | |
| |
| | Six Months Ended
April 30, 2008 | |
| |
Income Trust | | $ | 30 | |
Preferred and Equity | | $ | 23,449 | |
| |
Pursuant to the terms of the custody agreement, custodian fees may be reduced by amounts calculated on uninvested cash balances (“custody credits”), which are on the Statements of Operations as fees paid indirectly.
Certain officers and/or directors or trustees of the Trusts are officers and/or directors of BlackRock, Inc. or its affiliates.
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86 | SEMI-ANNUAL REPORT | APRIL 30, 2008 |
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|
|
Notes to Financial Statements (continued) |
3. Investments:
Purchases and sales (including paydowns, payups, TBA transactions and excluding short-term securities) of investments, excluding short-term securities, for the six months ended April 30, 2008 for each Trust were as follows:
| | | | | | | |
| |
| | | Purchases | | | Sales | |
| |
Broad Investment Grade | | $ | 6,302,020 | | $ | 3,521,814 | |
Core Bond | | $ | 2,424,691,512 | | $ | 2,485,512,831 | |
High Yield | | $ | 9,156,155 | | $ | 14,639,439 | |
Income Opportunity | | $ | 1,422,444,161 | | $ | 1,510,324,560 | |
Income Trust | | $ | 1,206,879,531 | | $ | 527,864,475 | |
Limited Duration | | $ | 887,164,786 | | $ | 868,841,113 | |
Preferred and Equity | | $ | 551,128,803 | | $ | 688,487,571 | |
Strategic Bond | | $ | 14,938,937 | | $ | 14,906,990 | |
| |
Transactions in options written for the six months ended April 30, 2008 were as follows:
Core Bond
| | | | | | | |
| |
| | Contracts* | | Premiums
Received | |
| |
Outstanding call options written, beginning of period | | | 28 | | $ | 1,130,772 | |
Options written | | | 58 | | | 142,079 | |
Options expired | | | (66 | ) | | (401,113 | ) |
| | | | | | | |
Outstanding call options written, end of period | | | 20 | | $ | 871,738 | |
| |
* Some contracts represent a notional amount of $1,000,000.
| | | | | | | |
| |
| | Contracts* | | Premiums
Received | |
| |
Outstanding put options written, beginning of period | | | 28 | | $ | 1,130,773 | |
Options written | | | 60 | | | 238,239 | |
Options expired | | | (12 | ) | | (371,035 | ) |
Options closed | | | (30 | ) | | (27,606 | ) |
| | | | | | | |
Outstanding put options written, end of period | | | 46 | | $ | 970,371 | |
| |
* Some contracts represent a notional amount of $1,000,000.
Income Opportunity
| | | | | | | |
| |
| | Contracts | | Premiums
Received | |
| |
Outstanding call options written, beginning of period | | | 31 | | $ | 1,239,280 | |
Options written | | | 63 | | | 156,092 | |
Options expired | | | (72 | ) | | (436,195 | ) |
| | | | | | | |
Outstanding call options written, end of period | | | 22 | | $ | 959,177 | |
| |
Income Trust
Transactions in call options written for the six months ended April 30, 2008 were as follows:
| | | | | | | |
| |
| | Contracts* | | Premiums
Received | |
| |
Outstanding call options written, beginning of period | | | 138 | | $ | 4,975,195 | |
Options written | | | 554 | | | 6,463,894 | |
Options expired | | | (28 | ) | | (431,530 | ) |
Options closed | | | (246 | ) | | (2,703,447 | ) |
| | | | | | | |
Outstanding call options written, end of period | | | 418 | | $ | 8,304,112 | |
| |
*Some contracts represent a notional amount of $1,000,000.
| | | | | | | |
| |
| | Contracts* | | Premiums
Received | |
| |
Outstanding put options written, beginning of period | | | 138 | | $ | 4,929,221 | |
Options expired | | | (13 | ) | | (403,292 | ) |
Options closed | | | (67 | ) | | (1,358,523 | ) |
| | | | | | | |
Outstanding put options written, end of period | | | 58 | | $ | 3,167,406 | |
| |
*Some contracts represent a notional amount of $1,000,000.
Preferred and Equity Advantage
| | | | | | | |
| |
| | Contracts* | | Premiums
Received | |
| |
Outstanding call options written, beginning of period | | | 2,455 | | $ | 5,426,127 | |
Options written | | | 34,204 | | | 50,754,570 | |
Options expired | | | (8,045 | ) | | (21,311,342 | ) |
Options closed | | | (17,484 | ) | | (29,474,258 | ) |
| | | | | | | |
Outstanding call options written, end of period | | | 11,130 | | $ | 5,395,097 | |
| |
4. Reverse Repurchase Agreements:
For the six months ended April 30, 2008, the Core Bond’s average amount of reverse repurchase agreements outstanding was approximately $140,791,000 and the daily weighted average interest rate was 3.51%.
For the six months ended April 30, 2008, Income Opportunity’s average amount of reverse repurchase agreements outstanding was approximately $141,168,000 and the daily weighted average interest rate was 3.72%.
For the six months ended April 30, 2008, the Income Trust’s average amount of reverse repurchase agreements outstanding was approximately $70,110,000 and the daily weighted average interest rate was 3.76%.
For the six months ended April 30, 2008, the Limited Duration Income’s average amount of reverse repurchase agreements outstanding was approximately $134,275,000 and the daily weighted average interest rate was 3.62%.
For the six months ended April 30, 2008, the Preferred and Equity’s average amount borrowed was approximately $27,807,000 and the daily weighted average interest rate was 4.74%.
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| SEMI-ANNUAL REPORT | APRIL 30, 2008 | 87 |
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Notes to Financial Statements (continued) | |
5. Commitments:
Limited Duration may invest in floating rate loans. In connection with these investments, the Trust may, with its Advisor, also enter into unfunded corporate loans (“commitments”). Commitments may obligate the Trust to furnish temporary financing to a borrower until permanent financing can be arranged. At April 30, 2008, the Trust had outstanding commitments of approximately $2,088,000. In connection with these commitments, the Trust earns a commitment fee, typically set as a percentage of the commitment amount. Such fee income, which is classified in the Statements of Operations as facility and other fees, is recognized ratably over the commitment period. As of April 30, 2008, the Trust had the following unfunded loan commitments:
| | | | | | | |
| | | | | | |
|
Borrower | | Commitment
(000) | | Value of Underlying
Loan (000) | |
| | | | | | |
Community Health | | $ | 419 | | $ | 419 | |
Las Vegas Sands | | $ | 448 | | $ | 411 | |
NG Wireless | | $ | 140 | | $ | 133 | |
Big West Oil | | $ | 425 | | $ | 398 | |
Cellular South | | $ | 500 | | $ | 468 | |
Advanced Foods | | $ | 156 | | $ | 138 | |
| | | | | | | | |
6. Capital Loss Carryforwards:
As of October 31, 2007, the Trusts had a capital loss carryforwards available to offset future realized capital gains through the indicated expiration dates:
| | | | | | | |
| | Capital Loss
Carryforward
Amount | | Expires | |
| | | | | | |
Broad Investment Grade | | $ | 2,058,299 | | | 2011 | |
| | | 684,360 | | | 2012 | |
| | | 479,568 | | | 2014 | |
| | | | | | | |
| | $ | 3,222,227 | | | | |
| | | | | | | |
|
| | | | | | | | |
Core Bond | | $ | 4,880,373 | | | 2014 | |
| | | | | | | |
|
| | | | | | | | |
High Yield | | $ | 3,270,311 | | | 2008 | |
| | | 15,159,280 | | | 2009 | |
| | | 8,468,860 | | | 2010 | |
| | | 4,771,417 | | | 2011 | |
| | | 316,410 | | | 2012 | |
| | | 2,060,533 | | | 2014 | |
| | | 2,467,773 | | | 2015 | |
| | | | | | | |
| | $ | 36,514,584 | | | | |
| | | | | | | |
|
| | | | | | | | |
Income Opportunity | | $ | 2,451,626 | | | 2014 | |
| | | 2,342,922 | | | 2015 | |
| | | | | | | |
| | $ | 4,794,548 | | | | |
| | | | | | | |
|
| | | | | | | | |
Income Trust | | $ | 1,352,206 | | | 2008 | |
| | | 13,940,898 | | | 2009 | |
| | | 21,960,613 | | | 2011 | |
| | | 10,100,201 | | | 2012 | |
| | | 3,861,222 | | | 2013 | |
| | | 6,952,429 | | | 2014 | |
| | | 8,585,744 | | | 2015 | |
| | | | | | | |
| | $ | 66,753,313 | | | | |
| | | | | | | |
|
| | | | | | | | |
Preferred and Equity | | $ | 49,741,712 | | | 2015 | |
| | | | | | | |
|
| | | | | | | | |
Strategic Bond | | $ | 447,113 | | | 2014 | |
| | | | | | | |
|
| | | | | | | | |
7. Capital Share Transactions:
There are 200 million of $0.01 par value Common Shares authorized for Broad Investment Grade, Income Opportunity and Income Trust. There are an unlimited number of $0.001 par value Common Shares authorized for Core Bond, High Yield, Limited Duration, Preferred and Equity and Strategic Bond. At April 30, 2008, the shares owned by an affiliate of the Advisor of Limited Duration and Preferred and Equity were 6,021 and 4,817, respectively.
Preferred and Equity, which commenced on December 27, 2006, issued 47,004,817 common shares under the initial public offering. On February 1, 2007, an additional 4,750,000 shares were issued by the underwriters exercising their over-allotment option. Offering costs incurred in connection with the offering of Common Shares have been charged against the proceeds from the initial Common Share offering in the amount of $1,367,957.
Common Shares
During the six months ended April 30, 2008 and year ended October 31, 2007, the following Trusts issued additional shares under their respective dividend reinvestment plan:
| | | | | |
| | | | | | |
|
| | April 30, 2008 | | October 31, 2007 | |
| | | | | | |
High Yield | | — | | 1,496 | |
Limited Duration | | — | | 107,367 | |
Preferred and Equity | | — | | 73,340 | |
| | | | | | |
Preferred Shares
As of April 30, 2008, Preferred and Equity has 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.
| | | |
| | | | |
|
Series | | Shares | |
| | | | |
T7 | | 4,620 | |
W7 | | 4,620 | |
R7 | | 4,620 | |
F7 | | 4,620 | |
| | | | |
Shares issued and outstanding for the six months ended April 30, 2008 remained constant.
Preferred and Equity pays commissions to certain broker-dealers at the end of each auction at an annual rate of 0.25% calculated on the aggregate principal amount. For the six months ended April 30, 2008, MLPF&S received $265,286 in commissions from Preferred and Equity.
Dividends on seven-day Preferred Shares are cumulative at a rate which is reset every seven days based on the results of an auction. If the Preferred Shares fail to clear the auction on an auction date, Preferred and Equity is required to pay the maximum applicable rate on the Preferred Shares to holders of such Shares for each successive dividend period until such time as the stock is successfully auctioned. The maximum applicable rate on the Preferred Shares is 150% times or 1.25% plus the Telerate/BBA LIBOR rate. During the six months ended April 30, 2008, the Preferred Shares of
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88 | SEMI-ANNUAL REPORT | APRIL 30, 2008 | |
|
|
|
Notes to Financial Statements (concluded) |
Preferred and Equity was successfully auctioned at each auction date until February 13, 2008. The low, high and average dividend rates on the Preferred Shares for Preferred and Equity for the six months ended April 30, 2008 were as follows:
| | | | | | | | | | |
| | | | | | | | | | | |
Series | | Low | | High | | Average | |
| | | | | | | | | | | |
T7 | | 3.950% | | | 5.850% | | | 4.764% | | |
W7 | | 4.023% | | | 5.400% | | | 4.763% | | |
R7 | | 3.880% | | | 6.000% | | | 4.742% | | |
F7 | | 3.600% | | | 5.750% | | | 4.666% | | |
| | | | | | | | | | | |
Since February 13, 2008 the Preferred Shares of Preferred and Equity failed to clear any of it auctions. As a result, the Preferred Shares dividend rates were reset to the maximum applicable rate which ranged from 3.94% to 4.73%. A failed auction is not an event of default for Preferred and Equity but it is a liquidity event for the holders of the Preferred Shares. A failed auction occurs when there are more sellers of a fund’s auction rate Preferred Shares than buyers. It is impossible to predict how long this imbalance will last. An auction for the Fund’s Preferred Shares may not occur for some time, if ever, and even if liquidity does resume, holders of the Preferred Shares may not have the ability to sell the Preferred Shares at its liquidation preference.
Preferred and Equity 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 is less than 200%.
The Preferred Shares are redeemable at the option of Preferred and Equity, in whole or in part, on any dividend payment date at $25,000 per share plus any accumulated 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 Preferred and Equity, as set forth in the Trust’s Statement of Preferences, 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 (one vote per share) as a single class. However, holders of Preferred Shares, voting as a separate class, are also entitled to elect two Trustees for Preferred and Equity. 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 subclassification 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.
8. Subsequent Events:
Subsequent to April 30, 2008, the Board declared dividends per Common Share payable June 2, 2008, to shareholders of record on May 15, 2008. The per share common dividends declared were as follows:
| | | | |
| | | | | |
| | Common Dividend
Per Share | |
| | | | | |
Broad Investment Grade | | $ | 0.049000 | |
Core Bond | | $ | 0.062000 | |
High Yield Trust | | $ | 0.051000 | |
Income Trust | | $ | 0.024000 | |
Limited Duration Income Trust | | $ | 0.105000 | |
Preferred & Equity Advantage | | $ | 0.156250 | |
Strategic Bond | | $ | 0.077000 | |
| | | | | |
The dividends declared on Preferred Shares for the period May 1, 2008 to May 31, 2008 for Preferred and Equity were as follows:
| | | | |
| | | | | |
Series | | Dividends
Declared | |
| | | | | |
T7 | | | $363,271 | |
W7 | | | $461,122 | |
R7 | | | $456,040 | |
F7 | | | $380,318 | |
| | | | | |
On June 2, 2008, Preferred and Equity announced the following redemptions of Preferred Shares at a price of $25,000 per share plus any accrued and unpaid dividends through the redemption date:
| | | | | | | | | | |
| | | | | | | | | | | |
Series | | Redemption
Date | | Shares to be
Redeemed | | Aggregate
Price | |
| | | | | | | | | | | |
T7 | | | 6/11/2008 | | | 2,310 | | $ | 57,750,000 | |
W7 | | | 6/12/2008 | | | 2,310 | | $ | 57,750,000 | |
R7 | | | 6/13/2008 | | | 2,310 | | $ | 57,750,000 | |
F7 | | | 6/9/2008 | | | 2,310 | | $ | 57,750,000 | |
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Preferred and Equity will finance the Preferred Share redemptions with cash received from reverse repurchase agreement transactions.
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| SEMI-ANNUAL REPORT | APRIL 30, 2008 | 89 |
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Officers and Directors or Trustees |
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G. Nicholas Beckwith, III, Director or Trustee |
Richard E. Cavanagh, Director or Trustee |
Richard S. Davis, Director or Trustee |
Kent Dixon, Director or Trustee |
Frank J. Fabozzi, Director or Trustee |
Kathleen F. Feldstein, Director or Trustee |
James T. Flynn, Director or Trustee |
Henry Gabbay, Director or Trustee |
Jerrold B. Harris, Director or Trustee |
R. Glenn Hubbard, Director or Trustee |
W. Carl Kester, Director or Trustee |
Karen P. Robards, Director or Trustee |
Robert S. Salomon, Jr., Director or Trustee |
Donald C. Burke, Fund President and Chief Executive Officer |
Anne F. Ackerley, Vice President |
Neal J. Andrews, Chief Financial Officer |
Jay M. Fife, Treasurer |
Brian P. Kindelan, Chief Compliance Officer of the Funds |
Howard Surloff, Secretary |
|
Custodian |
State Street Bank and Trust Company
Boston, MA 02101 |
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Transfer Agents
Common Shares: |
Computershare Trust Companies, N.A.
Canton, MA 02021 |
|
Preferred Shares: |
For Preferred and Equity Advantage Trust |
BNY Mellon Shareowner Services
Jersey City, NJ 07310 |
|
Accounting Agent |
State Street Bank and Trust Company
Princeton, NJ 08540 |
|
Independent Registered Public Accounting Firm |
Deloitte & Touche LLP
Princeton, NJ 08540 |
|
Legal Counsel |
Skadden, Arps, Slate, Meagher & Flom LLP
New York, NY 10036 |
|
Fund Address |
BlackRock Closed-End Funds
c/o BlackRock Advisors, LLC
100 Bellevue Parkway
Wilmington, DE 19809 |
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90 | SEMI-ANNUAL REPORT | APRIL 30, 2008 | |
|
Availability of Quarterly Schedule of Investments |
Each Trust files their complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Each Trust’s Forms N-Q are available on the SEC’s website at http://www.sec.gov and may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC.
Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330. Each Trust’s Forms N-Q may also be obtained upon request and without charge by calling (800) 441-7762.
Electronic copies of most financial reports are available on the Trusts’ website or shareholders can sign up for e-mail notifications of quarterly statements, annual and semi-annual reports and prospectuses by enrolling in the Trusts’ electronic delivery program.
Shareholders Who Hold Accounts with Investment Advisors, Banks or Brokerages:
Please contact your financial advisor to enroll. Please note that not all investment advisors, banks or brokerages may offer this service.
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 it is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. 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) 441-7762
Quarterly performance, semi-annual and annual reports and other information regarding each Trust 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 each Trust and does not, and is not intended to, incorporate BlackRock’s website into this report.
Effective May 30, 2008, following approval by the BlackRock Preferred and Equity Advantage Trust (the “Trust”) Board and the applicable ratings agencies, the definition of “Deposited Securities” in the Trust’s Statement of Preferences was amended in order to facilitate the redemption of the Trust’s Preferred Stock. The following phrase was added to the definition of “Deposit Securities” found in the Trust’s Statement of Preferences:
; provided, however, that solely in connection with any redemption of AMPS, the term Deposit Securities shall include (i) any committed financing pursuant to a credit agreement, reverse repurchase agreement facility or similar credit arrangement, in each case which makes available to the Corporation, no later than the day preceding the applicable redemption date, cash in an amount not less than the aggregate amount due to Holders by reason of the redemption of their shares of AMPS on such redemption date; and (ii) cash amounts due and payable to the Corporation out of a sale of its securities if such cash amount is not less than the aggregate amount due to Holders by reason of the redemption of their shares of AMPS on such redemption date and such sale will be settled not later than the day preceding the applicable redemption date.
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| SEMI-ANNUAL REPORT | APRIL 30, 2008 | 91 |
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Additional Information (concluded) |
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BlackRock Privacy Principles |
BlackRock is committed to maintaining the privacy of its current and former fund investors and individual clients (collectively, “Clients”) and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information BlackRock collects, how we protect that information and why in certain cases we share such information with select parties.
If you are located in a jurisdiction where specific laws, rules or regulations require BlackRock to provide you with additional or different privacy-related rights beyond what is set forth below, then BlackRock will comply with those specific laws, rules or regulations.
BlackRock obtains or verifies personal nonpublic information from and about you from different sources, including the following: (i) information we receive from you or, if applicable, your financial intermediary, on applications, forms or other documents; (ii) information about your transactions with us, our affiliates, or others; (iii) information we receive from a consumer reporting agency; and (iv) from visits to our websites.
BlackRock does not sell or disclose to nonaffiliated third parties any nonpublic information about its Clients, except as permitted by law or as necessary to service Client accounts. These nonaffiliated third parties are required to protect the confidentiality and security of this information and to use it only for its intended purpose.
We may share information with our affiliates to service your account or to provide you with information about other BlackRock products or services that may be of interest to you. In addition, BlackRock restricts access to nonpublic personal information about its Clients to those BlackRock employees with a legitimate business need for the information. BlackRock maintains physical, electronic and procedural safeguards that are designed to protect the nonpublic personal information of its Clients, including procedures relating to the proper storage and disposal of such information.
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.
| | | | | | | | | | | | | | | | | |
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| | Total Fiscal Year to Date Cumulative
Distributions by Character | | Percentage of Fiscal Year to Date Cumulative
Distributions by Character | |
| | | | | |
| | Net
Investment
Income | | Net
Realized
Capital
Gains | | Return
of
Capital | | Total Per
Common
Share | | Net
Investment
Income | | Net
Realized
Capital
Gains | | Return
of
Capital | | Total Per
Common
Share | |
| |
Limited Duration Income Trust | | $0.72 | | $— | | $0.03 | | $0.75 | | 96% | | —% | | 4% | | 100% | |
Preferred and Equity | | 0.50 | | — | | 0.44 | | 0.94 | | 53 | | — | | 47 | | 100 | |
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Each Trust estimates that it has distributed more than its income and net realized gains; therefore, a portion of the distribution may be a return of capital. A return of capital may occur, for example, when some or all of the money that you invested in the Fund is paid back to the shareholder. A return of capital does not necessarily reflect the Fund’s investment performance and should not be confused with ‘yield’ or ‘income’.
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92 | SEMI-ANNUAL REPORT | APRIL 30, 2008 | |
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This report is transmitted to shareholders only. It is not a prospectus. Past performance results shown in this report should not be considered a representation of future performance. The Trusts have leveraged their Common Shares, which creates risks for Common Shareholders, including the likelihood of greater volatility of net asset value and market price of the Common Shares and the risk that fluctuations in the short-term dividend rates of the Preferred Shares, currently set at the maximum reset rate as a result of failed auctions, may affect the yield to Common Shareholders. Statements and other information herein are as dated and are subject to change.
A description of the policies and procedures that the Trusts use to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling toll-free (800) 411-7762; (2) at www.blackrock.com; and (3) on the Securities and Exchange Commission’s website at http://www.sec.gov. Information about how each Trust voted proxies relating to securities held in each Trust’s portfolio during the most recent 12-month period ended June 30 is available upon request and without charge (1) at www.blackrock.com or by calling (800) 441-7762 and (2) on the Securities and Exchange Commission’s website at http://www.sec.gov.
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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 – Investments
(a) The registrant’s Schedule of Investments is included as part of the Report to Stockholders filed under Item 1 of this form.
(b) Not Applicable due to no such divestments during the semi-annual period covered since the previous Form N-CSR filing.
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 – Not Applicable to this semi-annual report
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 and Governance 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 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) 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 and Equity Advantage Trust
| By: | /s/ Donald C. Burke |
| | Donald C. Burke |
| | Chief Executive Officer of |
| | BlackRock Preferred and Equity Advantage Trust |
Date: June 23, 2008
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/ Donald C. Burke |
| | Donald C. Burke |
| | Chief Executive Officer (principal executive officer) of |
| | BlackRock Preferred and Equity Advantage Trust |
Date: June 23, 2008
| By: | /s/ Neal J. Andrews |
| | Neal J. Andrews |
| | Chief Financial Officer (principal financial officer) of |
| | BlackRock Preferred and Equity Advantage Trust |
Date: June 23, 2008
