100
Bellevue Parkway
Wilmington,
Delaware 19809
(Address
of Principal Executive Offices)
(800)
882-0052
(Registrant’s
telephone number, including area code)
Anne
F. Ackerley, President
BlackRock
Strategic Income Opportunities Trust
40
East 52nd Street
New
York, New York 10022
(Name
and Address of Agent for Service)
Copies
to:
Michael
K. Hoffman, Esq.
Skadden,
Arps, Slate, Meagher & Flom LLP
Four
Times Square
New
York, New York 10036
Approximate
Date of Proposed Public Offering:
As
soon as practicable after the effective date of this Registration
Statement.
CALCULATION
OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
|
Title
of Securities Being Registered
|
Amount
Being Registered
|
Proposed
Maximum Offering Price
per
Unit
|
Proposed
Maximum Aggregate Offering Price(1)
|
Amount
of Registration
Fee
|
|
Common
Shares, $.001 par value
|
50,000
shares
|
$20.00
|
$1,000,000
|
$30.70
|
(1) Estimated
solely for the purpose of calculating the registration fee.
The
registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and may be changed.
We may not sell these securities until the Registration Statement filed with
the
Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer
or sale
is not permitted.
SUBJECT
TO COMPLETION, DATED SEPTEMBER 21, 2007
| P
R E L I M I N A R Y P R O S P E C T U
S |
|
BlackRock
|
Shares
BLACKROCK
STRATEGIC INCOME OPPORTUNITIES TRUST
Common
Shares
$20.00
per share
Investment
Objectives. BlackRock Strategic Income Opportunities Trust (the
“Trust”) is a newly organized, diversified, closed-end management investment
company. The Trust’s primary investment objective is to seek high current
income, with a secondary objective of long-term capital appreciation. There
can
be no assurance that the Trust will achieve its investment
objectives.
Investment
Policies. The Trust seeks to achieve its investment objectives
by investing substantially all of its Managed Assets (as defined herein)
in a
portfolio of loan and debt instruments and loan-related and debt-related
instruments (collectively “debt securities”). Under normal market
conditions, the Trust will invest at least 80% of its Managed Assets in any
combination of the following debt securities: (i) senior secured floating
rate
and fixed rate loans; (ii) second lien or other subordinated or unsecured
floating rate and fixed rate loans or debt; (iii) debt securities that are
rated
below investment grade by a nationally recognized credit rating organization
or
unrated debt securities that are deemed to be of comparable quality, which
securities are commonly known as “junk bonds” and are regarded as predominantly
speculative with respect to the issuer’s capacity to pay interest and repay
principal; and (iv) other loan and debt and loan-related and debt-related
instruments, including investment grade corporate bonds, government securities,
distressed and defaulted securities, structured products (e.g., collateralized
debt and loan obligations), mortgage-backed securities and asset-backed
securities.
The
Trust may invest in debt securities
of any credit quality, maturity and duration. The Trust may invest in
U.S. dollar and non-U.S. dollar denominated debt securities of issuers located
anywhere in the world, including issuers located in emerging market countries,
and of issuers that operate in any industry. The Trust may also
invest in swaps, including credit default, total return, index and interest
rate
swaps. To the extent that the Trust invests in structured products or swaps
as a
substitute for direct investment in a debt security or that adjust the risk
profile of the Trust’s debt securities portfolio, the value of such investments
will be counted as debt securities for purposes of the Trust’s 80%
policy.
Leverage. The
Trust
currently anticipates borrowing funds and/or issuing preferred shares in
an
aggregate amount of up to 38% of its Managed Assets to buy additional
securities. This practice is known as “leverage.” The
Trust may borrow funds from banks or other financial institutions, and may
also
borrow through reverse repurchase agreements and dollar rolls. The
use of borrowings and/or preferred shares to leverage the common shares can
create risks.
(continued
on next page)
______________________________
Investing
in the common shares involves certain risks. See “Risks” on page 28
of this prospectus.
______________________________
| |
|
Per
Share
|
|
Total(1)
|
|
Public
offering price
|
|
$
|
|
$
|
|
Sales
load(2)
|
|
$
|
|
$
|
|
Estimated
offering expenses(3)
|
|
$
|
|
$
|
|
Proceeds,
after expenses, to the Trust(4)
|
|
$
|
|
$
|
(notes
on next page)
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
underwriters expect to deliver the common shares to purchasers on or
about ,
2007.
The
date of this prospectus
is ,
2007.
(continued
from previous page)
No
Prior History. Because the Trust is newly organized, its shares
have no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. The risk of loss
due
to this discount may be greater for initial investors expecting to sell their
shares in a relatively short period after completion of the public
offering.
The
Trust’s common shares have been approved for listing on the New York Stock
Exchange under the symbol “ ,” subject to
notice of issuance.
Investment
Advisor and Sub-Advisor. The Trust’s investment advisor is
BlackRock Advisors, LLC (“BlackRock Advisors” or the “Advisor”) and the Trust’s
sub-advisor is BlackRock Financial Management, Inc. (“BlackRock Financial
Management” or the “Sub-Advisor”). We sometimes refer to the Advisor
and the Sub-Advisor collectively as the “Advisors.”
You
should read this prospectus, which concisely sets forth information about
the
Trust, before deciding whether to invest in the common shares, and retain
it for
future reference. A Statement of Additional Information, dated ,
2007, containing additional information about the Trust, has been filed with
the
Securities and Exchange Commission and, as amended from time to time, is
incorporated by reference in its entirety into this prospectus. You
can review the table of contents of the Statement of Additional Information
on
page 52 of this prospectus. You may request a free copy of the
Statement of Additional Information by calling (800) 882-0052 or by writing
to
the Trust, or obtain a copy (and other information regarding the Trust) from
the
Securities and Exchange Commission’s Public Reference Room in Washington, D.C.
Call (202) 551-8090 for information. The Securities and Exchange Commission
charges a fee for copies. You can get the same information free from
the Securities and Exchange Commission’s web site
(http://www.sec.gov). You may also e-mail requests for these
documents to publicinfo@sec.gov or make a request in writing to the Securities
and Exchange Commission’s Public Reference Section, 100 F Street, N.E.,
Washington, D.C. 20549-0102. The Trust does not post a copy of the
Statement of Additional Information on its web site because the Trust’s common
shares are not continuously offered, which means the Statement of Additional
Information will not be updated after completion of this offering and the
information contained in the Statement of Additional Information will become
outdated. The Trust’s annual and semi-annual reports, when produced, will be
available at the Trust’s web site (http://www.blackrock.com).
The
Trust’s common shares do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution,
and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
(notes
from previous page)
________________________
|
(1)
|
The
Trust has granted the underwriters an option to purchase up
to additional
common shares at the public offering price, less the sales load,
within 45
days of the date of this prospectus solely to cover over-allotments,
if
any. If such option is exercised in full, the public offering
price, sales load, estimated offering expenses and proceeds, after
expenses, to the Trust will be
$ ,
$ ,
$ and
$ ,
respectively. See
“Underwriting.”
|
|
(2)
|
BlackRock
Advisors, LLC has agreed to pay from its own assets a structuring
fee
to . BlackRock
Advisors, LLC may pay certain qualifying underwriters a structuring
fee,
additional compensation or a sales incentive fee in connection
with the
offering. BlackRock Advisors, LLC may pay commissions to
employees of its affiliates that participate in the marketing of
the
Trust’s common shares. See
“Underwriting.”
|
|
(3)
|
The
Trust will pay offering expenses of the Trust (other than the sales
load)
up to an aggregate of $ per common share sold
in this offering, which may include a reimbursement of BlackRock
Advisors,
LLC’s expenses incurred in connection with this
offering. BlackRock Advisors, LLC has agreed to pay such
offering expenses of the Trust (other than sales load, and not
including
organizational costs) to the extent they exceed
$ per common share. The aggregate
offering expenses (other than sales load) are estimated to be
$ or
$ per
common share. The aggregate offering expenses (other than sales
load) to be incurred by the Trust are estimated to be
$ or
$ per
common share. The aggregate offering expenses (other than sales
load)
to be incurred by BlackRock Advisors, LLC on behalf of the Trust
are
estimated to be
$ or
$ per
common share.
|
|
(4)
|
The
Trust will pay its organizational costs in full out of its seed capital
prior to completion of this
offering.
|
TABLE
OF CONTENTS
| |
Page
|
|
PROSPECTUS
SUMMARY
|
1
|
|
SUMMARY
OF TRUST EXPENSES
|
15
|
|
THE
TRUST
|
17
|
|
USE
OF PROCEEDS
|
17
|
|
THE
TRUST’S INVESTMENTS
|
17
|
|
LEVERAGE
|
26
|
|
RISKS
|
28
|
|
HOW
THE TRUST MANAGES RISK
|
36
|
|
MANAGEMENT
OF THE TRUST
|
36
|
|
NET
ASSET VALUE
|
38
|
|
DISTRIBUTIONS
|
39
|
|
DIVIDEND
REINVESTMENT PLAN
|
40
|
|
DESCRIPTION
OF SHARES
|
41
|
|
ANTI-TAKEOVER
PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
|
43
|
|
CLOSED-END
FUND STRUCTURE
|
45
|
|
REPURCHASE
OF COMMON SHARES
|
45
|
|
TAX
MATTERS
|
46
|
|
UNDERWRITING
|
48
|
|
CUSTODIAN
AND TRANSFER AGENT
|
50
|
|
LEGAL
OPINIONS
|
50
|
|
PRIVACY
PRINCIPLES OF THE TRUST
|
50
|
|
TABLE
OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
|
52
|
_________________________________
You
should rely only on the information contained or incorporated by reference
in
this prospectus. We have not, and the underwriters have not, authorized any
other person to provide you with different information. If anyone provides
you
with different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to sell
these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information in this prospectus
is accurate only as of the date of this prospectus. Our business,
financial condition and prospects may have changed since that
date.
_________________________________
Until ,
2007 (25 days after the date of this prospectus), all dealers that buy, sell
or
trade the common shares, whether or not participating in this offering, may
be
required to deliver a prospectus. This is in addition to the dealers’
obligations to deliver a prospectus when acting as underwriters and with
respect
to their unsold allotments or subscriptions.
PROSPECTUS
SUMMARY
This
is only a summary of certain information contained in this prospectus relating
to BlackRock Strategic Income Opportunities Trust. This summary may not contain
all of the information that you should consider before investing in our common
shares. You should review the more detailed information contained in this
prospectus and in the Statement of Additional Information.
|
THE
TRUST
|
BlackRock
Strategic Income Opportunities Trust is a newly organized, diversified,
closed-end management investment company. Throughout the
prospectus, we refer to BlackRock Strategic Income Opportunities
Trust
simply as the “Trust” or as “we,” “us” or “our.” See “The
Trust.”
|
|
THE
OFFERING
|
The
Trust is
offering common
shares of beneficial interest at $20.00 per share through a group
of
underwriters led
by . The
common shares of beneficial interest are called “common shares” in the
rest of this prospectus. You must purchase at least 100 common
shares ($2,000) in order to participate in this offering. The
Trust has given the underwriters an option to purchase up
to additional
common shares to cover over-allotments. BlackRock Advisors has
agreed to pay the Trust’s offering expenses (other than sales load, and
not including the Trust’s organizational costs) to the extent that
offering expenses (other than sales load) plus organizational costs
exceed
$ per common share. See
“Underwriting.”
|
|
INVESTMENT
OBJECTIVES
|
The
Trust’s primary investment objective is to seek high current income,
with
a secondary objective of long-term capital appreciation. The
Trust is not intended as, and you should not construe it to be,
a complete
investment program. There can be no assurance that the Trust will
achieve
its investment objectives. The Trust’s investment objectives may be
changed without shareholder approval. See “The Trust’s
Investments.”
|
|
INVESTMENT
POLICIES
|
The
Trust seeks to achieve its investment objectives by investing
substantially all of its Managed Assets in a portfolio of loan
and debt
instruments and loan-related and debt-related instruments (collectively
“debt securities”). “Managed Assets” means the total assets of
the Trust (including any assets attributable to money borrowed
for
investment purposes) minus the sum of the Trust’s accrued liabilities
(other than money borrowed for investment purposes).
Under
normal market conditions, the Trust will invest at least 80% of
its
Managed Assets in any combination of the following debt securities:
(i)
senior secured floating rate and fixed rate loans (“Senior Loans”); (ii)
second lien or other subordinated or unsecured floating rate and
fixed
rate loans or debt (“Second Lien Loans”); (iii) debt securities that are
rated below investment grade by a nationally recognized credit
rating
organization or unrated debt securities that are deemed to be of
comparable quality, which securities are commonly known as “junk bonds”
and are regarded as predominantly speculative with respect to the
issuer’s
capacity to pay interest and repay principal; and (iv) other loan
and debt
and loan-related and debt-related instruments, including investment
grade
corporate bonds, government securities, distressed and defaulted
securities, structured products (e.g., collateralized debt and
loan
obligations), mortgage-backed securities and asset-backed
securities.
The
Trust may invest in debt securities of any credit quality, maturity
and
duration. The Trust may invest in U.S. dollar and non-U.S.
dollar denominated debt securities of issuers located anywhere
in the
world,
|
| |
including
issuers located in emerging market countries, and of issuers that
operate
in any industry. The Trust may also invest in swaps, including
credit default, total return, index and interest rate swaps. To
the extent
that the Trust invests in structured products or swaps as a substitute
for
direct investment in a debt security or that adjust the risk profile
of
the Trust’s debt securities portfolio, the value of such investments will
be counted as debt securities for purposes of the Trust’s 80%
policy.
The
Trust may invest up to 20% of its Managed Assets in securities
other than
debt securities, including common stocks, convertible securities,
warrants
and depositary receipts. See “The Trust’s Investments—Equity
Securities.”
The
Trust anticipates that, under current market conditions, a significant
portion of its portfolio will consist of below investment grade
debt
securities. Below investment grade securities, commonly referred
to as
“junk bonds,” are debt securities that are rated below investment grade by
the national rating agencies that cover the security, or, if unrated,
are
determined to be of comparable quality by the Advisors. Moody’s
Investors Service, Inc. (“Moody’s”) considers securities rated below Baa3
to be below investment grade and Standard & Poor’s Ratings Group, a
division of The McGraw-Hill Companies, Inc. (“S&P”), and Fitch Ratings
(“Fitch”) consider securities rated below BBB- to be below investment
grade. Securities of below investment grade quality are
regarded as having predominately speculative characteristics with
respect
to an issuer’s capacity to pay interest and repay principal. Senior Loans
and emerging market debt securities are generally rated below investment
grade.
In
addition to the swap strategies discussed above, the Trust may
engage in
other strategic transactions for hedging and risk management purposes
or
to enhance total return. See “The Trust’s Investments—Other
Investment Techniques—Strategic Transactions.” In connection
with the Trust’s anticipated use of leverage, the Trust may enter into
interest rate swap or cap transactions. See “The Trust’s
Investments—Other Investment Techniques—Interest Rate
Transactions.”
|
|
LEVERAGE
|
The
Trust currently anticipates borrowing funds and/or issuing preferred
shares in an aggregate amount of up to 38% of its Managed Assets
in order
to buy additional securities. This practice is known as
“leverage.” The Trust may borrow from banks and other financial
institutions, and may also borrow through reverse repurchase agreements
and dollar rolls. The Trust’s leveraging strategy may not be
successful.
Money
borrowed for investment purposes generally will pay interest or
dividends
based on shorter-term interest rates. If the rate of return,
after the payment of applicable expenses of the Trust, on the intermediate
and long-term debt securities purchased by the Trust is greater
than the
interest or dividends paid by the Trust on its borrowed money,
the Trust
will generate more income from such investments than it will need
to pay
interest or dividends on the borrowed money. If so, the excess
income may be used to pay higher dividends to holders of common
shares. However, the Trust cannot assure you that the use of
leverage will result in a higher yield on the common
shares. When leverage is employed, the net asset value and
market price of the common shares and the yield to holders of common
shares will be more volatile. See “Leverage,” “Risks—Leverage
Risk” and “Description of Shares—Preferred
Shares.”
|
|
INVESTMENT
ADVISOR AND SUB-ADVISOR
|
BlackRock
Advisors, as the Trust’s investment advisor, and its affiliate, BlackRock
Financial Management, as sub-advisor, will provide certain day-to-day
investment management services to the Trust. BlackRock Advisors
will receive an annual fee, payable monthly, in an amount equal
to % of the average daily value of the
Trust’s Managed Assets. BlackRock Advisors will pay a
sub-advisory fee to BlackRock Financial Management equal
to % of the management fee received by the
BlackRock Advisors. See “Management of the Trust.”
|
|
DISTRIBUTIONS
|
Commencing
with the Trust’s initial dividend, the Trust intends to make regular
monthly cash distributions of all or a portion of its net investment
income to common shareholders. We expect to declare the initial
monthly dividend on the Trust’s common shares within approximately 45 days
after completion of this offering and to pay that initial monthly
dividend
approximately 60 to 90 days after completion of this
offering. Unless an election is made to receive dividends in
cash, shareholders will automatically have all dividends and distributions
reinvested in common shares through the Trust’s Dividend Reinvestment
Plan. See “Dividend Reinvestment Plan.”
The
Trust will pay common shareholders at least annually all, or a
portion of,
its net investment income after the payment of dividends and interest,
if
any, owed with respect to any outstanding preferred shares or other
forms
of leverage utilized by the Trust. If the Trust realizes a
long-term capital gain, it will be required to allocate such gain
between
the common shares and any preferred shares issued by the Trust
in
proportion to the total dividends paid to each class for the year
in which
the income is realized. See “Distributions” and
“Leverage.”
|
|
LISTING
|
The
Trust’s common shares have been approved for listing on the New York
Stock
Exchange under the symbol “ ,” subject to
notice of issuance. See “Description of Shares—Common
Shares.”
|
|
CUSTODIAN
AND TRANSFER AGENT
|
The
Bank of New York will serve as the Trust’s custodian and transfer
agent. See “Custodian and Transfer Agent.”
|
|
MARKET
PRICE OF SHARES
|
Common
shares of closed-end investment companies frequently trade at prices
lower
than their net asset value. Common shares of closed-end investment
companies like the Trust that invest primarily in debt securities
have
during some periods traded at prices higher than their net asset
value and
during other periods have traded at prices lower than their net
asset
value. The Trust cannot assure you that its common shares will
trade at a price higher than or equal to net asset value. The Trust’s net
asset value will be reduced immediately following this offering
by the
sales load and the amount of the offering expenses paid by the
Trust. See “Use of Proceeds.” In addition to net
asset value, the market price of the Trust’s common shares may be affected
by such factors as distribution levels, which are in turn affected
by
expenses, distribution stability, liquidity and market supply and
demand.
See “Risks,” “Description of Shares—Common Shares” and “Repurchase of
Common Shares.” The common shares are designed primarily for
long-term investors; you should not purchase common shares of the
Trust if
you intend to sell them shortly after purchase.
|
|
SPECIAL
RISK CONSIDERATIONS
|
No
Operating History. The Trust is a newly organized,
diversified, closed-end management investment company with no operating
history. See “Risks—No Operating History.”
|
| |
Market
Discount Risk. Common shares of closed-end management
investment companies frequently trade at a discount from their
net asset
values. The Trust’s common shares may trade at a price that is less than
the initial offering price. This risk may be greater for investors
who
sell their common shares in a relatively short period of time after
completion of the initial offering. See “Risks—Market Discount
Risk.”
|
| |
Investment
and Market Risk. An investment in the Trust’s common shares is
subject to investment risk, including the possible loss of the
entire
principal amount invested. An investment in the Trust’s common
shares represents an indirect investment in the portfolio securities
owned
by the Trust, and the value of these securities will move up or
down,
sometimes rapidly and unpredictably. At any point in time an
investment in the Trust’s common shares may be worth less than the
original amount invested, even after taking into account reinvestment
of
dividends and distributions paid by the Trust. The Trust
anticipates using leverage, which will magnify the Trust’s investment,
market and certain other risks. See “Risks—Investment and
Market Risk.”
|
| |
Credit
Risk. Credit risk is the risk that one or more debt
securities in the Trust’s portfolio will decline in price, or fail to pay
interest or principal when due, because the issuer of the security
experiences a decline in its financial status. While a senior
position in the capital structure of a borrower may provide some
protection with respect to the Trust’s investments in Senior Loans, losses
may still occur. To the extent the Trust invests in below
investment grade debt securities, it will be exposed to a greater
amount
of credit risk than a fund which invests in investment grade debt
securities. The prices of lower grade securities are more
sensitive to negative developments, such as a decline in the issuer’s
revenues or a general economic downturn, than are the prices of
higher
grade securities. Securities of below investment grade quality
are
predominantly speculative with respect to the issuer’s capacity to pay
interest and repay principal when due and therefore involve a greater
risk
of default. In addition, the Trust’s use of credit derivatives
will expose it to additional risk in the event that the bonds underlying
the derivatives default. See “Risks—Credit Risk.”
|
| |
Senior
Loans Risk. Senior Loans hold the most senior position in
the capital structure of a business entity, are typically secured
with
specific collateral and have a claim on the assets and/or stock
of the
borrower that is senior to that held by subordinated debt holders
and
stockholders of the borrower. The risks associated with Senior
Loans are similar to the risks of below investment grade securities,
although Senior Loans are typically senior and secured in contrast
to
below investment grade securities, which are often subordinated
and
unsecured. See “Risks—Below Investment Grade Securities Risk.”
Senior Loans’ higher standing has historically resulted in generally
higher recoveries in the event of a corporate reorganization. In
addition, because their interest rates are typically adjusted for
changes
in short-term interest rates, Senior Loans generally have less
interest
rate risk than below investment grade securities, which are typically
fixed rate.
|
| |
The
Trust will typically invest in Senior Loans rated below investment
grade,
which are considered speculative because of the credit risk of
their
issuers. Such companies are more likely to default on their payments
of interest and principal owed to the Trust, and such defaults
could
reduce the Trust’s net asset value and income distributions. An
economic downturn generally leads to a higher non-payment rate,
and a
Senior Loan may lose significant value before a default
occurs. Moreover, any specific collateral used to secure a
Senior Loan may decline in value or become illiquid, which would
adversely
affect the Senior Loan’s value.
No
active trading market may exist for certain Senior Loans, which
may impair
the ability of the Trust to realize full value in the event of
the need to
liquidate such assets and which may make it difficult to value
the assets.
Adverse market conditions may impair the liquidity of some actively
traded
Senior Loans.
Although
Senior Loans in which the Trust will invest generally will be secured
by
specific collateral, there can be no assurance that liquidation
of such
collateral would satisfy the borrower’s obligation in the event of
non-payment of scheduled interest or principal, or that such collateral
could be readily liquidated. In the event of the bankruptcy of
a borrower, the Trust could experience delays or limitations with
respect
to its ability to realize the benefits of the collateral securing
a Senior
Loan. If the terms of a Senior Loan do not require the borrower
to pledge additional collateral in the event of a decline in the
value of
the already pledged collateral, the Trust will be exposed to the
risk that
the value of the collateral will not at all times equal or exceed
the
amount of the borrower’s obligations under the Senior Loans. To the
extent that a Senior Loan is collateralized by stock in the borrower
or
its subsidiaries, such stock may lose all of its value in the event
of the
bankruptcy of the borrower. Uncollateralized Senior Loans involve
a
greater risk of loss.
For
a more detailed discussion of the characteristics and risks associated
with Senior Loans, see “The Trust’s Investments—Portfolio
Composition—Senior Loans” and “Risks—Senior Loans Risk.”
|
| |
Second
Lien Loans Risk. Second Lien Loans generally are subject
to similar risks as those associated with investments in Senior
Loans. Because Second Lien Loans are subordinated or unsecured
and thus lower in priority of payment to Senior Loans, they are
subject to
the additional risk that the cash flow of the borrower and property
securing the loan or debt, if any, may be insufficient to meet
scheduled
payments after giving effect to the senior secured obligations
of the
borrower. This risk is generally higher for subordinated
unsecured loans or debt, which are not backed by a security interest
in
any specific collateral. Second Lien Loans are expected to have
greater price volatility than Senior Loans and may be less
liquid. There is also a possibility that originators will not
be able to sell participations in Second Lien Loans, which would
create
greater credit risk exposure for the holders of such
loans. Second Lien Loans share the same risks of other below
investment grade securities. See “The Trust’s
Investments—Portfolio Composition—Second Lien Loans” and “Risks—Second
Lien Loans Risk.”
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| |
Below
Investment Grade Securities Risk. The Trust may invest a
substantial portion of its assets in debt securities that are rated
below
investment grade, which are commonly referred to as “junk bonds” and are
regarded as predominately speculative with respect to the issuer’s
capacity to pay interest and repay
principal.
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| |
Lower
grade securities, though high yielding, are characterized by high
risk. They may be subject to certain risks with respect to the
issuing entity and to greater market fluctuations than certain
lower
yielding, higher rated securities. The retail secondary market
for lower grade securities may be less liquid than that of higher
rated
securities. Adverse conditions could make it difficult at times
for the Trust to sell certain securities or could result in lower
prices
than those used in calculating the Trust’s net asset
value. Because of the substantial risks associated with lower
grade securities, you could lose money on your investment in common
shares
of the Trust, both in the short-term and the long-term. See
“The Trust’s Investments—Portfolio Composition—Below Investment Grade
Securities” and “Risks—Below Investment Grade Securities
Risk.”
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| |
Prepayment
Risk. During periods of declining interest rates,
borrowers may exercise their option to prepay principal earlier
than
scheduled. For fixed rate securities, such payments often occur
during
periods of declining interest rates, forcing the Trust to reinvest
in
lower yielding securities, resulting in a possible decline in the
Trust’s
income and distributions to shareholders. This is known as
prepayment or “call” risk. Below investment grade securities
frequently have call features that allow the issuer to redeem the
security
at dates prior to its stated maturity at a specified price (typically
greater than par) only if certain prescribed conditions are met
(“call
protection”). An issuer may redeem a below investment grade
security if, for example, the issuer can refinance the debt at
a lower
cost due to declining interest rates or an improvement in the credit
standing of the issuer. Senior Loans typically do not have call
protection. For premium bonds (bonds acquired at prices that
exceed their par or principal value) purchased by the Trust, prepayment
risk may be enhanced. See “Risks—Prepayment Risk.”
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| |
Interest
Rate Risk. The value of certain debt securities in the
Trust’s portfolio could be affected by interest rate
fluctuations. When interest rates decline, the value of fixed
rate securities can be expected to rise. Conversely, when
interest rates rise, the value of fixed rate securities can be
expected to
decline. Although changes in prevailing interest rates can be
expected to cause some fluctuations in the value of floating rate
securities (due to the fact that rates only reset periodically),
the
values of these securities are substantially less sensitive to
changes in
market interest rates than fixed rate instruments. Fluctuations
in the value of the Trust’s securities will not affect interest income on
existing securities, but will be reflected in the Trust’s net asset
value. The Trust may utilize certain strategies, including
taking positions in futures or interest rate swaps, for the purpose
of
reducing the interest rate sensitivity of the portfolio and decreasing
the
Trust’s exposure to interest rate risk, although there is no assurance
that it will do so or that such strategies will be
successful. See “Risks—Interest Rate Risk.”
|
| |
Liquidity
Risk. The Trust may invest in Senior Loans and
other debt securities for which there is no readily available trading
market or which are otherwise illiquid. The Trust may not be able to
readily dispose of such securities at prices that approximate those
at
which the Trust could sell such securities if they were more widely-traded
and, as a result of such
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| |
illiquidity,
the Trust may have to sell other investments or engage in borrowing
transactions if necessary to raise cash to meet its
obligations. Limited liquidity can also affect the market price
of securities, thereby adversely affecting the Trust’s net asset value and
ability to make dividend distributions.
Some
Senior Loans are not readily marketable and may be subject to restrictions
on resale. Senior Loans generally are not listed on any national
securities exchange or automated quotation system and no active
trading
market may exist for some of the Senior Loans in which the Trust
will
invest. Where a secondary market exists, the market for some Senior
Loans may be subject to irregular trading activity, wide bid/ask
spreads
and extended trade settlement periods. The Trust has no limitation
on the amount of its assets which may be invested in securities
that are
not readily marketable or are subject to restrictions on resale.
See
“Risks—Liquidity Risk.”
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| |
Distressed
and Defaulted Securities Risk. Investments in the securities of
financially distressed companies involve substantial risks. These
securities may present a substantial risk of default or may be
in default.
The Trust may incur additional expenses to the extent it is required
to
seek recovery upon a default in the payment of principal of or
interest on
its portfolio holdings. In any reorganization or liquidation proceeding
relating to a portfolio company, the Trust may lose its entire
investment
or may be required to accept cash or securities with a value less
than the
original investment. Among the risks inherent in investments in
a troubled
entity is the fact that it frequently may be difficult to obtain
information as to the true condition of such issuer. The
Advisors’ judgments about the credit quality of the issuer and the
relative value of its securities may prove to be wrong. See
“The Trust’s Investments—Portfolio Composition—Distressed and Defaulted
Securities” and “Risks—Distressed and Defaulted Securities
Risk.”
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| |
Structured
Products Risk. The Trust may invest in structured
products, including collateralized debt obligations (“CDOs”),
collateralized bond obligations (“CBOs”), collateralized loan obligations
(“CLOs”), structured notes, credit-linked notes and other types of
structured products. Holders of structured products bear risks
of the underlying investments, index or reference obligation and
are
subject to counterparty risk. The Trust may have the right to receive
payments only from the structured product, and generally does not
have
direct rights against the issuer or the entity that sold the assets
to be
securitized. While certain structured products enable the
investor to acquire interests in a pool of securities without the
brokerage and other expenses associated with directly holding the
same
securities, investors in structured products generally pay their
share of
the structured product’s administrative and other
expenses. Although it is difficult to predict whether the
prices of indices and securities underlying structured products
will rise
or fall, these prices (and, therefore, the prices of structured
products)
will be influenced by the same types of political and economic
events that
affect issuers of securities and capital markets generally. If
the issuer of a structured product uses shorter term financing
to purchase
longer term securities, the issuer may be forced to sell its securities
at
below market prices if it experiences difficulty in obtaining short
term
financing, which may adversely affect the value of the structured
products
owned by the Trust.
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Certain
structured products may be thinly traded or have a limited trading
market. CBOs, CLOs and other CDOs are typically privately
offered and sold, and thus are not registered under the securities
laws. As a result, investments in CBOs, CLOs and CDOs may be
characterized by the Trust as illiquid securities; however, an
active
dealer market may exist which would allow such securities to be
considered
liquid in some circumstances. In addition to the general risks
associated with debt securities discussed herein, CBOs, CLOs and
CDOs
carry additional risks, including, but not limited to: (i) the
possibility
that distributions from collateral securities will not be adequate
to make
interest or other payments; (ii) the quality of the collateral
may decline
in value or default; (iii) the possibility that the CBOs, CLOs
and CDOs
are subordinate to other classes; and (iv) the complex structure
of the
security may not be fully understood at the time of investment
and may
produce disputes with the issuer or unexpected investment
results.
Investments
in structured notes involve risks, including credit risk and market
risk.
Where the Trust’s investments in structured notes are based upon the
movement of one or more factors, including currency exchange rates,
interest rates, referenced bonds and stock indices, depending on
the
factor used and the use of multipliers or deflators, changes in
interest
rates and movement of the factor may cause significant price fluctuations.
Additionally, changes in the reference instrument or security may
cause
the interest rate on the structured note to be reduced to zero,
and any
further changes in the reference instrument may then reduce the
principal
amount payable on maturity. Structured notes may be less liquid
than other
types of securities and more volatile than the reference instrument
or
security underlying the note. See “The Trust’s
Investments—Portfolio Composition—Structured Products” and
“Risks—Structured Products Risk.”
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| |
Mortgage-Backed
Securities Risk. The risks associated with mortgage-backed
securities include: (1) credit risk associated with the performance
of the
underlying mortgage properties and of the borrowers owning these
properties; (2) adverse changes in economic conditions and circumstances,
which are more likely to have an adverse impact on mortgage-backed
securities secured by loans on certain types of commercial properties
than
on those secured by loans on residential properties; (3) prepayment
risk,
which can lead to significant fluctuations in value of the mortgage-backed
security; (4) loss of all or part of the premium, if any, paid;
and (5)
decline in the market value of the security, whether resulting
from
changes in interest rates or prepayments on the underlying mortgage
collateral.
Mortgage-backed
securities represent an interest in a pool of mortgages. When
market interest rates decline, more mortgages are refinanced and
the
securities are paid off earlier than expected. Prepayments may
also occur on a scheduled basis or due to foreclosure. When
market interest rates increase, the market values of mortgage-backed
securities decline. At the same time, however, mortgage
refinancings and prepayments slow, which lengthens the effective
maturities of these securities. As a result, the negative
effect of the rate increase on the market value of mortgage-backed
securities is usually more pronounced than it is for other types
of debt
securities. In addition, due to increased instability in the
credit markets, the market for some mortgage backed securities
has
experience reduced liquidity and greater volatility with respect
to the
value of such
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| |
securities,
making it more difficult to value such securities. See “The
Trust’s Investments—Portfolio Composition—Mortgage-Backed Securities” and
“Risks—Mortgage-Backed Securities Risk.”
|
| |
Asset-Backed
Securities Risk. Asset-backed securities involve certain
risks in addition to those presented by mortgage-backed
securities. Asset-backed securities do not have the benefit of
the same security interest in the underlying collateral as mortgage-backed
securities and are more dependent on the borrower’s ability to
pay. For example, asset-backed securities can be collateralized
with credit card and automobile receivables. Credit card
receivables are generally unsecured, and the debtors are entitled
to the
protection of a number of state and federal consumer credit laws,
many of
which give debtors the right to set off certain amounts owed on
the credit
cards, thereby reducing the balance due. Most issuers of
automobile receivables permit the servicers to retain possession
of the
underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser
would
acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large
number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the
automobile receivables may not have an effective security interest
in all
of the obligations backing such receivables. See “The Trust’s
Investments—Portfolio Composition—Asset-Backed Securities” and
“Risks—Asset-Backed Securities Risk.”
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| |
Non-U.S.
Securities Risk. The Trust may invest in securities of
non-U.S. issuers (“Non-U.S. Securities”). Such investments
involve certain risks not involved in domestic
investments. Securities markets in foreign countries often are
not as developed, efficient or liquid as securities markets in
the United
States, and therefore the prices of Non-U.S. Securities can be
more
volatile. Certain foreign countries may impose restrictions on
the ability of issuers of Non-U.S. Securities to make payments
of
principal and interest to investors located outside the
country. In addition, the Trust will be subject to risks
associated with adverse political and economic developments in
foreign
countries, which could cause the Trust to lose money on its investments
in
Non-U.S. Securities. The ability of a foreign sovereign issuer,
especially an emerging market country, to make timely and ultimate
payments on its debt obligations will also be strongly influenced
by the
sovereign issuer’s balance of payments, including export performance, its
access to international credits and investments, fluctuations of
interest
rates and the extent of its foreign reserves. The cost of
servicing external debt will also generally be adversely affected
by
rising international interest rates, as many external debt obligations
bear interest at rates which are adjusted based upon international
interest rates. See “Risks—Non-U.S. Securities
Risk.”
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| |
Emerging
Markets Risk. The Trust may invest in Non-U.S. Securities
of issuers in so-called “emerging markets” (or lesser developed
countries). Such investments are particularly speculative and entail
all
of the risks of investing in Non-U.S. Securities but to a heightened
degree. Foreign investment in certain emerging market countries
may be
restricted or controlled to varying degrees. These restrictions
or controls may at times limit or preclude foreign investment in
certain
emerging market issuers and increase the costs and expenses of
the
Trust. Certain emerging market countries require governmental
approval prior to investments by foreign persons in a particular
issuer,
limit the amount of investment by
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| |
foreign
persons in a particular issuer, limit the investment by foreign
persons
only to a specific class of securities of an issuer that may have
less
advantageous rights than the classes available for purchase by
domiciliaries of the countries and/or impose additional taxes on
foreign
investors. See “Risks—Emerging Markets Risk.”
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| |
Foreign
Currency Risk. Because the Trust may invest in securities
denominated or quoted in currencies other than the U.S. dollar,
changes in
foreign currency exchange rates may affect the value of securities
in the
Trust and the unrealized appreciation or depreciation of investments.
Currencies of certain countries may be volatile and therefore may
affect
the value of securities denominated in such currencies, which means
that
the Trust’s net asset value could decline as a result of changes in the
exchange rates between foreign currencies and the U.S.
dollar. In addition, certain countries, particularly emerging
markets countries, may impose foreign currency exchange controls
or other
restrictions on the transferability or convertibility of
currency. See “Risks—Foreign Currency Risk.”
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| |
Swap
Risk. The Trust may enter into swap transactions,
including credit default, total return, index and interest rate
swap
agreements, as well as options thereon, and may purchase or sell
interest
rate caps, floors and collars. Such transactions are subject to
market risk, risk of default by the other party to the transaction
and
risk of imperfect correlation between the value of such instruments
and
the underlying assets and may involve commissions or other
costs. Swaps generally do not involve delivery of securities,
other underlying assets or principal. Accordingly, the risk of
loss with
respect to swaps generally is limited to the net amount of payments
that
the Trust is contractually obligated to make, or in the case of
the other
party to a swap defaulting, the net amount of payments that the
Trust is
contractually entitled to receive. The swap market has grown
substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents
utilizing
standardized swap documentation. As a result, the swap market
has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not
yet been
fully developed and, accordingly, they are less liquid than
swaps. If the Advisors are incorrect in their forecasts of
market values, interest rates or currency exchange rates, the investment
performance of the Trust would be less favorable than it would
have been
if these investment techniques were not used. See “The Trust’s
Investments—Other Investment Techniques—Swaps” and “Risks—Swap
Risk.”
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Leverage
Risk. The use of leverage through reverse repurchase
agreements, dollar roll transactions, borrowing of money and the
issuance
of preferred shares to purchase additional securities creates an
opportunity for increased common share net investment income dividends,
but also creates risks for the holders of common
shares. Leverage is a speculative technique that may expose the
Trust to greater risk and increased costs. Increases and
decreases in the value of the Trust’s portfolio will be magnified when the
Trust uses leverage. As a result, leverage may cause greater
changes in the Trust’s net asset value. The Trust will also
have to pay interest and dividends on its borrowings, which may
reduce the
Trust’s return. This interest expense may be greater than the
Trust’s return on the underlying investment. The Trust’s leveraging
strategy may not be successful.
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Reverse
repurchase agreements involve the risks that the interest income
earned on
the investment of the proceeds will be less than the interest expense
and
fund expenses, that the market value of the securities sold by
the Trust
may decline below the price of the securities the Trust is obligated
to
repurchase and that the securities may not be returned to the
Trust. There is no assurance that reverse repurchase agreements
can be successfully employed.
Dollar
roll transactions involve the risk that the market value of the
securities
the Trust is required to purchase may decline below the agreed
upon
repurchase price of those securities. If the broker/dealer to
whom the Trust sells securities becomes insolvent, the Trust’s right to
purchase or repurchase securities may be restricted. Successful
use of dollar rolls may depend upon the Advisors’ ability to correctly
predict interest rates and prepayments. There is no assurance
that dollar rolls can be successfully employed.
We
anticipate that the money borrowed for investment purposes will
pay
interest or dividends based on shorter-term interest rates that
would be
periodically reset. The Trust intends to invest the proceeds of
the money borrowed for investment purposes in intermediate and
long-term,
typically fixed rate, bonds. So long as the Trust’s portfolio
provides a higher rate of return, net of expenses, than interest
and
dividend rates on borrowed money, as reset periodically, the leverage
may
cause the holders of common shares to receive a higher current
rate of
return than if the Trust were not leveraged. If, however,
long- and/or short-term rates rise, the interest and dividend
rates on borrowed money could exceed the rate of return on bonds
held by
the Trust, reducing return to the holders of common
shares. Recent developments in the credit markets may adversely
affect the ability of the Trust to borrow for investment purposes
and may
increase the costs of such borrowings, which would reduce returns
to the
holders of common shares.
There
is no assurance that a leveraging strategy will be successful.
Leverage
involves risks and special considerations for common shareholders,
including:
|
| |
· |
the
likelihood of greater volatility of net asset value, market price
and
dividend rate of the common shares than a comparable portfolio without
leverage; |
| |
|
|
| |
· |
the
risk that fluctuations in interest rates on borrowings and short-term
debt
or in the interest or dividend rates on any leverage that the Trust
must
pay will reduce the return to the common shareholders; |
| |
|
|
| |
· |
the
effect of leverage in a declining market, which is likely to cause
a
greater decline in the net asset value of the common shares than
if the
Trust were not leveraged, may result in a greater decline in the
market
price of the common shares; |
| |
|
|
| |
· |
when
the Trust uses financial leverage, the investment advisory fees payable
to
the Advisors will be higher than if the Trust did not use leverage;
and |
| |
|
|
| |
· |
leverage
may increase operating costs, which may reduce total return. |
| |
|
|
| |
Certain
types of borrowings by the Trust may result in the Trust being
subject to
covenants in credit agreements relating to asset coverage and Trust
composition requirements. The Trust may be subject to certain
restrictions on investments imposed by guidelines of one or more
rating
agencies, which may issue ratings for the short-term corporate
debt
securities or preferred shares issued by the Trust. These
guidelines may impose asset coverage or portfolio composition requirements
that are more stringent than those imposed by the Investment Company
Act
of 1940, as amended. The Advisors do not believe that these
covenants or guidelines will impede them from managing the Trust’s
portfolio in accordance with the Trust’s investment objectives and
policies. See “Leverage” and “Risks—Leverage
Risk.”
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Senior
Loan Based Derivatives Risk. The Trust may obtain exposure to Senior
Loans through the use of derivative instruments. The Trust currently
intends to invest in a derivative instrument known as the Select
Aggregate
Market Index (“SAMI”), which consists of a basket of credit default swaps
whose underlying reference securities are a basket of Senior
Loans. Investment in SAMIs involves many of the risks
associated with investments in derivatives more
generally. Derivative transactions involve the risk of loss due
to unanticipated adverse changes in securities prices, interest
rates, the
inability to close out a position, imperfect correlation between
a
position and the desired hedge, tax constraints on closing out
positions
and portfolio management constraints on securities subject to such
transactions. The potential loss on derivative instruments may
be substantial relative to the initial investment therein. The
Trust may also be subject to the risk that the counterparty in
a
derivative transaction will default on its obligations. See
“Risks—Senior Loan Based Derivatives Risk.”
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| |
Credit
Derivatives Risk. The use of credit derivatives is a
highly specialized activity which involves strategies and risks
different
from those associated with ordinary portfolio security
transactions. If the Advisors are incorrect in their forecasts
of default risks, market spreads or other applicable factors, the
investment performance of the Trust would diminish compared with
what it
would have been if these techniques were not used. Moreover,
even if the Advisors are correct in there forecasts, there is a
risk that
a credit derivative position may correlate imperfectly with the
price of
the asset or liability being protected. The Trust’s risk of
loss in a credit derivative transaction varies with the form of
the
transaction. For example, if the Trust purchases a default
option on a security, and if no default occurs with respect to
the
security, the Trust’s loss is limited to the premium it paid for the
default option. In contrast, if there is a default by the
grantor of a default option, the Trust’s loss will include both the
premium that it paid for the option and the decline in value of
the
underlying security that the default option protected. See “Risks—Credit
Derivatives Risk.”
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Strategic
Transactions Risk. The Trust may engage in various other
portfolio strategies, including interest rate and foreign currency
transactions, options, futures and other derivatives transactions
(“Strategic Transactions”), for hedging and risk management purposes and
to enhance total return. The use of Strategic Transactions to
enhance total return may be particularly speculative. Strategic
Transactions involve risks, including the imperfect correlation
between
the value of such instruments and
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the
underlying assets, the possible default of the other party to the
transaction and illiquidity of the derivative
instruments. Furthermore, the Trust’s ability to successfully
use Strategic Transactions depends on the Advisors’ ability to predict
pertinent market movements, which cannot be assured. The use of
Strategic Transactions may result in losses greater than if they
had not
been used, may require the Trust to sell or purchase portfolio
securities
at inopportune times or for prices other than current market values,
may
limit the amount of appreciation the Trust can realize on an investment
or
may cause the Trust to hold a security that it might otherwise
sell.
Additionally, amounts paid by the Trust as premiums and cash or
other
assets held in margin accounts with respect to Strategic Transactions
are
not otherwise available to the Trust for investment
purposes. See “The Trust’s Investments—Other Investment
Techniques—Strategic Transactions” and “Risks—Strategic Transactions
Risk.”
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Equity
Securities Risk. The Trust may invest up to 20% of its
Managed Assets in equity securities, including common stocks, convertible
securities, warrants and depositary receipts. Although common
stocks have historically generated higher average total returns
than debt
securities over the long-term, common stocks also have experienced
significantly more volatility in those returns and in certain periods
have
significantly under-performed relative to debt securities. An
adverse event, such as an unfavorable earnings report, may depress
the
value of a particular common stock held by the Trust. Also, the
price of common stocks is sensitive to general movements in the
stock
market and a drop in the stock market may depress the price of
common
stocks to which the Trust has exposure. Common stock prices
fluctuate for several reasons, including changes in investors’ perceptions
of the financial condition of an issuer or the general condition
of the
relevant stock market, or when political or economic events affecting
the
issuers occur. In addition, common stock prices may be particularly
sensitive to rising interest rates, as the cost of capital rises
and
borrowing costs increase. See “Risks—Equity Securities
Risk.”
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Market
Disruption and Geopolitical Risk. The aftermath of the war
in Iraq and the continuing occupation of Iraq, instability in the
Middle
East and terrorist attacks in the United States and around the
world may
result in market volatility and may have long-term effects on the
U.S. and
worldwide financial markets and may cause further economic uncertainties
in the United States and worldwide. The Trust does not know how
long the
securities markets may be affected by these events and cannot predict
the
effects of the occupation or similar events in the future on the
U.S.
economy and securities markets. See “Risks—Market Disruption
Risk.”
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Recent
Developments. Recent instability in the credit markets has
made it more difficult for a number of issuers of debt securities
to
obtain financing or refinancing for their investment or lending
activities
or operations. There is a risk that such issuers will be unable
to successfully complete such financing or refinancings. In
particular, because of the current conditions in the credit market,
issuers of debt securities may be subject to increased cost for
debt,
tightening underwriting standards and reduced liquidity for loans
they
make, securities they purchase and securities they issue. There
is also a risk that developments in sectors of the credit markets
in which
the Trust does not invest may adversely affect the liquidity and
the value
of securities in sectors of the credit markets in which the Trust
does
invest, including securities owned by the Trust. These
developments may increase the volatility of the value of
securities
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| |
owned
by the Trust. These developments also may make it more
difficult for the Trust to accurately value its securities or to
sell its
securities on a timely basis. These developments could
adversely affect the ability of the Trust to borrow for investment
purposes and increase the cost of such borrowings, which would
reduce
returns to the holders of common shares.
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| |
Given
the risks described above, an investment in the common shares may
not be
appropriate for all investors. You should carefully consider your
ability
to assume these risks before making an investment in the
Trust.
|
|
ANTI-TAKEOVER
PROVISIONS
|
The
Trust’s Agreement and Declaration of Trust includes provisions that could
limit the ability of other entities or persons to acquire control
of the
Trust or convert the Trust to open-end status. These provisions
could
deprive the holders of common shares of opportunities to sell their
common
shares at a premium over the then current market price of the common
shares or at net asset value. See “Anti-Takeover Provisions in
the Agreement and Declaration of Trust.”
|
SUMMARY
OF TRUST EXPENSES
The
following table assumes the issuance of preferred shares or the use of other
forms of leverage in an amount equal to 38% of the Trust’s Managed Assets (after
the leverage is incurred) and shows Trust expenses as a percentage of net
assets
attributable to common shares.
|
Shareholder
Transaction Expenses
|
|
|
|
Sales
load paid by you (as a percentage of offering price)
|
%
|
|
|
Offering
expenses borne by the Trust (as a percentage of offering
price)
|
%
|
(1)(2)
|
|
Dividend
reinvestment plan fees
|
None
|
(3)
|
| |
Percentage
of Net Assets
Attributable
to Common Shares
(Assumes
Leverage Incurred)
(4)
|
|
Annual
Expenses
|
|
|
|
Management
fees
|
%
|
|
|
Interest
expense
|
%
|
(5)
|
|
Other
expenses
|
%
|
|
|
Total
annual expenses
|
%
|
|
|
(1)
|
The
Trust will pay and expense its organizational costs in full out
of its
seed capital prior to completion of this offering. BlackRock Advisors
has
agreed to pay offering costs, and not organization costs, of the
Trust
(other than the sales load) that, when added to the Trust’s organizational
costs, exceed $ per common share
( % of the offering price). Assuming an
offering
of common
shares for
$ ,
the total offering costs are estimated to be
$ ,
$ of
which would be borne by the Trust (after taking into account
organizational costs) and
$ of
which would be paid by BlackRock
Advisors.
|
|
(2)
|
BlackRock
Advisors has agreed to pay from its own assets a structuring fee
to . BlackRock
Advisors may pay commissions to employees of its affiliates that
participate in the marketing of the Trust’s common shares. See
“Underwriting.”
|
|
(3)
|
You
will be charged a brokerage commission of $.02 per share if you
direct the
Plan Agent (as defined below) to sell your common shares held in
a
dividend reinvestment account.
|
|
(4)
|
The
table presented below in this footnote estimates what the Trust’s annual
expenses would be stated as percentages of the Trust’s net assets
attributable to common shares. This table assumes the Trust is
the same
size as in the table above, but unlike that table above, assumes
that no
leverage is incurred. In accordance with these assumptions, the
Trust’s expenses would be estimated to be as
follows:
|
| |
Percentage
of Net Assets
Attributable
to Common Shares
(Assumes
No Leverage Incurred)
|
|
Annual
Expenses
|
|
|
Management
fees
|
%
|
|
Other
expenses
|
%
|
|
Total
net annual expenses
|
%
|
|
(5)
|
If
the Trust offers preferred shares, the costs of that offering,
estimated
to be approximately % of the total dollar
amount of the preferred shares offering (including the sales load
paid to
the underwriters for the preferred shares offering), will be borne
immediately by the holders of the common shares and result in a
reduction
of the net asset value of the common
shares.
|
The
purpose of the table above and the example below is to help you understand
all
fees and expenses that you, as a holder of common shares, would bear directly
or
indirectly. The expenses shown in the table under “Other expenses”
and “Total annual expenses” are based on estimated amounts for the Trust’s first
full year of operations and assume that the Trust
issues common
shares. If the Trust issues fewer common shares, all other things
being equal, these expenses, as a percentage of the Trust’s net assets
attributable to common shares, would increase.
The
following example* illustrates the expenses (including the offering expenses
borne by the Trust and the sales load of $45) that you would pay on a $1,000
investment in common shares, assuming (1) total annual expenses
of % of net assets and (2) a 5%
annual return:
| |
1
Year
|
|
3
Years
|
|
5
Years
|
|
10
Years
|
|
Total
Expenses Incurred
|
$
|
|
$
|
|
$
|
|
$
|
|
*
|
The
example should not be considered a representation of future
expenses. The example assumes that the estimated “Other
expenses” set forth in the Annual Expenses table are accurate, and that
all dividends and distributions are reinvested at net asset value.
Actual
expenses may be greater or less than those assumed. Moreover, the
Trust’s
actual rate of return may be greater or less than the hypothetical
5%
return shown in the example.
|
THE
TRUST
The
Trust is a newly organized, diversified, closed-end management investment
company registered under the Investment Company Act of 1940, as amended (the
“Investment Company Act”). The Trust was organized as a Delaware
statutory trust on September 17, 2007, pursuant to an Agreement and Declaration
of Trust governed by the laws of the State of Delaware. The Trust has no
operating history. The Trust’s principal office is located at 100
Bellevue Parkway, Wilmington, Delaware 19809, and its telephone number is
(800)
882-0052.
USE
OF PROCEEDS
The
net proceeds of this offering of common shares will be approximately
$ ($ if
the underwriters exercise the over-allotment option in full) after payment
of
the estimated offering expenses. The Trust will invest the net proceeds of
this
offering in accordance with the Trust’s investment objectives and policies as
stated below. We currently anticipate that the Trust will be able to
invest substantially all of the net proceeds in securities that meet the
Trust’s
investment objectives and policies within approximately three months after
the
completion of this offering. Pending such investment, it is
anticipated that the proceeds will be invested in short-term debt
securities.
THE
TRUST’S INVESTMENTS
Investment
Objectives and Policies
The
Trust’s primary investment objective is to seek high current income, with a
secondary objective of long-term capital appreciation. The Trust is
not intended as, and you should not construe it to be, a complete investment
program. There can be no assurance that the Trust will achieve its investment
objectives. The Trust’s investment objectives may be changed without shareholder
approval.
The
Trust seeks to achieve its investment objectives by investing substantially
all
of its Managed Assets in a portfolio of loan and debt instruments (and
loan-related and debt-related instruments) (collectively “debt
securities”). “Managed Assets” means the total assets of the Trust
(including any assets attributable to money borrowed for investment purposes)
minus the sum of the Trust’s accrued liabilities (other than money borrowed for
investment purposes).
Under
normal market conditions, the Trust will invest at least 80% of its Managed
Assets in any combination of the following debt securities: (i) senior secured
floating rate and fixed rate loans (“Senior Loans”); (ii) second lien or other
subordinated or unsecured floating rate and fixed rate loans or debt (“Second
Lien Loans”); (iii) debt securities that are rated below investment grade by a
nationally recognized credit rating organization or unrated securities that
are
deemed to be of comparable quality, which securities are commonly known as
“junk
bonds” and are regarded as predominantly speculative with respect to the
issuer’s capacity; and (iv) other debt and debt-related instruments, including
investment grade corporate bonds, government securities, distressed and
defaulted securities, structured products (e.g., collateralized debt and
loan
obligations), mortgage-backed securities and asset-backed
securities.
The
Trust may invest in debt securities of any credit quality, maturity and
duration. The Trust may invest in U.S. dollar and non-U.S. dollar
denominated debt securities of issuers located anywhere in the world, including
issuers located in emerging market countries, and of issuers that operate
in any
industry. The Trust may also invest in swaps, including credit
default, total return, index and interest rate swaps. To the extent that
the
Trust invests in structured products or swaps as a substitute for direct
investment in a debt security or that adjust the risk profile of the Trust’s
debt securities portfolio, the value of such investments will be counted
as debt
securities for purposes of the Trust’s 80% policy.
The
Trust may invest up to 20% of its Managed Assets in securities other than
debt
securities, including equity securities, convertible securities, warrants
and
depositary receipts. See “The Trust’s Investments—Equity
Securities.”
In
addition to the swap strategies discussed above, the Trust may use various
other
investment techniques, including interest rate and foreign currency
transactions, options, futures and other derivative transactions (“Strategic
Transactions”), for hedging and risk management purposes or to enhance total
return. See “The Trust’s Investments—Other Investment
Techniques—Strategic Transactions.” In connection with the Trust’s
anticipated use of leverage, the Trust may enter into interest rate swap
or cap
transactions. See “The Trust’s Investments—Other Investment
Techniques—Interest Rate Transactions.”
The
Trust anticipates that, under current market conditions, a significant portion
of its portfolio will consist of below investment grade debt securities.
Below
investment grade securities, commonly referred to as “junk bonds,” are
securities that are rated below investment grade by the national rating agencies
that cover the security, or, if unrated, are determined to be of comparable
quality by the Advisors. Moody’s Investors Service, Inc. (“Moody’s”)
considers securities rated below Baa3 to be below investment grade and Standard
& Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc.
(“S&P”), and Fitch Ratings (“Fitch”) consider securities rated below BBB- to
be below investment grade. Securities of below investment grade
quality are regarded as having predominately speculative characteristics
with
respect to an issuer’s capacity to pay interest and repay principal. Senior
Loans and emerging market debt securities are generally rated below investment
grade.
The
Trust may invest in illiquid securities and securities for which prices are
not
readily available without limit. The Trust may implement various temporary
“defensive” strategies at times when the Advisors determine that conditions in
the markets make pursuing the Trust’s basic investment strategy inconsistent
with the best interests of its shareholders. These strategies may include
investing all or a portion of the Trust’s assets in U.S. Government obligations
and high-quality, short-term debt securities. See “The Trust’s
Investment’s—Portfolio Composition— Short-Term Debt Securities; Temporary
Defensive Position; Invest-Up Period.”
The
Trust can borrow money and/or issue preferred shares in order to buy additional
securities. This practice is known as “leverage.” The Trust may borrow from
banks or other financial institutions or through reverse repurchase agreements,
dollar rolls and other investment techniques. The Trust currently anticipates
borrowing funds and/or issuing preferred shares in an aggregate amount of
approximately 38% of its Managed Assets. See “Risks—Leverage Risk.”
Portfolio
Composition
The
Trust’s portfolio will be composed principally of the following
investments. A more detailed description of the Trust’s investment
policies and restrictions and more detailed information about the Trust’s
portfolio investments are contained in the Statement of Additional
Information.
Senior
Loans. Senior Loans hold the most senior position in the capital
structure of a business entity (the “Borrower”), are typically secured with
specific collateral and have a claim on the assets and/or stock of the Borrower
that is senior to that held by subordinated debt holders and stockholders
of the
Borrower. The proceeds of Senior Loans primarily are used to finance leveraged
buyouts, recapitalizations, mergers, acquisitions, stock repurchases,
refinancings and to finance internal growth and for other corporate purposes.
Senior Loans typically have rates of interest which are redetermined daily,
monthly, quarterly or semi-annually by reference to a base lending rate,
plus a
premium or credit spread. These base lending rates are primarily the
London-Interbank Offered Rate and secondarily the prime rate offered by one
or
more major U.S. banks and the certificate of deposit rate or other base lending
rates used by commercial lenders.
Senior
Loans typically have a stated term of between five and nine years, and have
rates of interest which typically are redetermined either daily, monthly,
quarterly or semi-annually. Longer interest rate reset periods generally
increase fluctuations in the Trust’s net asset value as a result of changes in
market interest rates. The Trust is not subject to any restrictions with
respect
to the maturity of Senior Loans held in its portfolio. As a result, as
short-term interest rates increase, interest payable to the Trust from its
investments in Senior Loans should increase, and as short-term interest rates
decrease, interest payable to the Trust from its investments in Senior Loans
should decrease. Because of prepayments, the Advisors expect the average
life of
Senior Loans to be shorter than the stated maturity.
Senior
Loans are subject to the risk of non-payment of scheduled interest or principal.
Such non-payment would result in a reduction of income to the Trust, a reduction
in the value of the investment and a potential decrease in the net asset
value
of the Trust. There can be no assurance that the liquidation of any collateral
securing a Senior Loan would satisfy the Borrower’s obligation in the event of
non-payment of scheduled interest or principal payments, or that such collateral
could be readily liquidated. In the event of bankruptcy of a Borrower, the
Trust
could experience delays or limitations with respect to its ability to realize
the benefits of the collateral securing a Senior Loan. The collateral securing
a
Senior Loan may lose all or substantially all of its value in the event of
bankruptcy of a Borrower. Some Senior Loans are subject to the risk that
a
court, pursuant to fraudulent conveyance or other similar laws, could
subordinate such Senior Loans to presently existing or future indebtedness
of
the Borrower or take other action detrimental to the holders of Senior Loans
including, in certain circumstances, invalidating such Senior Loans or causing
interest previously paid to be refunded to the Borrower. If interest were
required to be refunded, it could negatively affect the Trust’s
performance.
Many
Senior Loans in which the Trust will invest may not be rated by a rating
agency,
will not be registered with the Securities and Exchange Commission or any
state
securities commission and will not be listed on any national securities
exchange. The amount of public information available with respect to
Senior Loans will generally be less extensive than that available for registered
or exchange listed securities. In evaluating the creditworthiness of
Borrowers, the Advisors will consider, and may rely in part, on analyses
performed by others. Borrowers may have outstanding debt obligations that
are
rated below investment grade by a rating agency. Many of the Senior
Loans in the Trust will have been assigned below investment grade ratings
by
independent rating agencies. In the event Senior Loans are not rated,
they are likely to be the equivalent of below investment grade
quality. Because of the protective features of Senior Loans, the
Advisors believe that Senior Loans tend to have more favorable loss recovery
rates as compared to more junior types of below investment grade debt
obligations. The Advisors do not view ratings as the determinative factor
in its
investment decisions and relies more upon its credit analysis abilities than
upon ratings.
No
active trading market may exist for some Senior Loans, and some loans may
be
subject to restrictions on resale. A secondary market may be subject
to irregular trading activity, wide bid/ask spreads and extended trade
settlement periods, which may impair the ability to realize full value and
thus
cause a material decline in the Trust’s net asset value. In addition,
the Trust may not be able to readily dispose of its Senior Loans at prices
that
approximate those at which the Trust could sell such loans if they were more
widely-traded and, as a result of such illiquidity, the Trust may have to
sell
other investments or engage in borrowing transactions if necessary to raise
cash
to meet its obligations. During periods of limited supply and
liquidity of Senior Loans, the Trust’s yield may be lower. See
“Risks—Liquidity Risk” and “Risks—Senior Loans Risk.”
When
interest rates decline, the value of a fund invested in fixed rate obligations
can be expected to rise. Conversely, when interest rates rise, the value
of a
fund invested in fixed rate obligations can be expected to decline. Although
changes in prevailing interest rates can be expected to cause some fluctuations
in the value of Senior Loans (due to the fact that floating rates on Senior
Loans only reset periodically), the value of Senior Loans is substantially
less
sensitive to changes in market interest rates than fixed rate
instruments. As a result, to the extent the Trust invests in
floating-rate Senior Loans, the Trust’s portfolio may be less volatile and less
sensitive to changes in market interest rates than if the Trust invested
in
fixed rate obligations. Similarly, a sudden and significant increase
in market interest rates may cause a decline in the value of these investments
and in the Trust’s net asset value. Other factors (including, but not
limited to, rating downgrades, credit deterioration, a large downward movement
in stock prices, a disparity in supply and demand of certain securities or
market conditions that reduce liquidity) can reduce the value of Senior Loans
and other debt obligations, impairing the Trust’s net asset value.
The
Trust may purchase and retain in its portfolio a Senior Loan where the Borrower
has experienced, or may be perceived to be likely to experience, credit
problems, including involvement in or recent emergence from bankruptcy
reorganization proceedings or other forms of debt restructuring. Such
investments may provide opportunities for enhanced income as well as capital
appreciation, although they also will be subject to greater risk of loss.
At
times, in connection with the restructuring of a Senior Loan either outside
of
bankruptcy court or in the context of bankruptcy court proceedings, the Trust
may determine or be required to accept equity securities or junior debt
securities in exchange for all or a portion of a Senior Loan.
The
Trust may purchase Senior Loans on a direct assignment basis. If the Trust
purchases a Senior Loan on direct assignment, it typically succeeds to all
the
rights and obligations under the loan agreement of the assigning lender and
becomes a lender under the loan agreement with the same rights and obligations
as the assigning lender. The Trust may also purchase, without limitation,
participations in Senior Loans. The participation by the Trust in a lender’s
portion of a Senior Loan typically will result in the Trust having a contractual
relationship only with such lender, not with the Borrower. As a result, the
Trust may 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 such lender of payments from the Borrower. Such
indebtedness may be secured or unsecured. Loan participations typically
represent direct participations in a loan to a Borrower, and generally are
offered by banks or other financial institutions or lending
syndicates. The Trust may participate in such syndications, or can
buy part of a loan, becoming a part lender. When purchasing loan
participations, the Trust assumes the credit risk associated with the Borrower
and may assume the credit risk associated with an interposed bank or other
financial intermediary. The participation interests in which the
Trust intends to invest may not be rated by any nationally recognized rating
service. Given the current structure of the markets for loan
participations and assignments, the Trust expects to treat these securities
as
illiquid.
Investments
in Senior Loans through a direct assignment of a financial institution’s
interests with respect to the loan may involve additional risks to the
Trust. For example, if a loan is foreclosed, the Trust could become
part owner of any collateral, and would bear the costs and liabilities
associated with owning and disposing of the collateral.
The
Advisors may use an independent pricing service or prices provided by dealers
to
value loans and other debt securities at their market value. The
Advisors will use the fair value method to value Senior Loans or other
securities if market quotations for them are not readily available or are
deemed
unreliable. A security that is fair valued may be valued at a price
higher or lower than actual market quotations or the value determined by
other
funds using their own fair valuation procedures. Because foreign
securities trade on days when the common shares are not priced, net asset
value
can change at times when common shares cannot be sold.
Second
Lien Loans. The Trust may invest in Second Lien Loans, which
have the same characteristics as Senior Loans except that such loans are
second
in lien property rather than first. Second Lien Loans typically have
adjustable floating rate interest payments. Accordingly, the risks
associated with Second Lien Loans are higher than the risk of loans with
first
priority over the collateral. In the event of default on a Second
Lien Loan, the first priority lien holder has first claim to the underlying
collateral of the loan. It is possible that no collateral value would
remain for the second priority lien holder and therefore result in a loss
of
investment to the Trust.
Below
Investment Grade Securities. The Trust anticipates that, under
normal market conditions, a significant portion of its debt securities
portfolio, including its investments in Senior Loans and emerging markets
debt,
will be invested in securities rated below investment grade, such as those
rated
Ba or lower by Moody’s and BB or lower by S&P or Fitch or securities
comparably rated by other rating agencies, or in unrated securities determined
by the Advisors to be of comparable quality. Securities rated Ba by
Moody’s are judged to have speculative elements, their future cannot be
considered as well assured and often the protection of interest and principal
payments may be very moderate. Securities rated BB by S&P or
Fitch are regarded as having predominantly speculative characteristics and,
while such obligations have less near-term vulnerability to default than
other
speculative grade debt, they face major ongoing uncertainties or exposure
to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments. Securities rated C are regarded as having extremely poor
prospects of ever attaining any real investment standing. Securities
rated D are in default and the payment of interest and/or repayment of principal
is in arrears. When the Advisors believe it to be in the best
interests of the Trust’s shareholders, the Trust will reduce its investment in
lower grade securities.
Lower
grade securities, though high yielding, are characterized by high risk. They
may
be subject to certain risks with respect to the issuing entity and to greater
market fluctuations than certain lower yielding, higher rated securities.
The
retail secondary market for lower grade securities may be less liquid than
that
of higher rated securities. Adverse conditions could make it difficult at
times
for the Trust to sell certain securities or could result in lower prices
than
those used in calculating the Trust’s net asset value.
The
prices of debt securities generally are inversely related to interest rate
changes; however, the price volatility caused by fluctuating interest rates
of
securities also is inversely related to the coupon of such securities.
Accordingly, lower grade securities may be relatively less sensitive to interest
rate changes than higher quality securities of comparable maturity, because
of
their higher coupon. This higher coupon is what the investor receives in
return
for bearing greater credit risk. The higher credit risk associated with lower
grade securities potentially can have a greater effect on the value of such
securities than may be the case with higher quality issues of comparable
maturity, and will be a substantial factor in the Trust’s relative share price
volatility.
Lower
grade securities may be particularly susceptible to economic downturns. It
is
likely that an economic recession could disrupt severely the market for such
securities and may have an adverse impact on the value of such securities.
In
addition, it is likely that any such economic downturn could adversely affect
the ability of the issuers of such securities to repay principal and pay
interest thereon and increase the incidence of default for such
securities.
The
ratings of Moody’s, S&P and the other rating agencies represent their
opinions as to the quality of the obligations which they undertake to rate.
Ratings are relative and subjective and, although ratings may be useful in
evaluating the safety of interest and principal payments, they do not evaluate
the market value risk of such obligations. Although these ratings may be
an
initial criterion for selection of portfolio investments, BlackRock also
will
independently evaluate these securities and the ability of the issuers of
such
securities to pay interest and principal. To the extent that the Trust invests
in lower grade securities that have not been rated by a rating agency, the
Trust’s ability to achieve its investment objectives will be more dependent on
BlackRock’s credit analysis than would be the case when the Trust invests in
rated securities.
Corporate
Bonds. The Trust may invest in corporate bonds. The investment
return of corporate bonds reflects interest on the security and changes in
the
market value of the security. The market value of a corporate bond generally
may
be expected to rise and fall inversely with interest rates. The market value
of
a corporate bond also may be affected by the credit rating of the corporation,
the corporation’s performance and perceptions of the corporation in the market
place. There is a risk that the issuers of the securities may not be able
to
meet their obligations on interest or principal payments at the time called
for
by an instrument.
Sovereign
Government and Supranational Debt. The Trust may invest in all
types of debt securities of governmental issuers in all countries, including
emerging market countries. These sovereign debt securities may include: debt
securities issued or guaranteed by governments, governmental agencies or
instrumentalities and political subdivisions located in emerging market
countries; debt securities issued by government owned, controlled or sponsored
entities located in emerging market countries; interests in entities organized
and operated for the purpose of restructuring the investment characteristics
of
instruments issued by any of the above issuers; Brady Bonds, which are debt
securities issued under the framework of the Brady Plan as a means for debtor
nations to restructure their outstanding external indebtedness; participations
in loans between emerging market governments and financial institutions;
or debt
securities issued by supranational entities such as the World Bank or the
European Economic Community. A supranational entity is a bank, commission
or
company established or financially supported by the national governments
of one
or more countries to promote reconstruction or development. Sovereign government
and supranational debt involve all the risks described herein regarding foreign
and emerging markets investments as well as the risk of debt moratorium,
repudiation or renegotiation.
Distressed
and Defaulted Securities. The Trust may invest in the securities
of financially distressed and bankrupt issuers, including debt obligations
that
are in covenant or payment default. Such investments generally trade
significantly below par and are considered speculative. The repayment
of defaulted obligations is subject to significant
uncertainties. Defaulted obligations might be repaid only after
lengthy workout or bankruptcy proceedings, during which the issuer might
not
make any interest or other payments. Typically such workout or
bankruptcy proceedings result in only partial recovery of cash payments or
an
exchange of the defaulted obligation for other debt or equity securities
of the
issuer or its affiliates, which may in turn be illiquid or
speculative.
Collateralized
Bond Obligations. The Trust may invest in collateralized bond
obligations (“CBOs”), which are structured securities backed by a diversified
pool of high yield, public or private debt securities. These may be fixed
pools
or may be “market value” (or managed) pools of collateral. The pool of high
yield securities is typically separated into tranches representing different
degrees of credit quality. The top tranche of CBOs, which represents the
highest
credit quality in the pool, has the greatest collateralization and pays the
lowest interest rate. Lower CBO
tranches
represent lower degrees of credit quality and pay higher interest rates intended
to compensate for the attendant risks. The bottom tranche specifically receives
the residual interest payments (i.e., money that is left over after the
higher tranches have been paid) rather than a fixed interest rate. The return
on
the lower tranches of CBOs is especially sensitive to the rate of defaults
in
the collateral pool. Under normal market conditions, the Trust
expects to invest in the lower tranches of CBOs, and the entire principal
amount
of an investment in a lower tranche of a CBO may be lost if there are too
many
defaults in the pool.
Collateralized
Loan Obligations. A collateralized loan obligation (“CLO”) is a
structured credit security, issued by a financing company (generally called
a
Special Purpose Vehicle or “SPV”), that was created to reapportion the risk and
return characteristics of a pool of assets. The assets, typically Senior
Loans,
are used as collateral supporting the various debt tranches issued by the
SPV.
The key feature of the CLO structure is the prioritization of the cash flows
from a pool of debt securities among the several classes of CLO. The
SPV is a company founded solely for the purpose of securitizing payment claims
and its only asset is the risk arising out of this diversified asset
pool. On this basis, marketable securities are issued which, due to
the diversification of the underlying risk, generally represent a lower level
of
risk than the original assets. The redemption of the securities
issued by the SPV takes place at maturity out of the cash flow generated
by the
collected claims.
Mortgage-Backed
Securities. Mortgage-backed securities are structured debt obligations
collateralized by pools of commercial or residential mortgages. Pools of
mortgage loans and mortgage-related loans such as mezzanine loans are assembled
as securities for sale to investors by various governmental, government-related
and private organizations. These securities may include complex instruments
such
as collateralized mortgage obligations (“CMOs”), stripped mortgage-backed
securities, mortgage pass-through securities, interests in real estate mortgage
investment conduits (“REMICs”), real estate investment trusts (“REITs”),
including debt and preferred stock issued by REITs, as well as other real
estate-related securities. The mortgage-backed securities in which the Trust
may
invest include those with fixed, floating or variable interest rates, those
with
interest rates that change based on multiples of changes in a specified index
of
interest rates and those with interest rates that change inversely to changes
in
interest rates, as well as those that do not bear interest. The Trust may
invest
in residential and commercial mortgage-backed securities, including residual
interests, issued by governmental entities and private issuers, including
subordinated mortgage-related securities.
Asset-Backed
Securities. The Trust may invest in asset-backed securities.
Asset-backed securities are a form of structured debt obligation. The
securitization techniques used for asset-backed securities are similar to
those
used for mortgage-backed securities. The collateral for these
securities may include home equity loans, automobile and credit card
receivables, boat loans, computer leases, airplane leases, mobile home loans,
recreational vehicle loans and hospital account receivables. The Trust may
invest in these and other types of asset-backed securities that may be developed
in the future. Asset-backed securities present certain risks that are not
presented by mortgage-related securities. Primarily, these securities
may provide the Trust with a less effective security interest in the related
collateral than do mortgage-related securities. Therefore, there is
the possibility that recoveries on the underlying collateral may not, in
some
cases, be available to support payments on these securities.
Senior
Loan Based Derivatives. The Trust may obtain exposure to Senior Loans
through the use of derivative instruments, which have recently become
increasingly available. The Advisors may utilize these instruments
and similar instruments that may be available in the future. The Trust currently
intends to invest in a derivative instrument known as the Select Aggregate
Market Index (“SAMI”), which provides investors with exposure to a reference
basket of Senior Loans. SAMIs are structured as floating rate instruments.
SAMIs
consist of a basket of credit default swaps whose underlying reference
securities are senior secured loans. While investing in SAMIs will increase
the
universe of floating rate debt securities to which the Trust is exposed,
such
investments entail risks that are not typically associated with investments
in
other floating rate debt securities. The liquidity of the market for SAMIs
will
be subject to liquidity in the secured loan and credit derivatives markets.
Investment in SAMIs involves many of the risks associated with investments
in
derivative instruments discussed generally below. The Trust may also be subject
to the risk that the counterparty in a derivative transaction will default
on
its obligations. Derivative transactions generally involve the risk of loss
due
to unanticipated adverse changes in securities prices, interest rates, the
inability to close out a position, imperfect correlation between a position
and
the desired hedge, tax constraints on closing out positions and portfolio
management constraints on securities subject to such transactions. The potential
loss on derivative instruments may be substantial relative to the initial
investment therein.
Credit
Derivatives. The Trust may engage in credit derivative
transactions. There are two broad categories of credit derivatives: default
price risk derivatives and market spread derivatives. Default price risk
derivatives are linked to the price of reference securities or loans after
a
default by the issuer or borrower, respectively. Market spread derivatives
are
based on the risk that changes in market factors, such as credit spreads,
can
cause a decline in the value of a security, loan or index. There are three
basic
transactional forms for credit derivatives: swaps, options and structured
instruments. The Trust currently intends to invest primarily in credit default
swaps. A credit default swap is an agreement between two counterparties that
allows one counterparty (the “seller”) to be “long” a third party’s credit risk
and the other party (the “buyer”) to be “short” the credit risk. Typically, the
seller agrees to make regular fixed payments to the buyer with the same
frequency as the underlying reference bond. In exchange, the seller typically
has the right upon default of the underlying bond to put the bond to the
buyer
in exchange for the bond’s par value plus interest. Credit default
swaps can be used as a substitute for purchasing or selling a debt security
and
sometimes is preferable to actually purchasing the security. The
Trust does not intend to leverage its investments through the use of credit
default swaps. A purchaser of a credit default swap is subject to
counterparty risk.
Credit-Linked
Notes. The Trust may invest in credit-linked notes (“CLN”) for risk
management purposes, including diversification. A CLN is a derivative
instrument. It is a synthetic obligation between two or more parties where
the
payment of principal and/or interest is based on the performance of some
obligation (a reference obligation). In addition to the credit risk of the
reference obligations and interest rate risk, the buyer/seller of the CLN
is
subject to counterparty risk.
Non-U.S.
Securities. The Trust may invest without limit in securities of
non-U.S. issuers (“Non-U.S. Securities”). Some Non-U.S. Securities
may be less liquid and more volatile than securities of comparable U.S.
issuers. Similarly, there is less volume and liquidity in most
foreign securities markets than in the United States and, at times, greater
price volatility than in the United States.
Because
evidences of ownership of such securities usually are held outside the United
States, the Trust will be subject to additional risks if it invests in Non-U.S.
Securities, which include possible adverse political and economic developments,
seizure or nationalization of foreign deposits and adoption of governmental
restrictions which might adversely affect or restrict the payment of principal
and interest on the foreign securities to investors located outside the country
of the issuer, whether from currency blockage or otherwise.
Emerging
Markets Investments. Investing in emerging market issuers may
involve unique risks compared to investing in the securities of U.S. issuers.
These securities may be U.S. dollar-denominated or non-U.S. dollar-denominated
and include: (a) debt obligations issued or guaranteed by foreign national,
provincial, state, municipal or other governments with taxing authority or
by
their agencies or instrumentalities, including Brady Bonds; (b) debt obligations
of supranational entities; (c) debt obligations and other debt securities
of
foreign corporate issuers; (d) debt obligations of U.S. corporate issuers;
(e)
debt securities issued by corporations that generate significant profits
from
emerging market countries; and (f) structured securities, including but not
limited to, warrants, options and other derivatives, whose price is directly
linked to emerging market securities or indices. The Trust may also
invest in securities denominated in currencies of emerging market
countries. Emerging market countries generally include every nation
in the world except the United States, Canada, Japan, Australia, New Zealand
and
most countries located in Western Europe. There is no minimum rating
criteria for the Trust’s investments in such securities. Some of
these risks do not apply to issuers in larger, more developed countries.
These
risks are more pronounced to the extent the Trust invests significantly in
one
country. Less information about non-U.S. issuers or markets may be
available due to less rigorous disclosure and accounting standards or regulatory
practices. Many non-U.S. markets are smaller, less liquid and more
volatile than U.S. markets. In a changing market, the Advisors may
not be able to sell the Trust’s portfolio securities in amounts and at prices
they consider reasonable. The U.S. dollar may appreciate against
non-U.S. currencies or an emerging market government may impose restrictions
on
currency conversion or trading. The economies of non-U.S. countries
may grow at a slower rate than expected or may experience a downturn or
recession. Economic, political and social developments may adversely affect
non-U.S. securities markets.
Other
Investment Companies. The Trust may invest up to 10% of its
Managed Assets in securities of other open- or closed-end investment companies
that invest primarily in securities of the types in which the Trust may invest
directly. The Trust generally expects to invest in other investment
companies either during periods when it
has
large amounts of uninvested cash, such as the period shortly after the Trust
receives the proceeds of the offering of its common shares, or during periods
when there is a shortage of attractive opportunities in the fixed income
market. As a shareholder in an investment company, the Trust would
bear its ratable share of that investment company’s expenses, and would remain
subject to payment of the Trust’s advisory and other fees and expenses with
respect to assets so invested. Holders of common shares would
therefore be subject to duplicative expenses to the extent the Trust invests
in
other investment companies. The Advisors will take expenses into
account when evaluating the investment merits of an investment in an investment
company relative to available bond investments. The securities of
other investment companies may also be leveraged and will therefore be subject
to the same leverage risks to which the Trust is subject. As
described in this prospectus in the sections entitled “Leverage” and
“Risks—Leverage Risk,” the net asset value and market value of leveraged shares
will be more volatile and the yield to shareholders will tend to fluctuate
more
than the yield generated by unleveraged shares. Investment companies may
have
investment policies that differ from those of the Trust. In addition,
to the extent the Trust invests in other investment companies, the Trust
will be
dependent upon the investment and research abilities of persons other than
those
employed by the Advisors.
Equity
Securities. The Trust may invest up to 20% of its Managed Assets
in equity securities, including common and preferred stocks, convertible
securities, warrants, depository receipts, exchange-traded funds (“ETFs”) and
equity interests in real estate investment trusts (“REITs”). Common
stock represents an equity ownership interest in a company. The Trust
may hold or have exposure to common stocks of issuers of any size, including
small and medium capitalization stocks. Because the Trust will
ordinarily have substantial exposure to common stocks, historical trends
would
indicate that the Trust’s portfolio and investment returns will be subject at
times, and over time, to higher levels of volatility and market and
issuer-specific risk than if it invested exclusively in debt
securities. The Trust will also employ a strategy, as described
below, of writing covered call options on common stocks. For more
information regarding preferred stocks, convertible securities, warrants,
depository receipts, ETFs and REITs, see “Investment Policies and
Techniques—Equity Securities” in the Statement of Additional
Information.
Short-Term
Debt Securities; Temporary Defensive Position; Invest-Up
Period. During the period in which the net proceeds of this
offering of common shares are being invested, during periods in which the
Advisors determine that they are temporarily unable to follow the Trust’s
investment strategy or that it is impractical to do so or pending re-investment
of proceeds received in connection with the expiration of a bond or the sale
of
a security, the Trust may deviate from its investment strategy and invest
all or
any portion of its assets in cash, cash equivalents or short-term debt
instruments. See “Investment Policies and Techniques—Short-Term Debt
Securities” in the Statement of Additional Information.
The
Advisors’ determination that they are temporarily unable to follow the Trust’s
investment strategy or that it is impractical to do so will generally occur
only
in situations in which a market disruption event has occurred and where trading
in the securities selected through application of the Trust’s investment
strategy is extremely limited or absent. In such a case, shares of
the Trust may be adversely affected and the Trust may not pursue or achieve
its
investment objectives. The Advisors currently anticipate that these
are the only circumstances in which the Trust will invest in short-term debt
securities.
Other
Investment Techniques
Strategic
Transactions. In addition to credit derivatives and Senior Loan
based derivatives, the Trust may, but is not required to, use various other
Strategic Transactions described below for hedging and risk management purposes
or to enhance total return. Such Strategic Transactions are generally
accepted under modern portfolio management and are regularly used by many
mutual
funds, closed-end funds and other institutional investors. Although the Advisors
seek to use Strategic Transactions to further the Trust’s investment objectives,
no assurance can be given that they will be successful.
The
Trust may purchase and sell derivative instruments such as exchange-listed
and
over-the-counter put and call options on securities, financial futures, equity,
fixed income and interest rate indices, and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter
into
various interest rate transactions such as swaps, caps, floors or collars
(see
“—Interest Rate Transactions” below) and enter into various currency
transactions such as currency forward contracts, currency futures contracts,
currency swaps or options on
currency
or currency futures or credit transactions and credit default
swaps. The Trust also may purchase derivative instruments that
combine features of these instruments. Collectively, all of the above
are referred to as “Strategic Transactions.” The Trust generally uses
Strategic Transactions as a portfolio management or hedging technique to
seek to
protect against possible adverse changes in the market value of securities
held
in or to be purchased for the Trust’s portfolio, protect the value of the
Trust’s portfolio, facilitate the sale of certain securities for investment
purposes, manage the effective interest rate exposure of the Trust, protect
against changes in currency exchange rates, manage the effective maturity
or
duration of the Trust’s portfolio or establish positions in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. The Trust may use Strategic Transactions to enhance total
return, although the Trust will commit variation margin for Strategic
Transactions that involve futures contracts in accordance with the rules
of the
Commodity Futures Trading Commission.
Strategic
Transactions have risks, including the imperfect correlation between the
value
of such instruments and the underlying assets, the possible default of the
other
party to the transaction or illiquidity of the derivative instruments.
Furthermore, the ability to successfully use Strategic Transactions depends
on
BlackRock’s ability to predict pertinent market movements, which cannot be
assured. Thus, the use of Strategic Transactions may result in losses greater
than if they had not been used, may require the Trust to sell or purchase
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Trust can realize
on an
investment or may cause the Trust to hold a security that it might otherwise
sell. The use of currency transactions can result in the Trust incurring
losses
as a result of the imposition of exchange controls, suspension of settlements
or
the inability of the Trust to deliver or receive a specified
currency. Additionally, amounts paid by the Trust as premiums and
cash or other assets held in margin accounts with respect to Strategic
Transactions are not otherwise available to the Trust for investment purposes.
A
more complete discussion of Strategic Transactions and their risks is contained
in the Trust’s Statement of Additional Information under the heading “Other
Investment Policies and Techniques—Strategic Transactions and Risk
Management.”
Interest
Rate Transactions. In connection with the Trust’s anticipated
use of leverage through its issuance of preferred shares or borrowings, the
Trust may enter into interest rate swap or cap transactions. Interest rate
swaps
involve the Trust’s agreement with the swap counterparty to pay a fixed rate
payment on a notional amount in exchange for the counterparty paying the
Trust a
variable rate payment on a notional amount that is intended to approximate
the
Trust’s variable rate payment obligation on preferred shares or any variable
rate borrowing. The payment obligation would be based on the notional amount
of
the swap.
The
Trust may use an interest rate cap, which would require it to pay a premium
to
the cap counterparty and would entitle it, to the extent that a specified
variable rate index exceeds a predetermined fixed rate, to receive from the
counterparty payment of the difference based on the notional amount. The
Trust
would use interest rate swaps or caps only with the intent to reduce or
eliminate the risk that an increase in short-term interest rates could have
on
common share net earnings as a result of leverage.
The
Trust will usually enter into swaps or caps on a net basis; that is, the
two
payment streams will be netted out in a cash settlement on the payment date
or
dates specified in the instrument, with the Trust receiving or paying, as
the
case may be, only the net amount of the two payments. The Trust intends to
designate on its books and records cash or liquid securities having a value
at
least equal to the Trust’s net payment obligations under any swap transaction,
marked to market daily. The Trust has no current intention of selling
an interest rate swap or cap. The Trust would not enter into interest rate
swap
or cap transactions in an aggregate notional amount that exceeds the outstanding
amount of the Trust’s leverage.
The
use of interest rate swaps and caps is a highly specialized activity that
involves investment techniques and risks different from those associated
with
ordinary portfolio security transactions. Depending on the state of interest
rates in general, the Trust’s use of interest rate swaps or caps could enhance
or harm the overall performance or the common shares. To the extent there
is a
decline in interest rates, the value of the interest rate swap or cap could
decline, and could result in a decline in the net asset value of the common
shares. In addition, if short-term interest rates are lower than the Trust’s
fixed rate of payment on the interest rate swap, the swap will reduce common
share net earnings. If, on the other hand, short-term interest rates are
higher
than the fixed rate of payment on the interest rate swap, the swap will enhance
common share net earnings. Buying interest rate caps could enhance the
performance of the common shares by providing a maximum leverage expense.
Buying
interest rate caps could also decrease the net earnings of the common shares
in
the event that the premium paid by the Trust to the counterparty
exceeds the additional amount the Trust would have been required to pay had
it
not entered into the cap agreement.
Interest
rate swaps and caps generally do not involve the delivery of securities or
other
underlying assets or principal. Accordingly, the risk of loss with respect
to
interest rate swaps is limited to the net amount of interest or premium payments
that the Trust is contractually obligated to make. If the counterparty defaults,
the Trust would not be able to use the anticipated net receipts under the
swap
or cap to offset the dividend payments on its preferred shares or interest
payments on borrowing. Depending on whether the Trust would be entitled to
receive net payments from the counterparty on the swap or cap, which in turn
would depend on the general state of short-term interest rates at that point
in
time, such a default could negatively impact the performance of the common
shares.
Although
the Trust cannot eliminate counterparty risk, the Trust will not enter into
an
interest rate swap or cap transaction with any counterparty that the Advisors
believe does not have the financial resources to honor its obligation under
the
interest rate swap or cap transaction. Further, the Advisors will
continually monitor the financial stability of a counterparty to an interest
rate swap or cap transaction in an effort to proactively protect the Trust’s
investments.
In
addition, at the time the interest rate swap or cap transaction reaches its
schedule termination date, there is a risk that the Trust will not be able
to
obtain a replacement transaction or that the terms of the replacement will
not
be as favorable as on the expiring transactions. If this occurs, it
could have a negative impact on the performance of the common
shares.
The
Trust may choose or be required to redeem some or all preferred shares or
prepay
any borrowings. This redemption would likely result in the Trust
seeking to terminate early all or a portion of any swap or cap transaction.
Such
early termination of a swap could result in termination payment by or to
the
Trust. An early termination of a cap could result in a termination
payment to the Trust.
The
Trust may also use interest rate transactions in connection with the management
of its portfolio. See “—Strategic Transactions” above for additional
information.
LEVERAGE
The
Trust currently anticipates borrowing funds and/or issuing preferred shares
in
an aggregate amount of approximately 38% of its Managed Assets to purchase
additional securities. This practice is known as
“leverage.” The Trust may borrow from banks and other financial
institutions and may also borrow additional funds using such investment
techniques and in such amounts as the Advisors may from time to time
determine. Of these investment techniques, the Trust expects
primarily to use reverse repurchase agreements and dollar roll
transactions. Changes in the value of the Trust’s portfolio,
including securities bought with the proceeds of the leverage, will be borne
entirely by the holders of common shares. If there is a net decrease,
or increase, in the value of the Trust’s investment portfolio, the leverage will
decrease or increase, as the case may be, the net asset value per common
share
to a greater extent than if the Trust were not leveraged. During
periods in which the Trust is using leverage, the fees paid to the Advisors
for
advisory and sub-advisory services will be higher than if the Trust did not
use
leverage because the fees paid will be calculated on the basis of the Trust’s
Managed Assets, which includes the proceeds from the issuance of preferred
shares and other leverage. Leverage involves greater
risks. The Trust’s leveraging strategy may not be
successful.
Reverse
Repurchase Agreements
Borrowings
may be made by the Trust,
through reverse repurchase agreements under which the Trust sells portfolio
securities to financial institutions such as banks and broker dealers and
agrees
to repurchase them at a particular date and price. Such agreements are
considered to be borrowings under the Investment Company Act. 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.
Dollar
Roll Transactions
Borrowings
may be made by the Trust through dollar roll transactions. A dollar roll
transaction involves a sale by the Trust of a mortgage-backed or other security
concurrently with an agreement by the Trust to repurchase a similar security
at
a later date at an agreed-upon price. The securities that are repurchased
will
bear the same interest rate and stated maturity as those sold, but pools
of
mortgages collateralizing those securities may have different prepayment
histories than those sold. During the period between the sale and repurchase,
the Trust will not be entitled to receive interest and principal payments
on the
securities sold. Proceeds of the sale will be invested in additional instruments
for the Trust, and the income from these investments will generate income
for
the Trust. 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 Trust compared with what the performance would have been without the
use
of dollar rolls.
Preferred
Shares
Although
the Trust is authorized, under the Investment Company Act, to issue preferred
shares in an amount up to 50% of its total assets less its liabilities and
indebtedness, the Trust anticipates that under current market conditions
it will
offer preferred shares representing no more than 38% of the Trust’s Managed
Assets immediately after the issuance of the preferred shares. If, as
a result of market conditions, or any other reason, the Trust does not issue
preferred shares, the Trust will limit its borrowing to 33⅓% of the Trust’s
Managed Assets. The preferred shares would have
complete priority upon distribution assets over the common
shares. The issuance of preferred shares will leverage the common
shares. Although the timing and other terms of the offering of
preferred shares and the terms of the preferred shares would be determined
by
the Trust’s board of trustees, the Trust expects to invest the proceeds of any
preferred shares offering in intermediate and long-term bonds. The
preferred shares will pay adjustable rate dividends based on shorter-term
interest rates, which would be re-determined periodically by an auction
process. The adjustment period for preferred share dividends could be
as short as one day or as long as a year or more. So long as the
Trust’s portfolio is invested in securities that provide a higher rate of return
than the dividend rate of the preferred shares, after taking expenses into
consideration, the leverage will cause you to receive a higher rate of income
than if the Trust were not leveraged.
Under
the Investment Company Act, the Trust is not permitted to issue preferred
shares
unless immediately after such issuance the value of the Trust’s total assets,
less all liabilities and indebtedness of the Trust, is at least 200% of the
liquidation value of the outstanding preferred shares (i.e., the
liquidation value may not exceed 50% of the Trust’s total assets less all
liabilities and indebtedness of the Trust). In addition, the Trust is
not permitted to declare any cash dividend or other distribution on its common
shares unless, at the time of such declaration, the value of the Trust’s total
assets is at least 200% of the liquidation value of its outstanding preferred
shares plus its outstanding liabilities and indebtedness. If
preferred shares are issued, the Trust intends, to the extent possible, to
purchase or redeem preferred shares from time to time to the extent necessary
in
order to maintain coverage of any preferred shares of at least
200%. In addition, as a condition to obtaining ratings on the
preferred shares, the terms of any preferred shares issued are expected to
include asset coverage maintenance provisions which will require a reduction
of
indebtedness or the redemption of the preferred shares in the event of
non-compliance by the Trust and may also prohibit dividends and other
distributions on the common shares in such circumstances. In order to
meet redemption requirements, the Trust may have to liquidate portfolio
securities. Such liquidations and redemptions, or reductions in
indebtedness, would cause the Trust to incur related transaction costs and
could
result in capital losses to the Trust. Prohibitions on dividends and
other distributions on the common shares could impair the Trust’s ability to
qualify as a regulated investment company under the Internal Revenue Code
of
1986 (the “Code”). If the Trust has preferred shares outstanding, two
of the Trust’s trustees will be elected by the holders of preferred shares
voting separately as a class. The remaining trustees of the Trust
will be elected by holders of common shares and preferred shares voting together
as a single class. In the event the Trust failed to pay dividends on
preferred shares for two years, holders of preferred shares would be entitled
to
elect a majority of the trustees of the Trust.
The
Trust will be subject to certain restrictions imposed by guidelines of one
or
more rating agencies that may issue ratings for preferred shares issued by
the
Trust. These guidelines are expected to impose asset coverage or
portfolio composition requirements that are more stringent than those imposed
on
the Trust by the Investment Company Act and may limit the ability of the
Trust
to borrow money through the use of reverse repurchase agreements and dollar
rolls and may limit the ability of the Trust to engage in Strategic
Transactions. It is not anticipated
that these covenants or guidelines will impede the Advisors from managing
the
Trust’s portfolio in accordance with the Trust’s investment objectives and
policies.
The
Trust may also borrow money in an amount equal to 5% of its total assets
as a
temporary measure for extraordinary or emergency purposes, including the
payment
of dividends and the settlement of securities transactions which otherwise
might
require untimely dispositions of Trust securities.
Assuming
that the leverage will represent approximately 38% of the Trust’s Managed
Assets, the interest and dividends paid on the leverage is a blended annual
average rate of % and the income generated by the
Trust’s portfolio (net of estimated expenses) must
exceed % in order to cover the interest and
dividend payments related to the leverage. Of course, these numbers
are merely estimates used for illustration. Actual interest rates on
leverage will vary frequently and may be significantly higher or lower than
the
rate estimated above.
The
following table is furnished in response to requirements of the Securities
and
Exchange Commission. It is designed to illustrate the effect of
leverage on common share total return, assuming investment portfolio total
returns (comprised of income and changes in the value of bonds held in the
Trust’s portfolio) of -10%, -5%, 0%, 5% and
10%. These assumed investment portfolio returns are hypothetical
figures and are not necessarily indicative of the investment portfolio returns
experienced or expected to be experienced by the Trust. See
“Risks.” The table further reflects leverage using debt and preferred
shares representing, in the aggregate, 38% of the Trust’s Managed Assets, net of
expenses, and the Trust’s currently projected blended average annual leverage
dividend and interest rate of %.
|
Assumed
Portfolio Total Return (Net of Expenses)
|
(10
)%
|
(5
)%
|
0
%
|
5
%
|
10
%
|
|
Common
Share Total Return
|
%
|
%
|
%
|
%
|
%
|
Common
share total return is composed of two elements — the common share dividends paid
by the Trust (the amount of which is largely determined by the net investment
income of the Trust after paying dividends and interest on its leverage)
and
gains or losses on the value of the securities the Trust owns. As
required by Securities and Exchange Commission rules, the tables above assume
that the Trust is more likely to suffer capital losses than to enjoy capital
appreciation. For example, to assume a total return of 0% the Trust
must assume that the interest it receives on its debt security investments
is
entirely offset by losses in the value of those bonds.
RISKS
The
net asset value of, and dividends paid on, the common shares will fluctuate
with
and be affected by, among other things, the risks described below.
No
Operating History
The
Trust is a newly organized, diversified, closed-end management investment
company with no operating history.
Market
Discount Risk
Common
shares of closed-end management investment companies frequently trade at
a
discount from their net asset values. The Trust’s common shares may trade at a
price that is less than the initial offering price. This risk may be greater
for
investors who sell their common shares in a relatively short period of time
after completion of the initial offering.
Investment
and Market Risk.
An
investment in the Trust’s common shares is subject to investment risk, including
the possible loss of the entire principal amount invested. An
investment in the Trust’s common shares represents an indirect investment in the
portfolio securities owned by the Trust, and the value of these securities
will
move up or down, sometimes rapidly and unpredictably. At any point in
time an investment in the Trust’s common shares may be worth less than the
original amount invested, even after taking into account reinvestment of
dividends and distributions paid by the Trust. The
Trust anticipates using leverage, which will magnify the Trust’s investment,
market and certain other risks.
Credit
Risk
Credit
risk is the risk that one or more debt securities in the Trust’s portfolio will
decline in price, or fail to pay interest or principal when due, because
the
issuer of the security experiences a decline in its financial
status. While a senior position in the capital structure of a
borrower may provide some protection with respect to the Trust’s investments in
Senior Loans, losses may still occur. To the extent the Trust invests
in below investment grade debt securities, it will be exposed to a greater
amount of credit risk than a fund which invests in investment grade debt
securities. The prices of lower grade securities are more sensitive
to negative developments, such as a decline in the issuer’s revenues or a
general economic downturn, than are the prices of higher grade securities.
Securities of below investment grade quality are predominantly speculative
with
respect to the issuer’s capacity to pay interest and repay principal when due
and therefore involve a greater risk of default. In addition, the
Trust’s use of credit derivatives will expose it to additional risk in the event
that the bonds underlying the derivatives default.
Senior
Loans Risk
Senior
Loans hold the most senior position in the capital structure of a business
entity, are typically secured with specific collateral and have a claim on
the
assets and/or stock of the borrower that is senior to that held by subordinated
debt holders and stockholders of the borrower. The risks associated
with Senior Loans are similar to the risks of below investment grade securities,
although Senior Loans are typically senior and secured in contrast to below
investment grade securities, which are often subordinated and
unsecured. See “Risks—Below Investment Grade Securities Risk.” Senior
Loans’ higher standing has historically resulted in generally higher recoveries
in the event of a corporate reorganization. In addition, because
their interest rates are typically adjusted for changes in short-term interest
rates, Senior Loans generally have less interest rate risk than below investment
grade securities, which are typically fixed rate.
The
Trust will typically invest in Senior Loans rated below investment grade,
which
are considered speculative because of the credit risk of their
issuers. Such companies are more likely to default on their payments
of interest and principal owed to the Trust, and such defaults could reduce
the
Trust’s net asset value and income distributions. An economic
downturn generally leads to a higher non-payment rate, and a Senior Loan
may
lose significant value before a default occurs. Moreover, any
specific collateral used to secure a Senior Loan may decline in value or
become
illiquid, which would adversely affect the Senior Loan’s value.
No
active trading market may exist for certain Senior Loans, which may impair
the
ability of the Trust to realize full value in the event of the need to liquidate
such assets and which may make it difficult to value the assets. Adverse
market
conditions may impair the liquidity of some actively traded Senior
Loans.
Although
Senior Loans in which the Trust will invest generally will be secured by
specific collateral, there can be no assurance that liquidation of such
collateral would satisfy the borrower’s obligation in the event of non-payment
of scheduled interest or principal, or that such collateral could be readily
liquidated. In the event of the bankruptcy of a borrower, the Trust
could experience delays or limitations with respect to its ability to realize
the benefits of the collateral securing a Senior Loan. If the terms
of a Senior Loan do not require the borrower to pledge additional collateral
in
the event of a decline in the value of the already pledged collateral, the
Trust
will be exposed to the risk that the value of the collateral will not at
all
times equal or exceed the amount of the borrower’s obligations under the Senior
Loans. To the extent that a Senior Loan is collateralized by stock in
the borrower or its subsidiaries, such stock may lose all of its value in
the
event of the bankruptcy of the borrower. Uncollateralized Senior Loans involve
a
greater risk of loss.
Second
Lien Loans Risk
Second
Lien Loans generally are subject to similar risks as those associated with
investments in Senior Loans. Because Second Lien Loans are
subordinated or unsecured and thus lower in priority of payment to Senior
Loans,
they are subject to the additional risk that the cash flow of the borrower
and
property securing the loan or debt, if any, may be insufficient to meet
scheduled payments after giving effect to the senior secured obligations
of
the
borrower. This risk is generally higher for subordinated unsecured
loans or debt, which are not backed by a security interest in any specific
collateral. Second Lien Loans are expected to have greater price
volatility than Senior Loans and may be less liquid. There is also a
possibility that originators will not be able to sell participations in Second
Lien Loans, which would create greater credit risk exposure for the holders
of
such loans. Second Lien Loans share the same risks of other below
investment grade securities.
Below
Investment Grade Securities Risk
The
Trust may invest a substantial portion of its assets in debt securities that
are
rated below investment grade, which are commonly referred to as “junk bonds” and
are regarded as predominately speculative with respect to the issuer’s capacity
to pay interest and repay principal.
Lower
grade securities, though high yielding, are characterized by high
risk. They may be subject to certain risks with respect to the
issuing entity and to greater market fluctuations than certain lower yielding,
higher rated securities. The retail secondary market for lower grade
securities may be less liquid than that of higher rated
securities. Adverse conditions could make it difficult at times for
the Trust to sell certain securities or could result in lower prices than
those
used in calculating the Trust’s net asset value. Because of the
substantial risks associated with lower grade securities, you could lose
money
on your investment in common shares of the Trust, both in the short-term
and the
long-term.
Prepayment
Risk
During
periods of declining interest rates, borrowers may exercise their option
to
prepay principal earlier than scheduled. For fixed rate securities, such
payments often occur during periods of declining interest rates, forcing
the
Trust to reinvest in lower yielding securities, resulting in a possible decline
in the Trust’s income and distributions to shareholders. This is
known as prepayment or “call” risk. Below investment grade securities
frequently have call features that allow the issuer to redeem the security
at
dates prior to its stated maturity at a specified price (typically greater
than
par) only if certain prescribed conditions are met (“call
protection”). An issuer may redeem a below investment grade security
if, for example, the issuer can refinance the debt at a lower cost due to
declining interest rates or an improvement in the credit standing of the
issuer. Senior Loans typically do not have call
protection. For premium bonds (bonds acquired at prices that exceed
their par or principal value) purchased by the Trust, prepayment risk may
be
enhanced.
Interest
Rate Risk
The
value of certain debt securities in the Trust’s portfolio could be affected by
interest rate fluctuations. When interest rates decline, the value of
fixed rate securities can be expected to rise. Conversely, when
interest rates rise, the value of fixed rate securities can be expected to
decline. Although changes in prevailing interest rates can be
expected to cause some fluctuations in the value of floating rate securities
(due to the fact that rates only reset periodically), the values of these
securities are substantially less sensitive to changes in market interest
rates
than fixed rate instruments. Fluctuations in the value of the Trust’s
securities will not affect interest income on existing securities, but will
be
reflected in the Trust’s net asset value. The Trust may utilize
certain strategies, including taking positions in futures or interest rate
swaps, for the purpose of reducing the interest rate sensitivity of the
portfolio and decreasing the Trust’s exposure to interest rate risk, although
there is no assurance that it will do so or that such strategies will be
successful.
Liquidity
Risk
The
Trust may invest in Senior Loans and other debt securities for which there
is no
readily available trading market or which are otherwise illiquid. The
Trust may not be able to readily dispose of such securities at prices that
approximate those at which the Trust could sell such securities if they were
more widely-traded and, as a result of such illiquidity, the Trust may have
to
sell other investments or engage in borrowing transactions if necessary to
raise
cash to meet its obligations. Limited liquidity can also affect the
market price of securities, thereby adversely affecting the Trust’s net asset
value and ability to make dividend distributions.
Some
Senior Loans are not readily marketable and may be subject to restrictions
on
resale. Senior Loans generally are not listed on any national
securities exchange or automated quotation system and no active trading market
may exist for some of the Senior Loans in which the Trust will
invest. Where a secondary market exists, the market for some Senior
Loans may be subject to irregular trading activity, wide bid/ask spreads
and
extended trade settlement periods. The Trust has no limitation on the
amount of its assets which may be invested in securities that are not readily
marketable or are subject to restrictions on resale.
Distressed
and Defaulted Securities Risk
Investments
in the securities of financially distressed companies involve substantial
risks.
These securities may present a substantial risk of default or may be in default.
The Trust may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment of principal of or interest on its
portfolio holdings. In any reorganization or liquidation proceeding relating
to
a portfolio company, the Trust may lose its entire investment or may be required
to accept cash or securities with a value less than the original investment.
Among the risks inherent in investments in a troubled entity is the fact
that it
frequently may be difficult to obtain information as to the true condition
of
such issuer. The Advisors’ judgments about the credit quality of the
issuer and the relative value of its securities may prove to be
wrong.
Structured
Products Risk
The
Trust may invest in structured products, including CDOs, CBOs, CLOs, structured
notes, credit-linked notes and other types of structured
products. Holders of structured products bear risks of the underlying
investments, index or reference obligation and are subject to counterparty
risk.
The Trust may have the right to receive payments only from the structured
product, and generally does not have direct rights against the issuer or
the
entity that sold the assets to be securitized. While certain
structured products enable the investor to acquire interests in a pool of
securities without the brokerage and other expenses associated with directly
holding the same securities, investors in structured products generally pay
their share of the structured product’s administrative and other
expenses. Although it is difficult to predict whether the prices of
indices and securities underlying structured products will rise or fall,
these
prices (and, therefore, the prices of structured products) will be influenced
by
the same types of political and economic events that affect issuers of
securities and capital markets generally. If the issuer of a
structured product uses shorter term financing to purchase longer term
securities, the issuer may be forced to sell its securities at below market
prices if it experiences difficulty in obtaining short term financing, which
may
adversely affect the value of the structured products owned by the
Trust
Certain
structured products may be thinly traded or have a limited trading
market. CBOs, CLOs and other CDOs are typically privately offered and
sold, and thus are not registered under the securities laws. As a
result, investments in CBOs, CLOs and CDOs may be characterized by the Trust
as
illiquid securities; however, an active dealer market may exist which would
allow such securities to be considered liquid in some
circumstances. In addition to the general risks associated with debt
securities discussed herein, CBOs, CLOs and CDOs carry additional risks,
including, but not limited to: (i) the possibility that distributions from
collateral securities will not be adequate to make interest or other payments;
(ii) the quality of the collateral may decline in value or default; (iii)
the
possibility that the CBOs, CLOs and CDOs are subordinate to other classes;
and
(iv) the complex structure of the security may not be fully understood at
the
time of investment and may produce disputes with the issuer or unexpected
investment results.
Investments
in structured notes involve risks, including credit risk and market risk.
Where
the Trust’s investments in structured notes are based upon the movement of one
or more factors, including currency exchange rates, interest rates, referenced
bonds and stock indices, depending on the factor used and the use of multipliers
or deflators, changes in interest rates and movement of the factor may cause
significant price fluctuations. Additionally, changes in the reference
instrument or security may cause the interest rate on the structured note
to be
reduced to zero, and any further changes in the reference instrument may
then
reduce the principal amount payable on maturity. Structured notes may be
less
liquid than other types of securities and more volatile than the reference
instrument or security underlying the note.
Mortgage-Backed
Securities Risk
The
risks associated with mortgage-backed securities include: (1) credit risk
associated with the performance of the underlying mortgage properties and
of the
borrowers owning these properties; (2) adverse changes in economic conditions
and circumstances, which are more likely to have an adverse impact on
mortgage-backed securities secured by loans on certain types of commercial
properties than on those secured by loans on residential properties; (3)
prepayment risk, which can lead to significant fluctuations in value of the
mortgage-backed security; (4) loss of all or part of the premium, if any,
paid;
and (5) decline in the market value of the security, whether resulting from
changes in interest rates or prepayments on the underlying mortgage
collateral.
Mortgage-backed
securities represent an interest in a pool of mortgages. When market
interest rates decline, more mortgages are refinanced and the securities
are
paid off earlier than expected. Prepayments may also occur on a
scheduled basis or due to foreclosure. When market interest rates
increase, the market values of mortgage-backed securities decline. At
the same time, however, mortgage refinancings and prepayments slow, which
lengthens the effective maturities of these securities. As a result,
the negative effect of the rate increase on the market value of mortgage-backed
securities is usually more pronounced than it is for other types of debt
securities. In addition, due to increased instability in the credit
markets, the market for some mortgage backed securities has experience reduced
liquidity and greater volatility with respect to the value of such securities,
making it more difficult to value such securities.
Asset-Backed
Securities Risk
Asset-backed
securities involve certain risks in addition to those presented by
mortgage-backed securities. Asset-backed securities do not have the
benefit of the same security interest in the underlying collateral as
mortgage-backed securities and are more dependent on the borrower’s ability to
pay. For example, asset-backed securities can be collateralized with
credit card and automobile receivables. Credit card receivables are
generally unsecured, and the debtors are entitled to the protection of a
number
of state and federal consumer credit laws, many of which give debtors the
right
to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the
servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk
that
the purchaser would acquire an interest superior to that of the holders of
the
related automobile receivables. In addition, because of the large
number of vehicles involved in a typical issuance and technical requirements
under state laws, the trustee for the holders of the automobile receivables
may
not have an effective security interest in all of the obligations backing
such
receivables.
Non-U.S.
Securities Risk
The
Trust may invest in Non-U.S. Securities. Such investments involve
certain risks not involved in domestic investments. Securities
markets in foreign countries often are not as developed, efficient or liquid
as
securities markets in the United States, and therefore the prices of Non-U.S.
Securities can be more volatile. Certain foreign countries may impose
restrictions on the ability of issuers of Non-U.S. Securities to make payments
of principal and interest to investors located outside the
country. In addition, the Trust will be subject to risks associated
with adverse political and economic developments in foreign countries, which
could cause the Trust to lose money on its investments in Non-U.S.
Securities. The ability of a foreign sovereign issuer, especially an
emerging market country, to make timely and ultimate payments on its debt
obligations will also be strongly influenced by the sovereign issuer’s balance
of payments, including export performance, its access to international credits
and investments, fluctuations of interest rates and the extent of its foreign
reserves. The cost of servicing external debt will also generally be
adversely affected by rising international interest rates, as many external
debt
obligations bear interest at rates which are adjusted based upon international
interest rates.
Emerging
Markets Risk
The
Trust may invest in Non-U.S. Securities of issuers in so-called “emerging
markets” (or lesser developed countries). Such investments are particularly
speculative and entail all of the risks of investing in Non-U.S. Securities
but
to a heightened degree. Foreign investment in certain emerging market countries
may be restricted or controlled to varying degrees. These
restrictions or controls may at times limit or preclude foreign investment
in
certain emerging market issuers and increase the costs and expenses of the
Trust. Certain
emerging
market countries require governmental approval prior to investments by foreign
persons in a particular issuer, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign persons only
to
a specific class of securities of an issuer that may have less advantageous
rights than the classes available for purchase by domiciliaries of the countries
and/or impose additional taxes on foreign investors.
Foreign
Currency Risk
Because
the Trust may invest in securities denominated or quoted in currencies other
than the U.S. dollar, changes in foreign currency exchange rates may affect
the
value of securities in the Trust and the unrealized appreciation or depreciation
of investments. Currencies of certain countries may be volatile and therefore
may affect the value of securities denominated in such currencies, which
means
that the Trust’s net asset value could decline as a result of changes in the
exchange rates between foreign currencies and the U.S. dollar. In
addition, certain countries, particularly emerging markets countries, may
impose
foreign currency exchange controls or other restrictions on the transferability
or convertibility of currency.
Swap
Risk
The
Trust may enter into swap transactions, including credit default, total return,
index and interest rate swap agreements, as well as options thereon, and
may
purchase or sell interest rate caps, floors and collars. Such
transactions are subject to market risk, risk of default by the other party
to
the transaction and risk of imperfect correlation between the value of such
instruments and the underlying assets and may involve commissions or other
costs. Swaps generally do not involve delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect
to
swaps generally is limited to the net amount of payments that the Trust is
contractually obligated to make, or in the case of the other party to a swap
defaulting, the net amount of payments that the Trust is contractually entitled
to receive. The swap market has grown substantially in recent years
with a large number of banks and investment banking firms acting both
as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively
liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps. If the Advisors are
incorrect in their forecasts of market values, interest rates or currency
exchange rates, the investment performance of the Trust would be less favorable
than it would have been if these investment techniques were not
used.
Leverage
Risk
The
use of leverage through reverse repurchase agreements, dollar roll transactions,
borrowing of money and the issuance of preferred shares to purchase additional
securities creates an opportunity for increased common share net investment
income dividends, but also creates risks for the holders of common
shares. Leverage is a speculative technique that may expose the Trust
to greater risk and increased costs. Increases and decreases in the
value of the Trust’s portfolio will be magnified when the Trust uses
leverage. As a result, leverage may cause greater changes in the
Trust’s net asset value. The Trust will also have to pay interest and
dividends on its borrowings, which may reduce the Trust’s
return. This interest expense may be greater than the Trust’s return
on the underlying investment. The Trust’s leveraging strategy may not be
successful.
Reverse
repurchase agreements involve the risks that the interest income earned on
the
investment of the proceeds will be less than the interest expense and fund
expenses, that the market value of the securities sold by the Trust may decline
below the price of the securities the Trust is obligated to repurchase and
that
the securities may not be returned to the Trust. There is no
assurance that reverse repurchase agreements can be successfully
employed.
Dollar
roll transactions involve the risk that the market value of the securities
the
Trust is required to purchase may decline below the agreed upon repurchase
price
of those securities. If the broker/dealer to whom the Trust sells
securities becomes insolvent, the Trust’s right to purchase or repurchase
securities may be restricted. Successful use of dollar rolls may
depend upon the Advisors’ ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be
successfully employed.
We
anticipate that the money borrowed for investment purposes will pay interest
or
dividends based on shorter-term interest rates that would be periodically
reset. The Trust intends to invest the proceeds of the money borrowed
for investment purposes in intermediate and long-term, typically fixed rate,
bonds. So long as the Trust’s portfolio provides a higher rate of
return, net of expenses, than interest and dividend rates on borrowed money,
as
reset periodically, the leverage may cause the holders of common shares to
receive a higher current rate of return than if the Trust were not
leveraged. If, however, long- and/or short-term rates
rise, the interest and dividend rates on borrowed money could exceed the
rate of
return on bonds held by the Trust, reducing return to the holders of common
shares. Recent developments in the credit markets may adversely
affect the ability of the Trust to borrow for investment purposes and may
increase the costs of such borrowings, which would reduce returns to the
holders
of common shares.
There
is no assurance that a leveraging strategy will be successful. Leverage involves
risks and special considerations for common shareholders,
including:
|
|
(1)
|
the
likelihood of greater volatility of net asset value, market price
and
dividend rate of the common shares than a comparable portfolio
without
leverage;
|
|
|
(2)
|
the
risk that fluctuations in interest rates on borrowings and short-term
debt
or in the interest or dividend rates on any leverage that the Trust
must
pay will reduce the return to the common
shareholders;
|
|
|
(3)
|
the
effect of leverage in a declining market, which is likely to cause
a
greater decline in the net asset value of the common shares than
if the
Trust were not leveraged, may result in a greater decline in the
market
price of the common shares;
|
|
|
(4)
|
when
the Trust uses financial leverage, the investment advisory fees
payable to
the Advisors will be higher than if the Trust did not use leverage;
and
|
|
|
(5)
|
leverage
may increase operating costs, which may reduce total
return.
|
Certain
types of borrowings by the Trust may result in the Trust being subject to
covenants in credit agreements relating to asset coverage and Trust composition
requirements. The Trust may be subject to certain restrictions on
investments imposed by guidelines of one or more rating agencies, which may
issue ratings for the short-term corporate debt securities or preferred shares
issued by the Trust. These guidelines may impose asset coverage or
portfolio composition requirements that are more stringent than those imposed
by
the Investment Company Act of 1940, as amended. The Advisors do not
believe that these covenants or guidelines will impede them from managing
the
Trust’s portfolio in accordance with the Trust’s investment objectives and
policies.
Senior
Loan Based Derivatives Risk
The
Trust may obtain exposure to Senior Loans through the use of derivative
instruments. The Trust currently intends to invest in SAMIs), which consists
of
a basket of credit default swaps whose underlying reference securities are
a
basket of Senior Loans. Investment in SAMIs involves many of the
risks associated with investments in derivatives more
generally. Derivative transactions involve the risk of loss due to
unanticipated adverse changes in securities prices, interest rates, the
inability to close out a position, imperfect correlation between a position
and
the desired hedge, tax constraints on closing out positions and portfolio
management constraints on securities subject to such
transactions. The potential loss on derivative instruments may be
substantial relative to the initial investment therein. The Trust may
also be subject to the risk that the counterparty in a derivative transaction
will default on its obligations.
Credit
Derivatives Risk
The
use of credit derivatives is a highly specialized activity which involves
strategies and risks different from those associated with ordinary portfolio
security transactions. If the Advisors are incorrect in their
forecasts of default risks, market spreads or other applicable factors, the
investment performance of the Trust would diminish compared with what it
would
have been if these techniques were not used. Moreover, even if the
Advisors are
correct
in there forecasts, there is a risk that a credit derivative position may
correlate imperfectly with the price of the asset or liability being
protected. The Trust’s risk of loss in a credit derivative
transaction varies with the form of the transaction. For example, if
the Trust purchases a default option on a security, and if no default occurs
with respect to the security, the Trust’s loss is limited to the premium it paid
for the default option. In contrast, if there is a default by the
grantor of a default option, the Trust’s loss will include both the premium that
it paid for the option and the decline in value of the underlying security
that
the default option protected.
Strategic
Transactions Risk
The
Trust may engage in various other portfolio strategies, including interest
rate
and foreign currency transactions, options, futures and other derivatives
transactions (“Strategic Transactions”), for hedging and risk management
purposes and to enhance total return. The use of Strategic
Transactions to enhance total return may be particularly
speculative. Strategic Transactions involve risks, including the
imperfect correlation between the value of such instruments and the underlying
assets, the possible default of the other party to the transaction and
illiquidity of the derivative instruments. Furthermore, the Trust’s
ability to successfully use Strategic Transactions depends on the Advisors’
ability to predict pertinent market movements, which cannot be
assured. The use of Strategic Transactions may result in losses
greater than if they had not been used, may require the Trust to sell or
purchase portfolio securities at inopportune times or for prices other than
current market values, may limit the amount of appreciation the Trust can
realize on an investment or may cause the Trust to hold a security that it
might
otherwise sell. Additionally, amounts paid by the Trust as premiums and cash
or
other assets held in margin accounts with respect to Strategic Transactions
are
not otherwise available to the Trust for investment purposes.
Equity
Securities Risk
The
Trust may invest up to 20% of its Managed Assets in equity securities, including
common stocks, convertible securities, warrants and depositary
receipts. Although common stocks have historically generated higher
average total returns than debt securities over the long-term, common stocks
also have experienced significantly more volatility in those returns and
in
certain periods have significantly under-performed relative to debt
securities. An adverse event, such as an unfavorable earnings report,
may depress the value of a particular common stock held by the
Trust. Also, the price of common stocks is sensitive to general
movements in the stock market and a drop in the stock market may depress
the
price of common stocks to which the Trust has exposure. Common stock
prices fluctuate for several reasons, including changes in investors’
perceptions of the financial condition of an issuer or the general condition
of
the relevant stock market, or when political or economic events affecting
the
issuers occur. In addition, common stock prices may be particularly sensitive
to
rising interest rates, as the cost of capital rises and borrowing costs
increase.
Market
Disruption and Geopolitical Risk
The
aftermath of the war in Iraq and the continuing occupation of Iraq, instability
in the Middle East and terrorist attacks in the United States and around
the
world may result in market volatility and may have long-term effects on the
U.S.
and worldwide financial markets and may cause further economic uncertainties
in
the United States and worldwide. The Trust does not know how long the securities
markets may be affected by these events and cannot predict the effects of
the
occupation or similar events in the future on the U.S. economy and securities
markets.
Recent
Developments
Recent
instability in the credit markets has made it more difficult for a number
of
issuers of debt securities to obtain financing or refinancing for their
investment or lending activities or operations. There is a risk that
such issuers will be unable to successfully complete such financing or
refinancings. In particular, because of the current conditions in the
credit market, issuers of debt securities may be subject to increased cost
for
debt, tightening underwriting standards and reduced liquidity for loans they
make, securities they purchase and securities they issue. There is
also a risk that developments in sectors of the credit markets in which the
Trust does not invest may adversely affect the liquidity and the value of
securities in sectors of the credit markets in which the Trust does invest,
including securities owned by the Trust. These developments may
increase the volatility of the value of securities owned by the
Trust. These developments also may make it more difficult for the
Trust to accurately value
its
securities or to sell its securities on a timely basis. These
developments could adversely affect the ability of the Trust to borrow for
investment purposes and increase the cost of such borrowings, which would
reduce
returns to the holders of common shares.
HOW
THE TRUST MANAGES RISK
Investment
Limitations
The
Trust has adopted certain investment limitations designed to limit investment
risk. These limitations are fundamental and may not be changed without the
approval of the holders of a majority of the outstanding common shares and,
if
issued, preferred shares voting together as a single class, and the approval
of
the holders of a majority of the preferred shares voting as a separate class.
Among other restrictions, the Trust may not invest 25% or more of the value
of
its total assets in any one industry, provided that securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities will
not
be considered to represent an industry.
The
Trust may become subject to guidelines which are more limiting than its
investment restrictions in order to obtain and maintain ratings from rating
agencies on the preferred shares that it intends to issue. The Trust does
not
anticipate that such guidelines would have a material adverse effect on the
Trust’s common shareholders or the Trust’s ability to achieve its investment
objectives. See “Investment Restrictions” in the Statement of Additional
Information for a complete list of the fundamental and non-fundamental
investment policies of the Trust.
Management
of Investment Portfolio and Capital Structure to Limit Leverage
Risk
The
Trust may take certain actions if
short-term interest rates increase or market conditions otherwise change
(or the
Trust anticipates such an increase or change) and the Trust’s leverage begins
(or is expected) to adversely affect common shareholders. In order to attempt
to
offset such a negative impact of leverage on common shareholders, the Trust
may
shorten the average maturity of its investment portfolio (by investing in
short-term securities) or may reduce its indebtedness or extend the maturity
of
outstanding preferred shares or unwind other leverage transactions. The Trust
may also attempt to reduce the leverage by redeeming or otherwise purchasing
preferred shares. As explained above under “Risks—Leverage Risk,” the success of
any such attempt to limit leverage risk depends on the Advisors’ ability to
accurately predict interest rate or other market changes. Because of the
difficulty of making such predictions, the Trust may never attempt to manage
its
capital structure in the manner described in this paragraph. If market
conditions suggest that additional leverage would be beneficial, the Trust
may
sell previously unissued preferred shares or preferred shares that the Trust
previously issued but later repurchased.
Strategic
Transactions
The
Trust may use certain Strategic Transactions designed to limit the risk of
bond
price fluctuations and to preserve capital. These strategies include using
swaps, financial futures contracts, options on financial futures or options
based on either an index of long-term securities or on taxable debt securities
whose prices, in the opinion of Advisors, correlate with the prices of the
Trust’s investments.
MANAGEMENT
OF THE TRUST
Trustees
and Officers
The
board of trustees is responsible for oversight of the Trust, including
supervision of the duties performed by the Advisors. There
are trustees of the Trust. A majority of the
trustees are not “interested persons” (as defined in the Investment Company Act)
of the Trust (in such capacity the “independent trustees”). The name and
business address of the trustees and officers of the Trust and their principal
occupations and other affiliations during the past five years are set forth
under “Management of the Trust” in the Statement of Additional
Information.
Investment
Advisor and Sub-Advisor
BlackRock
Advisors acts as the Trust’s investment advisor. BlackRock Financial Management
acts as the sub-advisor for the Trust. BlackRock Advisors, located at
100 Bellevue Parkway, Wilmington, Delaware 19809, and BlackRock Financial
Management, located at 40 East 52nd Street, New York, New York 10022, are
wholly
owned subsidiaries of BlackRock, Inc. (“BlackRock”), which is one of the world’s
largest publicly-traded investment management firms. As
of June 30, 2007, BlackRock’s assets under management were
approximately $1.230 trillion. BlackRock manages assets on behalf of
institutional and individual investors worldwide through a variety of equity,
fixed income, cash management and alternative investment products. In
addition, a growing number of institutional investors use BlackRock Solutions®
investment system, risk management and financial advisory services.
The
BlackRock organization has over 18 years of experience managing closed-end
products and, as of June 30, 2007, advised a closed-end family of 105 active
funds with approximately $45.7 billion in assets. BlackRock Advisors
and its affiliated entities had $490 billion in fixed income assets under
management as of June 30, 2007, including $12 billion of assets across 23
fixed
income closed-end funds. Headquartered in New York City, BlackRock has over
4,700 employees in 18 countries and a major presence in key global markets,
including the United States, Europe, Asia, Australia and the Middle
East.
Portfolio
Managers. BlackRock uses a team approach in managing its
portfolios. BlackRock believes that this approach offers substantial
benefits over one that is dependent on the market wisdom or investment expertise
of only a few individuals. The Trust’s portfolio management team
includes the following three portfolio managers who are primarily responsible
for the day-to-day management of the Trust’s portfolio:
To
be filed by amendment.
Investment
Philosophy
BlackRock
specializes in managing fixed income portfolios against both published and
customized benchmarks and has been doing this since the inception of its
fixed
income products in 1988. BlackRock’s style is designed with the
objective of generating excess returns with lower risk than its benchmarks
and
competitors. BlackRock applies the same controlled-duration, active
relative value sector rotation style to the management of all its fixed income
portfolios. BlackRock manages fixed income portfolios by using a
strategy that invests in sectors of the fixed income market that BlackRock
believes are undervalued by moving out of sectors that BlackRock believes
are
fairly or overvalued. BlackRock researches and is active in analyzing
the sectors which it believes are under, fairly and overvalued in order to
achieve a portfolio’s investment objective. BlackRock has in-depth
expertise in all sectors of the fixed income market.
The
BlackRock organization’s philosophy has not changed since the inception of the
firm. The technology that enables BlackRock to implement its
investment strategies, however, is constantly evolving. BlackRock’s
commitment to maintaining and developing its state-of-the-art analytics in
the
most efficient manner is manifest in (1) the development of proprietary tools,
(2) the use of external tools to assist in its analysis and (3) the integration
of all of these tools into a unique portfolio level risk management
system. By continually updating its analytics and systems, BlackRock
attempts to better quantify and evaluate the risk of each investment
decision. These advanced analytics are designed to provide real time
analysis of a vast array of risk measures in order to assess the potential
effect of various strategies on total return.
In
selecting securities for the Trust’s portfolio, the Advisors will seek to
identify issuers and industries that they believe are likely to experience
stable or improving financial conditions. The Advisors believe this
strategy should enhance the Trust’s ability to seek total return. The
Advisors’ analysis will include:
· credit
research on the issuers’ financial strength;
· assessment
of the issuers’ ability to meet principal and interest payments;
· general
industry trends;
· the
issuers’ managerial strength;
· changing
financial conditions;
· borrowing
requirements or debt maturity schedules; and
· the
issuers’ responsiveness to change in business conditions and interest
rates.
The
Advisors will consider relative values among issuers based on anticipated
cash
flow, interest or dividend coverage, asset coverage and earnings
prospects. Using these tools, the Advisors will seek to add
consistent value and control performance volatility consistent with the Trust’s
investment objectives and policies.
Investment
Management Agreement
The
Trust has agreed to pay BlackRock Advisors a management fee at an annual
rate
equal to % of the average daily value of the
Trust’s Managed Assets. Managed Assets are the total assets of the
Trust (including any assets attributable to money borrowed for investment
purposes) minus the sum of the Trust’s accrued liabilities (other than money
borrowed for investment purposes). This means that during periods in
which the Trust is using leverage, the fee paid to BlackRock Advisors will
be
higher than if the Trust did not use leverage because the fee is calculated
as a
percentage of the Trust’s Managed Assets, which include those assets purchased
with leverage.
BlackRock
Advisors will pay a sub-advisory fee to the Sub-Advisor equal
to % of the management fee received by
BlackRock Advisors. In addition, with the approval of the board of
trustees, including a majority of the independent trustees, a pro rata portion
of the salaries, bonuses, health insurance, retirement benefits and similar
employment costs for the time spent on Trust operations (other than the
provision of services required under the investment management agreement)
of all
personnel employed by BlackRock Advisors who devote substantial time to Trust
operations may be reimbursed, at cost, to BlackRock Advisors by the Trust.
BlackRock Advisors currently anticipates that it may be reimbursed for employees
who provide pricing, secondary market support and compliance services to
the
Trust, subject to the approval of the board of trustees, including a majority
of
the independent trustees. A discussion regarding the basis for the approval
of
the investment management agreements by the board of trustees will be available
in the Trust’s report to shareholders for the period
ending ,
2008.
In
addition to the management fee of BlackRock Advisors, the Trust pays all
other
costs and expenses of its operations, including compensation of its trustees
(other than those affiliated with BlackRock Advisors), custodian, leveraging
expenses, transfer and dividend disbursing agent expenses, legal fees, rating
agency fees, listing fees and expenses, expenses of independent auditors,
expenses of repurchasing shares, expenses of preparing, printing and
distributing shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any.
NET
ASSET VALUE
The
net asset value of the common shares of the Trust will be computed based
upon
the value of the Trust’s portfolio securities and other assets. Net asset value
per common share will be determined daily on each day that the New York Stock
Exchange is open for business as of the close of the regular trading session
on
the New York Stock Exchange. The Trust calculates net asset value per common
share by subtracting liabilities (including accrued expenses or dividends)
from
the total assets of the Trust (the value of the securities plus cash or other
assets, including interest accrued but not yet received) and dividing the
result
by the total number of outstanding common shares of the Trust.
The
Trust values its investments primarily by using market quotations. Short-term
debt investments having a remaining maturity of 60 days or less when purchased
and debt investments originally purchased with maturities in excess of 60
days
but which currently have maturities of 60 days or less may be valued at cost
adjusted for amortization of premiums and accretion of discounts. Any
investments and other assets for which such current market quotations are
not
readily available are valued at fair value (“Fair Valued Assets”) as determined
in good faith under procedures established by, and under the general supervision
and responsibility of, the Trust’s board of trustees. The Advisors will submit
their recommendations regarding the valuation and/or valuation methodologies
for
Fair Valued Assets to a valuation committee comprised of officers and employees
of the Advisors. The valuation committee may accept, modify or reject any
recommendations. The pricing of all Fair Valued Assets shall be subsequently
reported to the Trust’s board of trustees.
Non-U.S.
Securities are valued by translating available quotes into U.S. dollar
equivalents, if the quotes are considered reliable, and are otherwise valued
at
fair value. OTC options are priced on the basis of dealer quotes. Other types
of
derivatives for which quotes may not be available are valued at fair
value.
When
determining the price for a Fair Valued Asset, the Advisors 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 the Advisors
deem
relevant.
DISTRIBUTIONS
Commencing
with the Trust’s initial dividend, the Trust intends to make regular monthly
cash distributions of all or a portion of its net investment income to common
shareholders. We expect to declare the initial monthly dividend on
the Trust’s common shares within approximately 45 days after completion of this
offering and to pay that initial monthly dividend approximately 60 to 90
days
after completion of this offering. The Trust will pay common
shareholders at least annually all or substantially all of its investment
company taxable income after the payment of dividends and interest, if any,
owed
with respect to any outstanding preferred shares or other forms of leverage
utilized by the Trust. The Trust intends to pay any capital gains
distributions at least annually. If the Trust realizes a long-term
capital gain, it will be required to allocate such gain between the common
shares and any preferred shares issued by the Trust in proportion to the
total
dividends paid to each class for the year in which the income is realized.
The
Investment Company Act generally limits the Trust to one capital gain
distribution per year, subject to certain exceptions. BlackRock has applied
to
the Securities and Exchange Commission for relief that would permit the Trust
to
distribute capital gains more frequently. There can be no assurance the Trust
will receive such relief.
The
tax treatment and characterization of the Trust’s distributions may vary
significantly from time to time because of the varied nature of the Trust’s
investments. In light of the Trust’s investment policies, the Trust
anticipates that the Investment Company Act will require it to accompany
each
monthly distribution with a statement setting forth the estimated source
(as
between net income, capital gains and return of capital) of the distribution
made. The Trust will indicate the proportion of its capital gains
distributions that constitute long-term and short-term gains
annually. The ultimate tax characterization of the Trust’s
distributions made in a calendar or fiscal year cannot finally be determined
until after the end of that fiscal year. As a result, there is a
possibility that the Trust may make total distributions during a calendar
or
fiscal year in an amount that exceeds the Trust’s net investment income and net
capital gains for the relevant fiscal year. In such situations, the
amount by which the Trust’s total distributions exceed its net investment income
and net capital gains would generally be treated as a tax-free return of
capital
reducing the amount of a shareholder’s tax basis in such shareholder’s shares,
with any amounts exceeding such basis treated as gain from the sale of
shares.
Various
factors will affect the level of the Trust’s income, including the asset mix,
the average maturity of the Trust’s portfolio, the amount of leverage utilized
by the Trust and the Trust’s use of hedging. To permit the Trust to
maintain a more stable monthly distribution, the Trust may from time to time
distribute less than the entire amount of income earned in a particular
period. The undistributed income would be available to supplement
future distributions. As a result, the distributions paid by the
Trust for any particular monthly period may be more or less than the amount
of
income actually earned by the Trust during that period. Undistributed
income will add to the Trust’s net asset value and, correspondingly,
distributions from undistributed income will deduct from the Trust’s net asset
value.
BlackRock
has applied to the Commission for an exemption from Section 19(b) of the
Investment Company Act and Rule 19b-1 thereunder that would permit the Trust
to
make periodic distributions of long-term capital gains provided that the
distribution policy of the Trust with respect to its common shares calls
for
periodic (e.g., quarterly) distributions in an amount equal to a fixed
percentage of the Trust’s average net asset value over a specified period of
time or market price per common share at or about the time of distribution
or
pay-out of a level dollar amount. The exemption also would permit the Trust
to
make distributions with respect to any preferred shares that may be issued
by
the Trust n accordance with such shares’ terms. No assurance can be
given that the Commission will grant the exemption to the
Trust.
Shareholders
will automatically have all dividends and distributions reinvested in common
shares of the Trust issued by the Trust or purchased in the open market in
accordance with the Trust’s dividend reinvestment plan unless an election is
made to receive cash. See “Dividend Reinvestment Plan.”
DIVIDEND
REINVESTMENT PLAN
Unless
the registered owner of common shares elects to receive cash by contacting
the
Plan Agent (as defined below), all distributions declared for your common
shares
of the Trust will be automatically reinvested by The Bank of New York (the
“Plan
Agent”), agent for shareholders in administering the Trust’s Dividend
Reinvestment Plan (the “Plan”), in additional common shares of the Trust. If a
registered owner of common shares elects not to participate in the Plan,
you
will receive all distributions in cash paid by check mailed directly to you
(or,
if the shares are held in street or other nominee name, then to such nominee)
by
The Bank of New York, as dividend disbursing agent. You may elect not to
participate in the Plan and to receive all distributions in cash by sending
written instructions or by contacting The Bank of New York, as dividend
disbursing agent, at the address set forth below. Participation in the Plan
is
completely voluntary and may be terminated or resumed at any time without
penalty by contacting the Plan Agent before the dividend record date; otherwise
such termination or resumption will be effective with respect to any
subsequently declared dividend or other distribution. Some brokers may
automatically elect to receive cash on your behalf and may re-invest that
cash
in additional common shares of the Trust for you. If you wish for all
distributions declared on your common shares of the Trust to be automatically
reinvested pursuant to the Plan, please contact your broker.
The
Plan Agent will open an account for each common shareholder under the Plan
in
the same name in which such common shareholder’s common shares are registered.
Whenever the Trust declares a dividend or other distribution (together, a
“dividend”) payable in cash, non-participants in the Plan will receive cash and
participants in the Plan will receive the equivalent in common shares. The
common shares will be acquired by the Plan Agent for the participants’ accounts,
depending upon the circumstances described below, either (i) through receipt
of
additional unissued but authorized common shares from the Trust (“newly issued
common shares”) or (ii) by purchase of outstanding common shares on the open
market (“open-market purchases”) on the New York Stock Exchange or
elsewhere.
If,
on the payment date for any dividend, the market price per common share plus
estimated brokerage commissions is greater than the net asset value per common
share (such condition being referred to herein as “market premium”), the Plan
Agent will invest the dividend amount in newly issued common shares, including
fractions, on behalf of the participants. The number of newly issued common
shares to be credited to each participant’s account will be determined by
dividing the dollar amount of the dividend by the net asset value per common
share on the payment date; provided that, if the net asset value per common
share is less than 95% of the market price per common share on the payment
date,
the dollar amount of the dividend will be divided by 95% of the market price
per
common share on the payment date.
If,
on the payment date for any dividend, the net asset value per common share
is
greater than the market value per common share plus estimated brokerage
commissions (such condition being referred to herein as “market discount”), the
Plan Agent will invest the dividend amount in common shares acquired on behalf
of the participants in open-market purchases.
In
the event of a market discount on the payment date for any dividend, the
Plan
Agent will have until the last business day before the next date on which
the
common shares trade on an “ex-dividend” basis or 30 days after the payment date
for such dividend, whichever is sooner (the “last purchase date”), to invest the
dividend amount in common shares acquired in open-market purchases. It is
contemplated that the Trust will pay quarterly dividends. If, before the
Plan
Agent has completed its open-market purchases, the market price of a common
share exceeds the net asset value per common share, the average per common
share
purchase price paid by the Plan Agent may exceed the net asset value of the
common shares, resulting in the acquisition of fewer common shares than if
the
dividend had been paid in newly issued common shares on the dividend payment
date. Because of the foregoing difficulty with respect to open market purchases,
if the Plan Agent is unable to invest the full dividend amount in open market
purchases during the purchase period or if the market discount shifts to
a
market premium during the purchase period, the Plan Agent may cease making
open-market purchases and may invest the uninvested portion of the dividend
amount in newly issued common shares at the net asset value per common share
at
the close of business on
the
last purchase date; provided that, if the net asset value per common share
is
less than 95% of the market price per common share on the payment date, the
dollar amount of the dividend will be divided by 95% of the market price
per
common share on the payment date.
The
Plan Agent maintains all shareholders’ accounts in the Plan and furnishes
written confirmation of all transactions in the accounts, including information
needed by shareholders for tax records. Common shares in the account of each
Plan participant will be held by the Plan Agent on behalf of the Plan
participant, and each shareholder proxy will include those shares purchased
or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for shares held under
the Plan in accordance with the instructions of the participants.
In
the case of shareholders such as banks, brokers or nominees which hold shares
for others who are the beneficial owners, the Plan Agent will administer
the
Plan on the basis of the number of common shares certified from time to time
by
the record shareholder’s name and held for the account of beneficial owners who
participate in the Plan.
There
will be no brokerage charges with respect to common shares issued directly
by
the Trust. However, each participant will pay a pro rata share of brokerage
commissions incurred in connection with open-market purchases. The automatic
reinvestment of dividends will not relieve participants of any U.S. federal,
state or local income tax that may be payable (or required to be withheld)
on
such dividends. See “Tax Matters.” Participants that request a sale of shares
through the Plan Agent are subject to a brokerage commission of $0.02 per
share
if they direct the Plan Agent to sell their common shares held in a dividend
reinvestment account.
The
Trust reserves the right to amend or terminate the Plan. There is no direct
service charge to participants in the Plan; however, the Trust reserves the
right to amend the Plan to include a service charge payable by the
participants.
All
correspondence concerning the Plan should be directed to the Plan Agent at
The
Bank of New York, Dividend Reinvestment Department, P.O. Box 1958, Newark,
New
Jersey 07101-9774 or by telephone at (866) 216-0242.
DESCRIPTION
OF SHARES
Common
Shares
The
Trust is an statutory trust organized under the laws of Delaware pursuant
to an
Agreement and Declaration of Trust dated as of September 17,
2007. The Trust is authorized to issue an unlimited number of common
shares of beneficial interest, par value $.001 per share. Each common
share has one vote and, when issued and paid for in accordance with the terms
of
this offering, will be fully paid and non-assessable, except that the trustees
shall have the power to cause shareholders to pay expenses of the Trust by
setting off charges due from shareholders from declared but unpaid dividends
or
distributions owed the shareholders and/or by reducing the number of common
shares owned by each respective shareholder. The holders of common
shares will not be entitled to receive any distributions from the Trust unless
all accrued dividends and interest and dividend payments with respect to
the
Trust’s leverage have been paid, unless certain asset coverage tests with
respect to the leverage employed by the Trust are satisfied after giving
effect
to the distributions and unless certain other requirements imposed by any
rating
agencies rating any preferred shares issued by the Trust have been
met. See “—Preferred Shares” below. All common shares are
equal as to dividends, assets and voting privileges and have no conversion,
preemptive or other subscription rights. The Trust will send annual
and semi-annual reports, including financial statements, to all holders of
its
common shares.
The
Trust has no present intention of offering any additional shares other than
the
common shares it may issue under the Trust’s Plan and the possible issuance of
preferred shares. Any additional offerings of shares will require
approval by the Trust’s board of trustees. Any additional offering of
common shares will be subject to the requirements of the Investment Company
Act,
which provides that shares may not be issued at a price below the then current
net asset value, exclusive of sales load, except in connection with an offering
to existing holders of common shares or with the consent of a majority of
the
Trust’s outstanding voting securities.
The
Trust’s common shares have been approved for listing on the New York Stock
Exchange under the symbol “ ,” subject
to notice of issuance.
The
Trust’s net asset value per share generally increases when interest rates
decline, and decreases when interest rates rise, and these changes are likely
to
be greater because the Trust intends to have a leveraged capital
structure. Net asset value will be reduced immediately following the
offering of common shares by the amount of the sales load and organizational
expenses and offering costs paid by the Trust. See “Use of
Proceeds.”
Unlike
open-end funds, closed-end funds like the Trust do not continuously offer
shares
and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional common shares or sell shares already held, the
shareholder may do so by trading through a broker on the New York Stock Exchange
or otherwise. Shares of closed-end investment companies frequently
trade on an exchange at prices lower than net asset value. Shares of
closed-end investment companies like the Trust that invest in bonds have,
during
some periods, traded at prices higher than net asset value and, during other
periods, have traded at prices lower than net asset value. Because
the market value of the common shares may be influenced by such factors as
dividend levels (which are in turn affected by expenses), call protection
on its
portfolio securities, dividend stability, portfolio credit quality, net asset
value, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors beyond the control of the
Trust, the Trust cannot assure you that common shares will trade at a price
equal to or higher than net asset value in the future. The common
shares are designed primarily for long-term investors and you should not
purchase the common shares if you intend to sell them soon after
purchase.
Preferred
Shares
The
Trust’s Agreement and Declaration of Trust provides that the board of trustees
of the Trust may authorize and issue preferred shares, with rights as determined
by the board of trustees, without the approval of the holders of the common
shares. Holders of common shares have no preemptive right to purchase any
preferred shares that might be issued.
The
Trust intends to issue preferred shares representing approximately 38% of
the
Trust’s Managed Assets immediately after the preferred shares are issued. The
board of trustees also reserves the right to change the foregoing percentage
limitation and may issue preferred shares to the extent permitted by the
Investment Company Act, which currently limits the aggregate liquidation
preference of all outstanding preferred shares to 50% of the value of the
Trust’s total assets less liabilities and indebtedness of the Trust. We cannot
assure you, however, that any preferred shares will be issued. Although the
terms of any preferred shares, including dividend rate, liquidation preference
and redemption provisions, will be determined by the board of trustees, subject
to applicable law and the Amended and Restated Agreement and Declaration
of
Trust, it is likely that the preferred shares will be structured to carry
a
relatively short-term dividend rate reflecting interest rates on short-term
bonds, by providing for the periodic redetermination of the dividend rate
at
relatively short intervals through an auction, remarketing or other procedure.
The Trust also believes that it is likely that the liquidation preference,
voting rights and redemption provisions of the preferred shares will be similar
to those stated below.
In
the event of any voluntary or involuntary liquidation, dissolution or winding
up
of the Trust, the holders of preferred shares will be entitled to receive
a
preferential liquidating distribution, which is expected to equal the original
purchase price per preferred share plus accrued and unpaid dividends, whether
or
not declared, before any distribution of assets is made to holders of common
shares. After payment of the full amount of the liquidating distribution
to
which they are entitled, the holders of preferred shares will not be entitled
to
any further participation in any distribution of assets by the
Trust.
The
Investment Company Act requires that the holders of any preferred shares,
voting
separately as a single class, have the right to elect at least two trustees
at
all times. The remaining trustees will be elected by holders of common shares
and preferred shares, voting together as a single class. In addition, subject
to
the prior rights, if any, of the holders of any other class of senior securities
outstanding, the holders of any preferred shares have the right to elect
a
majority of the trustees of the Trust at any time two years’ dividends on any
preferred shares are unpaid. The Investment Company Act also requires that,
in
addition to any 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 (1) adopt any plan of
reorganization that would adversely affect the preferred shares,
and
(2) take any action requiring a vote of security holders under Section 13(a)
of
the Investment Company Act, including, among other things, changes in the
Trust’s sub-classification as a closed-end investment company or changes in its
fundamental investment restrictions. See “Anti-Takeover Provisions in the
Agreement and Declaration of Trust.” As a result of these voting rights, the
Trust’s ability to take any such actions may be impeded to the extent that there
are any preferred shares outstanding. The board of trustees presently intends
that, except as otherwise indicated in this prospectus and except as otherwise
required by applicable law, holders of preferred shares will have equal voting
rights with holders of common shares (one vote per share, unless otherwise
required by the Investment Company Act) and will vote together with holders
of
common shares as a single class.
The
affirmative vote of the holders of a majority of the outstanding preferred
shares, voting as a separate class, will be required to amend, alter or repeal
any of the preferences, rights or powers of holders of preferred shares so
as to
affect materially and adversely such preferences, rights or powers, or to
increase or decrease the authorized number of preferred shares. The class
vote
of holders of preferred shares described above will in each case be in addition
to any other vote required to authorize the action in question.
The
terms of the preferred shares are expected to provide that (i) they are
redeemable by the Trust in whole or in part at the original purchase price
per
share plus accrued dividends per share, (ii) the Trust may tender for or
purchase preferred shares and (iii) the Trust may subsequently resell any
shares
so tendered for or purchased. Any redemption or purchase of preferred shares
by
the Trust will reduce the leverage applicable to the common shares, while
any
resale of shares by the Trust will increase that leverage.
The
Trust intends to seek a AAA credit rating for any preferred shares from a
rating
agency. The Trust intends that, as long as preferred shares are outstanding,
the
composition of its portfolio will reflect guidelines established by such
rating
agency. Although, as of the date hereof, no such rating agency has established
guidelines relating to preferred shares, based on previous guidelines
established by such rating agencies for the securities of other issuers,
the
Trust anticipates that the guidelines with respect to preferred shares will
establish a set of tests for portfolio composition and asset coverage that
supplement (and in some cases are more restrictive than) the applicable
requirements under the Investment Company Act. Although, at this time, no
assurance can be given as to the nature or extent of the guidelines which
may be
imposed in connection with obtaining a rating of any preferred shares, the
Trust
currently anticipates that such guidelines will include asset coverage
requirements, which are more restrictive than those under the Investment
Company
Act, restrictions on certain portfolio investments and investment practices,
requirements that the Trust maintain a portion of its assets in short-term,
high-quality, debt securities and certain mandatory redemption requirements
relating to preferred shares. No assurance can be given that the guidelines
actually imposed with respect to preferred shares by such rating agency will
be
more or less restrictive than as described in this prospectus.
The
discussion above describes the possible offering of preferred shares by the
Trust. If the board of trustees determines to proceed with such an offering,
the
terms of the preferred shares may be the same as, or different from, the
terms
described above, subject to applicable law and the Trust’s Agreement and
Declaration of Trust. The board of trustees, without the approval of the
holders
of common shares, may authorize an offering of preferred shares or may determine
not to authorize such an offering, and may fix the terms of the preferred
shares
to be offered.
ANTI-TAKEOVER
PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The
Agreement and Declaration of Trust includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Trust or to change the composition of its board of trustees. This
could
have the effect of depriving shareholders of an opportunity to sell their
shares
at a premium over prevailing market prices by discouraging a third party
from
seeking to obtain control over the Trust. Such attempts could have the effect
of
increasing the expenses of the Trust and disrupting the normal operation
of the
Trust. The board of trustees is divided into three classes, with the terms
of
one class expiring at each annual meeting of shareholders. At each annual
meeting, one class of trustees is elected to a three-year term. This provision
could delay for up to two years the replacement of a majority of the board
of
trustees. A trustee may be removed from office for cause only, and not without
cause, and only by the action of a majority of the remaining trustees followed
by a vote of the holders of at least 75% of the shares then entitled to vote
for
the election of the respective trustee.
In
addition, the Trust’s Agreement and Declaration of Trust requires the favorable
vote of a majority of the Trust’s board of trustees followed by the favorable
vote of the holders of at least 75% of the outstanding shares of each affected
class or series of the Trust, voting separately as a class or series, to
approve, adopt or authorize certain transactions with 5% or greater holders
of a
class or series of shares and their associates, unless the transaction has
been
approved by at least 80% of the trustees, in which case “a majority of the
outstanding voting securities” (as defined in the Investment Company Act) of the
Trust shall be required. For purposes of these provisions, a 5% or greater
holder of a class or series of shares (a “Principal Shareholder”) refers to any
person who, whether directly or indirectly and whether alone or together
with
its affiliates and associates, beneficially owns 5% or more of the outstanding
shares of all outstanding classes or series of common shares of the
Trust.
The
5% holder transactions subject to these special approval requirements are:
the
merger or consolidation of the Trust or any subsidiary of the Trust with
or into
any Principal Shareholder; the issuance of any securities of the Trust to
any
Principal Shareholder for cash, except pursuant to any automatic dividend
reinvestment plan; the sale, lease or exchange of all or any substantial
part of
the assets of the Trust to any Principal Shareholder, except assets having
an
aggregate fair market value of less than 2% of the total assets of the Trust,
aggregating for the purpose of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve month period;
or
the sale, lease or exchange to the Trust or any subsidiary of the Trust,
in
exchange for securities of the Trust, of any assets of any Principal
Shareholder, except assets having an aggregate fair market value of less
than 2%
of the total assets of the Trust, aggregating for purposes of such computation
all assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period.
To
convert the Trust to an open-end investment company, the Trust’s Agreement and
Declaration of Trust requires the favorable vote of a majority of the board
of
the trustees followed by the favorable vote of the holders of at least 75%
of
the outstanding shares of each affected class or series of shares of the
Trust,
voting separately as a class or series, unless such amendment has been approved
by at least 80% of the trustees, in which case “a majority of the outstanding
voting securities” (as defined in the Investment Company Act) of the Trust shall
be required. The foregoing vote would satisfy a separate requirement
in the Investment Company Act that any conversion of the Trust to an open-end
investment company be approved by the shareholders. If approved in the foregoing
manner, we anticipate conversion of the Trust to an open-end investment company
might not occur until 90 days after the shareholders’ meeting at which such
conversion was approved and would also require at least 10 days’ prior notice to
all shareholders. Conversion of the Trust to an open-end investment
company would require the redemption of any outstanding preferred shares,
which
could eliminate or alter the leveraged capital structure of the Trust with
respect to the common shares. Following any such conversion, it is
possible that certain of the Trust’s investment policies and strategies would
have to be modified to assure sufficient portfolio liquidity. In the
event of conversion, the common shares would cease to be listed on the New
York
Stock Exchange or other national securities exchanges or market systems.
Shareholders of an open-end investment company may require the company to
redeem
their shares at any time, except in certain circumstances as authorized by
or
under the Investment Company Act, at their net asset value, less such redemption
charge, if any, as might be in effect at the time of a
redemption. The Trust expects to pay all such redemption requests in
cash, but reserves the right to pay redemption requests in a combination
of cash
and securities. If such partial payment in securities were made,
investors may incur brokerage costs in converting such securities to
cash. If the Trust were converted to an open-end fund, it is likely
that new shares would be sold at net asset value plus a sales
load. The board of trustees believes, however, that the closed-end
structure is desirable in light of the Trust’s investment objective and
policies. Therefore, you should assume that it is not likely that the
board of trustees would vote to convert the Trust to an open-end
fund.
For
the purposes of calculating “a majority of the outstanding voting securities”
under the Trust’s Agreement and Declaration of Trust, each class and series of
the Trust shall vote together as a single class, except to the extent required
by the Investment Company Act or the Trust’s Agreement and Declaration of Trust,
with respect to any class or series of shares. If a separate class vote is
required, the applicable proportion of shares of the class or series, voting
as
a separate class or series, also will be required.
To
liquidate the Trust, the Trust’s Agreement and Declaration of Trust, requires
the favorable vote of a majority of the board of trustees followed by the
favorable vote of the holders of at least 75% of the outstanding shares of
each
affected class or series of the Trust, voting separately as a class or series,
unless such amendment has been approved by at least 80% of trustees, in which
case “a majority of the outstanding voting securities” (as
defined
in
the Investment Company Act) of the Trust shall be required. The
Agreement and Declaration of Trust also provides that the Trust may be dissolved
upon the approval of 80% of the trustees.
The
board of trustees has determined that provisions with respect to the board
of
trustees and the shareholder voting requirements described above, which voting
requirements are greater than the minimum requirements under Delaware law
or the
Investment Company Act, are in the best interest of shareholders
generally. Reference should be made to the Agreement and Declaration
of Trust on file with the Securities and Exchange Commission for the full
text
of these provisions.
CLOSED-END
FUND STRUCTURE
The
Trust is a newly organized, diversified, closed-end management investment
company (commonly referred to as a closed-end fund). Closed-end funds
differ from open-end funds (which are generally referred to as mutual funds)
in
that closed-end funds generally list their shares for trading on a stock
exchange and do not redeem their shares at the request of the
shareholder. This means that if you wish to sell your shares of a
closed-end fund you must trade them on the market like any other stock at
the
prevailing market price at that time. In a mutual fund, if the
shareholder wishes to sell shares of the fund, the mutual fund will redeem
or
buy back the shares at “net asset value.” Also, mutual funds generally offer new
shares on a continuous basis to new investors, and closed-end funds generally
do
not. The continuous inflows and outflows of assets in a mutual fund
can make it difficult to manage the fund’s investments. By
comparison, closed-end funds are generally able to stay more fully invested
in
securities that are consistent with their investment objectives, and also
have
greater flexibility to make certain types of investments, and to use certain
investment strategies, such as financial leverage and investments in illiquid
securities.
Shares
of closed-end funds frequently trade at a discount to their net asset
value. Because of this possibility and the recognition that any such
discount may not be in the interest of shareholders, the Trust’s board of
trustees might consider from time to time engaging in open-market repurchases,
tender offers for shares or other programs intended to reduce the
discount. We cannot guarantee or assure, however, that the Trust’s
board of trustees will decide to engage in any of these actions. Nor
is there any guarantee or assurance that such actions, if undertaken, would
result in the shares trading at a price equal or close to net asset value
per
share. The board of trustees might also consider converting the Trust
to an open-end mutual fund, which would also require a vote of the shareholders
of the Trust.
REPURCHASE
OF COMMON SHARES
The
Trust is a closed-end management investment company and as such its shareholders
will not have the right to cause the Trust to redeem their common shares.
Instead, the Trust’s common shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are
in
turn affected by expenses), net asset value, call protection, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because common shares of
a
closed-end investment company may frequently trade at prices lower than net
asset value, the Trust’s board of trustees may consider action that might be
taken to reduce or eliminate any material discount from net asset value in
respect of common shares, which may include the repurchase of such shares
in the
open market or in private transactions, the making of a tender offer for
such
shares, or the conversion of the Trust to an open-end investment company.
The
board of trustees may decide not to take any of these actions. In addition,
there can be no assurance that common share repurchases or tender offers,
if
undertaken, will reduce market discount.
Notwithstanding
the foregoing, at any time when the Trust’s preferred shares are outstanding,
the Trust may not purchase, redeem or otherwise acquire any of its common
shares
unless (1) all accrued preferred shares dividends have been paid and (2)
at the
time of such purchase, redemption or acquisition, the net asset value of
the
Trust’s portfolio (determined after deducting the acquisition price of the
common shares) is at least 200% of the liquidation value of the outstanding
preferred shares (expected to equal the original purchase price per share
plus
any accrued and unpaid dividends thereon). Any service fees incurred in
connection with any tender offer made by the Trust will be borne by the Trust
and will not reduce the stated consideration to be paid to tendering
shareholders.
Subject
to its investment restrictions, the Trust may borrow to finance the repurchase
of common shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the
Trust
in anticipation of share repurchases or tenders will reduce the Trust’s net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Trust’s board of trustees would have to comply with the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), the Investment Company
Act and the rules and regulations thereunder.
There
is no assurance that, if action is undertaken to repurchase or tender for
common
shares, such action will result in the common shares trading at a price which
approximates their net asset value. Although share repurchases and
tenders could have a favorable effect on the market price of the Trust’s common
shares, you should be aware that the acquisition of common shares by the
Trust
will decrease the total net assets of the Trust and, therefore, may have
the
effect of increasing the Trust’s expense ratio and decreasing the asset coverage
with respect to any preferred shares outstanding. Any share
repurchases or tender offers will be made in accordance with requirements
of the
Exchange Act, the Investment Company Act and the principal stock exchange
on
which the common shares are traded.
TAX
MATTERS
The
following is a description of certain U.S. federal income tax consequences
to a
shareholder of acquiring, holding and disposing of common shares of the
Trust. The discussion reflects applicable tax laws of the United
States as of the date of this prospectus, which tax laws may be changed or
subject to new interpretations by the courts or the Internal Revenue Service
(the “IRS”) retroactively or prospectively. No attempt is made to present a
detailed explanation of all U.S. federal, state, local and foreign tax concerns
affecting the Trust and its shareholders (including shareholders owning large
positions in the Trust). The discussion set forth herein does not
constitute tax advice. Shareholders are urged to consult their own
tax advisors to determine the tax consequences to them of investing in the
Trust.
The
Trust intends to elect to be treated and to qualify each year for special
tax
treatment afforded a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the “Code”). In order to
qualify as a regulated investment company, the Trust must satisfy income,
asset
diversification and distribution requirements. As long as it so
qualifies, the Trust will not be subject to U.S. federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Trust intends to distribute at least annually
substantially all of such income.
Distributions
paid to you by the Trust from its investment company taxable income (including
the excess of net short-term capital gain over net long-term capital losses)
are
generally taxable to you as ordinary income to the extent of the Trust’s current
and accumulated earnings and profits. Certain distributions (if
designated by the Trust) may, however, qualify (provided that holding period
and
other requirements are met by both the Trust and the shareholder) (i) for
the
dividends received deduction in the case of corporate shareholders to the
extent
that the Trust’s income consists of dividend income from U.S. corporations or
(ii) in the case of individual shareholders (effective for taxable years
beginning on or before December 31, 2010), as qualified dividend income eligible
to be taxed at a maximum rate of generally 15% (5% for individuals in lower
tax
brackets) to the extent that the Trust receives qualified dividend
income. Qualified dividend income is, in general, dividend income
from taxable domestic corporations and certain foreign
corporations. The Trust does not expect that a significant portion of
its ordinary income dividends will be treated as qualified dividend income,
which is eligible for taxation at the rates applicable to long-term capital
gains in the case of individual shareholders, or that a corporate shareholder
will be able to claim a dividends received reduction with respect to any
significant portion of Trust distributions. Distributions made to you
from an excess of net long-term capital gain over net short-term capital
loss
(“capital gain dividends”), including capital gain dividends credited to you but
retained by the Trust, are taxable to you as long-term capital gain if they
have
been properly designated by the Trust, regardless of the length of time you
have
owned Trust shares. The maximum tax rate on capital gain dividends
received by individuals generally is 15% (5% for individuals in lower brackets)
for such gain realized in taxable years beginning before January 1, 2011.
If,
for any calendar year, the Trust’s total distributions exceed both current
earnings and profits and accumulated earnings and profits, the excess will
generally be treated as a tax-free return of capital up to the amount of
a
shareholder’s tax basis in the common shares. The amount treated as a
tax-free return of capital will reduce a shareholder’s tax basis in the common
shares, thereby increasing such shareholder’s potential gain or reducing his or
her potential loss on
the
sale of the common shares. Any amounts distributed to a shareholder
in excess of his or her tax basis in the common shares will be taxable to
the
shareholder as capital gain (assuming the common shares are held as a capital
asset). Generally, not later than 60 days after the close of its
taxable year, the Trust will provide you with a written notice designating
the
amount of any qualified dividend income, income eligible for the dividends
received deduction and/or capital gain dividends and other
distributions.
The
sale or other disposition of shares of the Trust will generally result in
capital gain or loss to you (assuming the shares were held as a capital asset),
and will be long-term capital gain or loss if the shares have been held for
more
than one year at the time of sale. Any loss upon the sale or exchange
of Trust shares held for six months or less will be treated as long-term
capital
loss to the extent of any capital gain dividends received (including amounts
credited as an undistributed capital gain dividend) by you. Any loss
realized on a sale or exchange of shares of the Trust will be disallowed
if
other substantially identical shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning
30 days
before and ending 30 days after the date that the shares are disposed of.
In
such case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Present law taxes both long-term and short-term capital
gain of
corporations at the rates applicable to ordinary income. For
non-corporate taxpayers, short-term capital gain will currently be taxed
at a
maximum U.S. federal income tax rate of 35% applicable to ordinary income
while
long-term capital gain generally will be taxed at a current maximum U.S.
federal
income tax rate of 15%.
Dividends
and other taxable distributions are taxable to you even though they are
reinvested in additional shares of the Trust. If the Trust pays you a
dividend in January that was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the
Trust
and received by you on December 31 of the year in which the dividend was
declared.
The
Trust is required in certain circumstances to withhold, for U.S. federal
backup
withholding purposes, on taxable dividends and certain other payments paid
to
non-corporate holders of the Trust’s shares who do not furnish the Trust with
their correct taxpayer identification number (in the case of individuals,
their
social security number) and certain certifications, or who are otherwise
subject
to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld from payments made to you may be refunded
or credited against your U.S. federal income tax liability, if any, provided
that the required information is furnished to the IRS.
The
foregoing is a general and abbreviated summary of the provisions of the Code
and
the Treasury regulations in effect as they directly govern the taxation of
the
Trust and its shareholders. These provisions are subject to change by
legislative and administrative action, and any such change may be
retroactive. A more complete discussion of the tax rules applicable
to the Trust and its shareholders can be found in the Statement of Additional
Information that is incorporated by reference into this
prospectus. Shareholders are urged to consult their tax advisors
regarding specific questions as to U.S. federal, foreign, state, local income
or
other taxes.
UNDERWRITING
The
underwriters named below are acting as the representatives of the underwriters
named below. Subject to the terms and conditions stated in the underwriting
agreement dated the date of this prospectus, each underwriter named below
has
agreed to purchase, and the Trust has agreed to sell to that underwriter,
the
number of common shares set forth opposite the underwriter’s name.
|
Underwriters
|
Number
of
Common
Shares
|
| |
|
| |
|
| |
|
|
|
Total
|
|
|
The
underwriting agreement provides that the obligations of the underwriters
to
purchase the common shares included in this offering are subject to approval
of
legal matters by counsel and to other conditions. The underwriters are obligated
to purchase all the common shares (other than those covered by the
over-allotment option described below) if they purchase any of the common
shares.
The
underwriters propose to offer some of the common shares directly to the public
at the public offering price set forth on the cover page of this prospectus
and
some of the common shares to dealers at the public offering price less a
concession not to exceed
$ per
share. The sales load the Trust will pay of $ per share
is equal to % of the initial offering price. The
underwriters may allow, and dealers may reallow, a concession not to exceed
$ per
share on sales to other dealers. If all of the common shares are not sold
at the
initial offering price, the representatives may change the public offering
price
and other selling terms. Investors must pay for any common shares purchased
on
or
before ,
2007. The representatives have advised the Trust that the underwriters do
not
intend to confirm any sales to any accounts over which they exercise
discretionary authority. The representatives have advised us that the
underwriters do not intend to confirm sales to discretionary
accounts.
BlackRock
Advisors (and not the Trust) has agreed to pay from its own assets
to a
structuring fee for advice relating to the structure, design and organization
of
the Trust as well as services related to the sale and distribution of the
Trust’s common shares in the amount of
$ . The
structuring fee paid
to will
not
exceed %
of the total public offering price of the common shares sold
BlackRock
Advisors (and not the Trust) may also pay certain qualifying underwriters
a
marketing and structuring fee, a sales incentive fee or additional compensation
in connection with the offering.
BlackRock
Advisors (and not the Trust) has agreed to pay a commission to certain
wholesalers of its broker-dealer affiliate, BlackRock Investments, Inc.,
that
participate in the marketing of the Trust’s common shares, which commissions
will not
exceed %
of the total public offering price of the common shares sold in this offering.
The Trust may reimburse BlackRock for all or a portion of its expenses incurred
in connection with this offering (other than those described in the preceding
sentence), to the extent that the other offering expenses of the Trust do
not
equal or exceed the $ per common share
the Trust has agreed to pay for the offering expenses of the Trust.
The
total amount of the underwriter compensation payments described above will
not
exceed %
of the total public offering price of the shares offered hereby. The sum
total
of all compensation to the underwriters in connection with this public offering
of common shares, including sales load and all forms of additional compensation
or structuring or sales incentive fee payments to the underwriters and other
expenses, will be limited to not more than 9.0% of the total public offering
price of the common shares sold in this offering.
The
Trust has granted to the underwriters an option, exercisable for 45 days
from
the date of this prospectus, to purchase up
to additional
common shares at the public offering price less the sales load. The underwriters
may exercise the option solely for the purpose of covering over-allotments,
if
any, in connection with this
offering. To the extent such option is exercised, each underwriter must purchase
a number of additional common shares approximately proportionate to that
underwriter’s initial purchase commitment.
The
Trust and the Advisors have agreed that, for a period of 180 days from the
date
of this prospectus, they will not, without the prior written consent
of ,
on behalf of the underwriters, dispose of or hedge any common shares or any
securities convertible into or exchangeable for common shares, provided,
however, that the Trust may issue and sell common shares pursuant to the
Trust’s
Dividend Reinvestment
Plan. ,
in its sole discretion, may release any of the securities subject to these
agreements at any time without notice.
Prior
to the offering, there has been no public market for the common shares.
Consequently, the initial public offering price for the common shares was
determined by negotiation among the Trust, BlackRock Advisors and the
representatives. There can be no assurance, however, that the price at which
the
common shares will sell in the public market after this offering will not
be
lower than the price at which they are sold by the underwriters or that an
active trading market in the common shares will develop and continue after
this
offering. The common shares have been authorized for listing on the New York
Stock Exchange under the symbol “ ,” subject to official
notice of issuance. The underwriters have undertaken to sell common shares
to a
minimum of 400 beneficial owners in lots of 100 or more shares to meet the
New
York Stock Exchange distribution requirements for trading.
The
following table shows the sales load that the Trust will pay to the underwriters
in connection with this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters’ option to purchase additional
common shares.
| |
Paid
by the Trust
|
| |
No
exercise
|
Full
exercise
|
|
Per
common share
|
$
|
$
|
|
Total
|
$
|
$
|
The
Trust and the Advisors have agreed to indemnify the underwriters against
certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the underwriters may be required to make because
of
any of those liabilities.
Certain
underwriters may make a market in the common shares after trading in the
common
shares has commenced on the New York Stock Exchange. No underwriter is, however,
obligated to conduct market-making activities and any such activities may
be
discontinued at any time without notice, at the sole discretion of the
underwriter. No assurance can be given as to the liquidity of, or the trading
market for, the common shares as a result of any market-making activities
undertaken by any underwriter. This prospectus is to be used by any underwriter
in connection with the offering and, during the period in which a prospectus
must be delivered, with offers and sales of the common shares in market-making
transactions in the over-the-counter market at negotiated prices related
to
prevailing market prices at the time of the sale.
In
connection with the
offering, ,
on behalf of itself and the other underwriters, may purchase and sell common
shares in the open market. These transactions may include short sales, syndicate
covering transactions and stabilizing transactions. Short sales involve
syndicate sales of common shares in excess of the number of common shares
to be
purchased by the underwriters in the offering, which creates a syndicate
short
position. “Covered” short sales are sales of common shares made in an amount up
to the number of common shares represented by the underwriters’ over-allotment
option. In determining the source of common shares to close out the covered
syndicate short position, the underwriters will consider, among other things,
the price of common shares available for purchase in the open market as compared
to the price at which they may purchase common shares through the over-allotment
option. Transactions to close out the covered syndicate short position involve
either purchases of common shares in the open market after the distribution
has
been completed or the exercise of the over-allotment option. The underwriters
may also make “naked” short sales of common shares in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing common shares in the open market. A naked short position is
more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of common shares in the open market after
pricing
that could adversely affect investors who purchase in the offering. Stabilizing
transactions consist of bids for or purchases of common shares in the open
market while the offering is in progress.
The
underwriters may impose a penalty bid. Penalty bids permit the underwriting
syndicate to reclaim selling concessions allowed to an underwriter or a dealer
for distributing common shares in this offering if the syndicate repurchases
common shares to cover syndicate short positions or to stabilize the purchase
price of the common shares.
Any
of these activities may have the effect of preventing or retarding a decline
in
the market price of common shares. They may also cause the price of common
shares to be higher than the price that would otherwise exist in the open
market
in the absence of these transactions. The underwriters may conduct these
transactions on the New York Stock Exchange or in the over-the-counter market,
or otherwise. If the underwriters commence any of these transactions, they
may
discontinue them at any time.
A
prospectus in electronic format may be made available on the websites maintained
by one or more of the underwriters. Other than the prospectus in electronic
format, the information on any such underwriter’s website is not part of this
prospectus. The representatives may agree to allocate a number of common
shares
to underwriters for sale to their online brokerage account holders. The
representatives will allocate common shares to underwriters that may make
Internet distributions on the same basis as other allocations. In addition,
common shares may be sold by the underwriters to securities dealers who resell
common shares to online brokerage account holders.
Prior
to the initial public offering of common shares, an affiliate of the Advisor
purchased common shares from the Trust in an amount satisfying the net worth
requirements of Section 14(a) of the Investment Company Act.
The
Trust anticipates that, from time to time, certain underwriters may act as
brokers or dealers in connection with the execution of the Trust’s portfolio
transactions after they have ceased to be underwriters and, subject to certain
restrictions, may act as brokers while they are underwriters.
Certain
underwriters may, from time to time, engage in transactions with or perform
services for the Advisor and its affiliates in the ordinary course of
business.
The
principal business address
of is .
CUSTODIAN
AND TRANSFER AGENT
The
Bank of New York, located at 101 Barclay Street, New York, New York 10286,
will
be the custodian of the Trust’s assets. The Bank of New York will also serve as
the Trust’s Transfer Agent with respect to the common shares.
LEGAL
OPINIONS
Certain
legal matters in connection with the common shares will be passed upon for
the
Trust by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, and
for the underwriters
by .
PRIVACY
PRINCIPLES OF THE TRUST
The
Trust is committed to maintaining the privacy of its shareholders and to
safeguarding their non-public personal information. The following
information is provided to help you understand what personal information
the
Trust collects, how the Trust protects that information and why, in certain
cases, the Trust may share information with select other parties.
Generally,
the Trust does not receive any non-public personal information relating to
its
shareholders, although certain non-public personal information of its
shareholders may become available to the Trust. The Trust does not
disclose any non-public personal information about its shareholders or former
shareholders to anyone, except as permitted by law or as is necessary in
order
to service shareholder accounts (for example, to a transfer agent or third
party
administrator).
The
Trust restricts access to non-public personal information about its shareholders
to employees of the Trust’s investment advisor and its affiliates with a
legitimate business need for the information. The Trust maintains
physical,
electronic and procedural safeguards designed to protect the non-public
personal
information of its shareholders.
TABLE
OF CONTENTS OF THE
STATEMENT
OF ADDITIONAL INFORMATION
|
USE
OF PROCEEDS
|
2
|
|
INVESTMENT
RESTRICTIONS
|
2
|
|
INVESTMENT
POLICIES AND TECHNIQUES
|
3
|
|
OTHER
INVESTMENT POLICIES AND TECHNIQUES
|
13
|
|
MANAGEMENT
OF THE TRUST
|
19
|
|
PORTFOLIO
TRANSACTIONS AND BROKERAGE
|
25
|
|
DESCRIPTION
OF SHARES
|
26
|
|
REPURCHASE
OF COMMON SHARES
|
26
|
|
TAX
MATTERS
|
27
|
|
EXPERTS
|
32
|
|
ADDITIONAL
INFORMATION
|
33
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1
|
|
FINANCIAL
STATEMENTS
|
F-2
|
|
APPENDIX
A—RATING OF INVESTMENTS
|
A-1
|
|
APPENDIX
B—GENERAL CHARACTERISTICS AND RISKS OF STRATEGIC
TRANSACTIONS
|
B-1
|
|
APPENDIX
C—PROXY VOTING PROCEDURES
|
C-1
|
Shares
BLACKROCK
BlackRock
Strategic Income Opportunities Trust
Common
Shares
$20.00
per Share
P
R O S P E C T U S
The
information in this preliminary Statement of Additional Information is
not
complete and may be changed. We may not sell these securities until the
Registration Statement filed with the Securities and Exchange Commission
is
effective. This preliminary Statement of Additional Information is not
an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED SEPTEMBER 21, 2007
STATEMENT
OF ADDITIONAL INFORMATION
BlackRock
Strategic Income Opportunities Trust (the “Trust”) is a diversified, closed-end
management investment company with no operating history. This
Statement of Additional Information relating to common shares does not
constitute a prospectus, but should be read in conjunction with the prospectus
relating thereto
dated, 2007. This
Statement of Additional Information, which is not a prospectus, does not
include
all information that a prospective investor should consider before purchasing
common shares, and investors should obtain and read the prospectus prior
to
purchasing such shares. A copy of the prospectus may be obtained
without charge by calling (888) 825-2257. You may also obtain a copy
of the prospectus on the Securities and Exchange Commission’s web site
(http://www.sec.gov). Capitalized terms used but not defined in this
Statement of Additional Information have the meanings ascribed to them in
the
prospectus.
TABLE
OF CONTENTS
|
USE
OF PROCEEDS
|
2
|
|
INVESTMENT
RESTRICTIONS
|
2
|
|
INVESTMENT
POLICIES AND TECHNIQUES
|
3
|
|
OTHER
INVESTMENT POLICIES AND TECHNIQUES
|
13
|
|
MANAGEMENT
OF THE TRUST
|
19
|
|
PORTFOLIO
TRANSACTIONS AND BROKERAGE
|
25
|
|
DESCRIPTION
OF SHARES
|
26
|
|
REPURCHASE
OF COMMON SHARES
|
26
|
|
TAX
MATTERS
|
27
|
|
EXPERTS
|
32
|
|
ADDITIONAL
INFORMATION
|
33
|
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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F-1
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FINANCIAL
STATEMENTS
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F-2
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APPENDIX
A—RATING OF INVESTMENTS
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A-1
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APPENDIX
B—GENERAL CHARACTERISTICS AND RISKS OF STRATEGIC
TRANSACTIONS
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B-1
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APPENDIX
C—PROXY VOTING PROCEDURES
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C-1
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This
Statement of Additional Information is
dated ,
2007.
USE
OF PROCEEDS
Pending
investment in securities that meet the Trust’s investment objectives and
policies, the net proceeds of this offering will be invested in short-term
debt
securities of the type described under “Investment Policies and
Techniques—Short-Term Debt Securities.” We currently anticipate that
the Trust will be able to invest primarily in securities that meet the Trust’s
investment objectives and policies within approximately three months after
the
completion of this offering.
INVESTMENT
RESTRICTIONS
Except
as described below, the Trust, as a fundamental policy, may not, without
the
approval of the holders of majority of the outstanding common shares and
any
preferred shares, if any, voting together as a single class, and of the holders
of a majority of the outstanding preferred shares, if any, voting as a separate
class:
(1) with
respect to 75% of its total assets, invest more than 5% of the value of its
total assets in the securities of any single issuer or purchase more than
10% of
the outstanding voting securities of any one issuer;
(2) invest
25% or more of the value of its total assets in any one industry, provided
that
securities issued or guaranteed by the U.S. Government and non-U.S. governments,
their agencies or instrumentalities and corporations will not be considered
to
represent an industry;
(3) issue
senior securities or borrow money other than as permitted by the Investment
Company Act or pledge its assets other than to secure such issuances or in
connection with hedging transactions, short sales, when issued and forward
commitment transactions and similar investment strategies;
(4) make
loans of money or property to any person, except through loans of portfolio
securities, the purchase of debt securities (including Senior Loans) consistent
with the Trust’s investment objectives and policies or the entry into repurchase
agreements;
(5) underwrite
the securities of other issuers, except to the extent that, in connection
with
the disposition of portfolio securities or the sale of its own securities,
the
Trust may be deemed to be an underwriter;
(6) purchase
or sell real estate, except that the Trust may invest in securities of companies
that deal in real estate or are engaged in the real estate business, including
real estate investment trusts (“REITs”) and real estate operating companies, and
instruments secured by real estate or interests therein, and the Trust may
acquire, hold and sell real estate acquired through default, liquidation,
or
other distributions of an interest in real estate as a result of the Trust’s
ownership of such other assets; or
(7) purchase
or sell commodities or commodity contracts for any purposes except as, and
to
the extent, permitted by applicable law without the Trust becoming subject
to
registration with the Commodity Futures Trading Commission (the “CFTC”) as a
commodity pool.
When
used with respect to particular shares of the Trust, “majority of the
outstanding” means (i) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the shares are present or represented by proxy,
or
(ii) more than 50% of the shares, whichever is less.
The
Trust is also subject to the following non-fundamental restrictions and
policies, which may be changed by the board of trustees. The Trust may
not:
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(6)
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make
any short sale of securities except in conformity with applicable
laws,
rules and regulations and unless after giving effect to such sale,
the
market value of all securities sold short does not exceed 25% of
the value
of the Trust's total assets and the Trust's aggregate short sales
of a
particular class of securities of an issuer does not exceed 25%
of the
then outstanding securities of that class. The Trust may also make
short
sales "against the box" without respect to such limitations. In
this type
of short sale, at the time of the sale, the Trust owns
or has the immediate and unconditional right to acquire at no additional
cost the identical
security;
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(7)
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purchase
securities of open-end or closed-end investment companies except
in
compliance with the Investment Company Act or any rules promulgated
or
exemptive relief obtained thereunder. As a shareholder in any investment
company, the Trust may bear its ratable share of that investment
company's
expenses, and may remain subject to payment of the Trust's advisory
fees
and other expenses with respect to assets so invested. Holders
of common
shares would therefore be subject to duplicative expenses to the
extent
the Trust invests in other investment companies. In addition, the
securities of other investment companies may be leveraged and will
therefore be subject to the risks of leverage. The net asset value
and
market value of leveraged shares will be more volatile and the
yield to
shareholders will tend to fluctuate more than the yield generated
by
unleveraged shares; or
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(8)
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under
normal market conditions, invest less than 80% of its Managed Assets
in
debts securities. The Trust will provide shareholders with
notice at least 60 days prior to changing this non-fundamental
policy of
the Trust unless such change was previously approved by
shareholders.
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In
addition, to comply with federal tax requirements for qualification as a
regulated investment company, the Trust’s investments will be limited in a
manner such that at the close of each quarter of each taxable year, (a) no
more
than 25% of the value of the Trust’s total assets are invested in the securities
(other than U.S. Government securities or securities of other regulated
investment companies) of a single issuer or two or more issuers controlled
by
the Trust and engaged in the same, similar or related trades or businesses
and
(b) with regard to at least 50% of the Trust’s total assets, no more than 5% of
its total assets are invested in the securities (other than U.S. Government
securities or securities of other regulated investment companies) of a single
issuer and no investment represents more than 10% of the outstanding voting
securities of such issuer. These tax-related limitations may be changed by
the
trustees to the extent appropriate in light of changes to applicable tax
requirements.
The
percentage limitations applicable to the Trust’s portfolio described in this
statement of additional information and the prospectus apply only at the
time of
investment and the Trust will not be required to sell securities due to
subsequent changes in the value of securities it owns.
INVESTMENT
POLICIES AND TECHNIQUES
The
following information supplements the discussion of the Trust’s investment
policies and techniques that are described in the prospectus.
Senior
Loans
A
Senior Loan is typically originated, negotiated and structured by a U.S.
or
foreign commercial bank, insurance company, finance company or other financial
institution (the “Agent”) for a group of loan investors (“Loan
Investors”). The Agent typically administers and enforces the Senior
Loan on behalf of the other Loan Investors in the syndicate. In
addition, an institution, typically but not always the Agent, holds any
collateral on behalf of the Loan Investors.
Senior
Loans primarily include senior floating rate loans to corporations and
secondarily institutionally traded senior floating rate debt obligations
issued
by an asset-backed pool, and interests therein. Loan interests
primarily take the form of assignments purchased in the primary or secondary
market. Loan interests may also take the form of participation
interests in a Senior Loan. Such loan interests may be acquired from
U.S. or foreign commercial banks, insurance companies, finance companies
or
other financial institutions who have made loans or are Loan Investors or
from
other investors in loan interests.
The
Trust may purchase “Assignments” from the Agent or other Loan
Investors. The purchaser of an Assignment typically succeeds to all
the rights and obligations under the Loan Agreement (as defined herein) of
the
assigning Loan Investor and becomes a Loan Investor under the Loan Agreement
with the same rights and
obligations
as the assigning Loan Investor. Assignments may, however, be arranged
through private negotiations between potential assignees and potential
assignors, and the rights and obligations acquired by the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Loan Investor.
The
Trust also may invest in “Participations.” Participations by the Trust in a Loan
Investor’s portion of a Senior Loan typically will result in the Trust having a
contractual relationship only with such Loan Investor, not with the
Borrower. As a result, the Trust may have the right to receive
payments of principal, interest and any fees to which it is entitled only
from
the Loan Investor selling the Participation and only upon receipt by such
Loan
Investor of such 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, nor any
rights
with respect to any funds acquired by other Loan Investors through set-off
against the Borrower and the Trust may not directly benefit from the collateral
supporting the Senior Loan in which it has purchased the
Participation. As a result, the Trust may assume the credit risk of
both the Borrower and the Loan Investor selling the Participation. In
the event of the insolvency of the Loan Investor selling a Participation,
the
Trust may be treated as a general creditor of such Loan Investor. The
selling Loan Investors and other persons interpositioned between such Loan
Investors and the Trust with respect to such Participations will likely conduct
their principal business activities in the banking, finance and financial
services industries. Persons engaged in such industries may be more
susceptible to, among other things, fluctuations in interest rates, changes
in
the Federal Open Market Committee’s monetary policy, governmental regulations
concerning such industries and concerning capital raising activities generally
and fluctuations in the financial markets generally.
The
Trust will only acquire Participations if the Loan Investor selling the
Participation, and any other persons interpositioned between the Trust and
the
Loan Investor, at the time of investment has outstanding debt or deposit
obligations rated investment grade (BBB or A-3 or higher by S&P or Baa or
P-3 or higher by Moody’s or comparably rated by another nationally recognized
rating agency) or determined by BlackRock to be of comparable
quality. The effect of industry characteristics and market
compositions may be more pronounced. Indebtedness of companies whose
creditworthiness is poor involves substantially greater risks, and may be
highly
speculative. Some companies may never pay off their indebtedness, or
may pay only a small fraction of the amount owed. Consequently, when
investing in indebtedness of companies with poor credit, the Trust bears
a
substantial risk of losing the entire amount invested.
In
order to borrow money pursuant to a Senior Loan, a Borrower will frequently,
for
the term of the Senior Loan, pledge collateral, including but not limited
to,
(i) working capital assets, such as accounts receivable and inventory; (ii)
tangible fixed assets, such as real property, buildings and equipment; (iii)
intangible assets, such as trademarks and patent rights (but excluding
goodwill); and (iv) security interests in shares of stock of subsidiaries
or
affiliates. In the case of Senior Loans made to non-public companies,
the company’s shareholders or owners may provide collateral in the form of
secured guarantees and/or security interests in assets that they
own. In many instances, a Senior Loan may be secured only by stock in
the Borrower or its subsidiaries. Collateral may consist of assets
that may not be readily liquidated, and there is no assurance that the
liquidation of such assets would satisfy fully a Borrower’s obligations under a
Senior Loan.
In
the process of buying, selling and holding Senior Loans, the Trust may receive
and/or pay certain fees. These fees are in addition to interest
payments received and may include facility fees, commitment fees, amendment
fees, commissions and prepayment penalty fees. When the Trust buys a
Senior Loan it may receive a facility fee and when it sells a Senior 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 Senior Loan. In certain circumstances, the Trust may
receive a prepayment penalty fee upon the prepayment of a Senior Loan by
a
Borrower. Other fees received by the Trust may include covenant
waiver fees and covenant modification fees.
A
Borrower must comply with various restrictive covenants contained in a loan
agreement or note purchase agreement between the Borrower and the holders
of the
Senior Loan (the “Loan Agreement”). Such covenants, in addition to
requiring the scheduled payment of interest and principal, may include
restrictions on dividend payments and other distributions to stockholders,
provisions requiring the Borrower to maintain specific minimum financial
ratios,
and limits on total debt. In addition, the Loan Agreement may contain
a covenant requiring the Borrower to prepay the Loan with any free cash
flow. Free cash flow is generally defined as net cash flow after
scheduled debt service payments and permitted capital expenditures, and includes
the proceeds from asset dispositions or sales of
securities. A
breach of a covenant which is not waived by the Agent, or by the Loan Investors
directly, as the case may be, is normally an event of acceleration;
i.e., the Agent, or the Loan Investors directly, as the case may be,
has the right to call the outstanding Senior Loan. The typical
practice of an Agent or a Loan Investor in relying exclusively or primarily
on
reports from the Borrower to monitor the Borrower’s compliance with covenants
may involve a risk of fraud by the Borrower. In the case of a Senior
Loan in the form of a Participation, the agreement between the buyer and
seller
may limit the rights of the holder to vote on certain changes which may be
made
to the Loan Agreement, such as waiving a breach of a
covenant. However, the holder of the Participation will, in almost
all cases, have the right to vote on certain fundamental issues such as changes
in principal amount, payment dates and interest rate.
In
a typical Senior Loan the Agent administers the terms of the Loan
Agreement. In such cases, the Agent is normally responsible for the
collection of principal and interest payments from the Borrower and the
apportionment of these payments to the credit of all institutions which are
parties to the Loan Agreement. The Trust will generally rely upon the
Agent or an intermediate participant to receive and forward to the Trust
its
portion of the principal and interest payments on the Senior
Loan. Furthermore, unless under the terms of a Participation
Agreement the Trust has direct recourse against the Borrower, the Trust will
rely on the Agent and the other Loan Investors to use appropriate credit
remedies against the Borrower. The Agent is typically responsible for
monitoring compliance with covenants contained in the Loan Agreement based
upon
reports prepared by the Borrower. The seller of the Senior Loan
usually does, but is often not obligated to, notify holders of Senior Loans
of
any failures of compliance. The Agent may monitor the value of the
collateral and, if the value of the collateral declines, may accelerate the
Senior Loan, may give the Borrower an opportunity to provide additional
collateral or may seek other protection for the benefit of the participants
in
the Senior Loan. The Agent is compensated by the Borrower for
providing these services under a Loan Agreement, and such compensation may
include special fees paid upon structuring and funding the Senior Loan and
other
fees paid on a continuing basis. With respect to Senior Loans for
which the Agent does not perform such administrative and enforcement functions,
the Trust will perform such tasks on its own behalf, although a collateral
bank
will typically hold any collateral on behalf of the Trust and the other Loan
Investors pursuant to the applicable Loan Agreement.
A
financial institution’s appointment as Agent may usually be terminated in the
event that it fails to observe the requisite standard of care or becomes
insolvent, enters Federal Deposit Insurance Corporation (“FDIC”) receivership,
or, if not FDIC insured, enters into bankruptcy proceedings. A
successor Agent would generally be appointed to replace the terminated Agent,
and assets held by the Agent under the Loan Agreement should remain available
to
holders of Senior Loans. However, if assets held by the Agent for the
benefit of the Trust were determined to be subject to the claims of the Agent’s
general creditors, the Trust might incur certain costs and delays in realizing
payment on a Senior Loan, or suffer a loss of principal and/or
interest. In situations involving intermediate participants, similar
risks may arise.
Senior
Loans will usually require, in addition to scheduled payments of interest
and
principal, the prepayment of the Senior Loan from free cash flow, as defined
above. The degree to which Borrowers prepay Senior Loans, whether as
a contractual requirement or at their election, may be affected by general
business conditions, the financial condition of the Borrower and competitive
conditions among Loan Investors, among others. As such, prepayments
cannot be predicted with accuracy. Upon a prepayment, either in part
or in full, the actual outstanding debt on which the Trust derives interest
income will be reduced. However, the Trust may receive both a
prepayment penalty fee from the prepaying Borrower and a facility fee upon
the
purchase of a new Senior Loan with the proceeds from the prepayment of the
former. Prepayments generally will not materially affect the Trust’s
performance because the Trust typically is able to reinvest prepayments in
other
Senior Loans that have similar yields and because receipt of such fees may
mitigate any adverse impact on the Trust’s yield.
From
time to time BlackRock and its affiliates may borrow money from various banks
in
connection with their business activities. Such banks may also sell
interests in Senior Loans to or acquire them from the Trust or may be
intermediate participants with respect to Senior Loans in which the Trust
owns
interests. Such banks may also act as Agents for Senior Loans held by
the Trust.
The
Trust may acquire interests in Senior Loans which are designed to provide
temporary or “bridge” financing to a Borrower pending the sale of identified
assets or the arrangement of longer-term loans or the issuance and sale of
debt
obligations. The Trust may also invest in Senior Loans of Borrowers
that have obtained bridge loans from other parties. A Borrower’s use
of bridge loans involves a risk that the Borrower may be unable to locate
permanent financing to replace the bridge loan, which may impair the Borrower’s
perceived creditworthiness.
The
Trust will be subject to the risk that collateral securing a loan will decline
in value or have no value. Such a decline, whether as a result of
bankruptcy proceedings or otherwise, could cause the Senior Loan to be
undercollateralized or unsecured. In most credit agreements there is
no formal requirement to pledge additional collateral. In addition,
the Trust may invest in Senior Loans guaranteed by, or secured by assets
of,
shareholders or owners, even if the Senior Loans are not otherwise
collateralized by assets of the Borrower; provided, however, that such
guarantees are fully secured. There may be temporary periods when the
principal asset held by a Borrower is the stock of a related company, which
may
not legally be pledged to secure a Senior Loan. On occasions when
such stock cannot be pledged, the Senior Loan will be temporarily unsecured
until the stock can be pledged or is exchanged for or replaced by other assets,
which will be pledged as security for the Senior Loan. However, the
Borrower’s ability to dispose of such securities, other than in connection with
such pledge or replacement, will be strictly limited for the protection of
the
holders of Senior Loans and, indirectly, Senior Loans themselves.
If
a Borrower becomes involved in bankruptcy proceedings, a court may invalidate
the Trust’s security interest in the loan collateral or subordinate the Trust’s
rights under the Senior Loan to the interests of the Borrower’s unsecured
creditors or cause interest previously paid to be refunded to the
Borrower. If a court required interest to be refunded, it could
negatively affect the Trust’s performance. Such action by a court
could be based, for example, on a “fraudulent conveyance” claim to the effect
that the Borrower did not receive fair consideration for granting the security
interest in the loan collateral to the Trust. For Senior Loans made
in connection with a highly leveraged transaction, consideration for granting
a
security interest may be deemed inadequate if the proceeds of the Loan were
not
received or retained by the Borrower, but were instead paid to other persons
(such as shareholders of the Borrower) in an amount which left the Borrower
insolvent or without sufficient working capital. There are also other
events, such as the failure to perfect a security interest due to faulty
documentation or faulty official filings, which could lead to the invalidation
of the Trust’s security interest in loan collateral. If the Trust’s
security interest in loan collateral is invalidated or the Senior Loan is
subordinated to other debt of a Borrower in bankruptcy or other proceedings,
the
Trust would have substantially lower recovery, and perhaps no recovery on
the
full amount of the principal and interest due on the Loan.
The
Trust may acquire warrants and other equity securities as part of a unit
combining a Senior Loan and equity securities of a Borrower or its
affiliates. The acquisition of such equity securities will only be
incidental to the Trust’s purchase of a Senior Loan. The Trust may
also acquire equity securities or debt securities (including non-dollar
denominated debt securities) issued in exchange for a Senior Loan or issued
in
connection with the debt restructuring or reorganization of a Borrower, or
if
such acquisition, in the judgment of BlackRock, may enhance the value of
a
Senior Loan or would otherwise be consistent with the Trust’s investment
policies.
Below
Investment Grade Securities
The
Trust may invest in securities rated below investment grade such as those
rated
Ba or below by Moody’s or BB or below by S&P or Fitch or securities
comparably rated by other rating agencies or in unrated securities determined
by
BlackRock to be of comparable quality. Securities rated Ba and below
by Moody’s and Fitch are judged to have speculative elements; their future
cannot be considered as well assured and often the protection of interest
and
principle payments may be very moderate. Securities rated BB by
S&P are regarded as having predominantly speculative characteristics and,
while such obligations have less near-term vulnerability to default than
other
speculative grade debt, they face major ongoing uncertainties or exposure
to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
Lower
grade securities, though high yielding, are characterized by high
risk. They may be subject to certain risks with respect to the
issuing entity and to greater market fluctuations than certain lower yielding,
higher rated securities. The retail secondary market for lower grade
securities may be less liquid than that of higher rated securities; adverse
conditions could make it difficult at times for the Trust to sell certain
securities or could result in lower prices than those used in calculating
the
Trust’s net asset value.
The
prices of debt securities generally are inversely related to interest rate
changes; however, the price volatility caused by fluctuating interest rates
of
securities also is inversely related to the coupons of such
securities. Accordingly, below investment grade securities may be
relatively less sensitive to interest rate changes than higher quality
securities of comparable maturity because of their higher
coupon. This higher coupon is what the investor receives in return
for bearing greater credit risk. The higher credit risk associated
with below investment grade securities potentially can have a greater effect
on
the value of such securities than may be the case with higher quality issues
of
comparable maturity.
Lower
grade securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could severely
disrupt the market for such securities and may have an adverse impact on
the
value of such securities. In addition, it is likely that any such
economic downturn could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon and increase the
incidence of default for such securities.
The
ratings of Moody’s, S&P and other rating agencies represent their opinions
as to the quality of the obligations which they undertake to
rate. Ratings are relative and subjective and, although ratings may
be useful in evaluating the safety of interest and principle payments, they
do
not evaluate the market value risk of such obligations. Although
these ratings may be an initial criterion for selection of portfolio
investments, BlackRock also will independently evaluate these securities
and the
ability for the issuers of such securities to pay interest and
principal. To the extent that the Trust invests in lower grade
securities that have not been rated by a rating agency, the Trust’s ability to
achieve its investment objectives will be more dependent on BlackRock’s credit
analysis than would be the case when the Trust invests in rated
securities.
Other
Mortgage-Related and Asset-Backed Securities
Commercial
Mortgage-Related Securities. CMBS generally are multi-class debt
or pass-through certificates secured or backed by mortgage loans on commercial
properties. CMBS generally are structured to provide protection to
the senior class investors against potential losses on the underlying mortgage
loans. This protection generally is provided by having the holders of
subordinated classes of securities (“Subordinated CMBS”) take the first loss if
there are defaults on the underlying commercial mortgage loans. Other
protection, which may benefit all of the classes or particular classes, may
include issuer guarantees, reserve funds, additional Subordinated CMBS,
cross-collateralization and over-collateralization.
The
Trust may invest in Subordinated CMBS issued or sponsored by commercial banks,
savings and loan institutions, mortgage bankers, private mortgage insurance
companies and other non-governmental issuers. Subordinated CMBS have
no governmental guarantee, and are subordinated in some manner as to the
payment
of principal and/or interest to the holders of more senior Mortgage-Related
Securities arising out of the same pool of mortgages. The holders of
Subordinated CMBS typically are compensated with a higher stated yield than
are
the holders of more senior Mortgage-Related Securities. On the other
hand, Subordinated CMBS typically subject the holder to greater risk than
senior
CMBS and tend to be rated in a lower rating category, and frequently a
substantially lower rating category, than the senior CMBS issued in respect
of
the same mortgage pool. Subordinated CMBS generally are likely to be
more sensitive to changes in prepayment and interest rates and the market
for
such securities may be less liquid than is the case for traditional fixed
income
securities and senior Mortgage-Related Securities.
The
market for CMBS developed more recently and in terms of total outstanding
principal amount of issues is relatively small compared to the market for
residential single-family Mortgage-Related Securities. In addition,
commercial lending generally is viewed as exposing the lender to a greater
risk
of loss than one-to-four family residential lending. Commercial
lending, for example, typically involves larger loans to single borrowers
or
groups of related borrowers than residential one-to-four family mortgage
loans. In addition, the repayment of loans secured by income
producing properties typically is dependent upon the successful operation
of the
related real estate project and the cash flow generated
therefrom. Consequently, adverse changes in economic conditions and
circumstances are more likely to have an adverse impact on Mortgage-Related
Securities secured by loans on commercial properties than on those secured
by
loans on residential properties.
Government
Agency Securities. Mortgage-Related Securities issued by the Government
National Mortgage Association (“GNMA”) include GNMA Mortgage Pass-Through
Certificates (also known as “Ginnie Maes”) which are guaranteed as to the timely
payment of principal and interest by GNMA and such guarantee is backed by
the
full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of
GNMA to borrow funds from the U.S. Treasury to make payments under its
guarantee.
Government-Related
Securities. Mortgage-Related Securities issued by the Federal National
Mortgage Association (“FNMA”) include FNMA Guaranteed Mortgage Pass-Through
Certificates (also known as “Fannie Maes”) which are solely the obligations of
FNMA and are not backed by or entitled to the full faith and credit of the
United States. FNMA is a government-sponsored organization owned
entirely by private shareholders. Fannie Maes are guaranteed as to
timely payment of principal and interest by FNMA. Mortgage-Related
Securities issued by the Federal Home Loan Mortgage Corporation (“FHLMC”)
include FHLMC Mortgage Participation Certificates (also known as “Freddie Macs”
or “PCs”). FHLMC is a corporate instrumentality of the United States
created pursuant to an Act of Congress, which is owned entirely by Federal
Home
Loan Banks. Freddie Macs are not guaranteed by the United States or
by any Federal Home Loan Bank and do not constitute a debt or obligation
of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle
the holder to timely payment of interest, which is guaranteed by
FHLMC. FHLMC guarantees either ultimate collection or timely payment
of all principal payments on the underlying mortgage loans. When
FHLMC does not guarantee timely payment of principal, FHLMC may remit the
amount
due on account of its guarantee of ultimate payment of principal at any time
after default on an underlying mortgage, but in no event later than one year
after it becomes payable.
Private
Entity Securities. These Mortgage-Related Securities are issued by
commercial banks, savings and loan institutions, mortgage bankers, private
mortgage insurance companies and other non-governmental
issuers. Timely payment of principal and interest on Mortgage-Related
Securities backed by pools created by non-governmental issuers often is
supported partially by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance and
guarantees are issued by government entities, private insurers and the mortgage
poolers. There can be no assurance that the private insurers or
mortgage poolers can meet their obligations under the policies, so that if
the
issuers default on their obligations the holders of the security could sustain
a
loss. No insurance or guarantee covers the Trust or the price of the
Trust’s shares. Mortgage-Related Securities issued by
non-governmental issuers generally offer a higher rate of interest than
government-agency and government-related securities because there are no
direct
or indirect government guarantees of payment.
Collateralized
Mortgage Obligations (“CMOS”). A CMO is a multi-class bond
backed by a pool of mortgage pass-through certificates or mortgage
loans. CMOs may be collateralized by (a) Ginnie Mae, Fannie Mae, or
Freddie Mac pass-through certificates, (b) unsecuritized mortgage loans insured
by the Federal Housing Administration or guaranteed by the Department of
Veterans’ Affairs, (c) unsecuritized conventional mortgages, (d) other
mortgage-related securities, or (e) any combination thereof. Each
class of CMOs, often referred to as a “tranche,” is issued at a specific coupon
rate and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution
dates. The principal and interest on the underlying mortgages may be
allocated among the several classes of a series of a CMO in many
ways. One or more tranches of a CMO may have coupon rates which reset
periodically at a specified increment over an index, such as the London
Interbank Offered Rate (“LIBOR”) (or sometimes more than one
index). These floating rate CMOs typically are issued with lifetime
caps on the coupon rate thereon. The Trust also may invest in inverse
floating rate CMOs. Inverse floating rate CMOs constitute a tranche
of a CMO with a coupon rate that moves in the reverse direction to an applicable
index such as LIBOR. Accordingly, the coupon rate thereon will
increase as interest rates decrease. Inverse floating rate CMOs are
typically more volatile than fixed or floating rate tranches of
CMOs. Many inverse floating rate CMOs have coupons that move
inversely to a multiple of the applicable indexes. The effect of the
coupon varying inversely to a multiple of an applicable index creates a leverage
factor. Inverse floaters based on multiples of a stated index are
designed to be highly sensitive to changes in interest rates and can subject
the
holders thereof to extreme reductions of yield and loss of
principal. The markets for inverse floating rate CMOs with highly
leveraged characteristics at times may be very thin. The Trust’s
ability to dispose of its positions in such securities will depend on the
degree
of liquidity in the markets for such securities. It is impossible to
predict the amount of trading interest that may exist in such securities,
and
therefore the future degree of liquidity.
Stripped
Mortgage-Backed Securities. The Trust also may invest in
stripped mortgage-backed securities (“Stripped Mortgage-Backed
Securities”). Stripped Mortgage-Backed Securities are created by
segregating the cash flows from underlying mortgage loans or mortgage securities
to create two or more new securities, each with a specified percentage of
the
underlying security’s principal or interest payments. Mortgage
securities may be partially stripped so that each investor class receives
some
interest and some principal. When securities are completely stripped,
however, all of the interest is distributed to holders of one type of security,
known as an interest-only security, or IO, and all of the principal is
distributed to holders of another type of security known as a principal-only
security, or PO. Strips can be created in a pass-through structure or
as tranches of a CMO. The yields to maturity on IOs and POs are very
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Trust may
not
fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially and adversely
affected.
REITs. A
REIT is a corporation, or a business trust that would otherwise be taxed
as a
corporation, which meets the definitional requirements of the
Code. The Code permits a qualifying REIT to deduct dividends paid,
thereby effectively eliminating corporate level federal income tax and making
the REIT a pass-through vehicle for federal income tax purposes. To
meet the definitional requirements of the Code, a REIT must, among other
things,
invest substantially all of its assets in interests in real estate (including
mortgages and other REITs) or cash and government securities, derive most
of its
income from rents from real property or interest on loans secured by mortgages
on real property, and distribute to shareholders annually a substantial portion
of its otherwise taxable income. REITs are characterized as equity
REITs, mortgage REITs and hybrid REITs. Equity REITs, which may
include operating or finance companies, own real estate directly and the
value
of, and income earned by, the REITs depends upon the income of the underlying
properties and the rental income they earn. Equity REITs also can
realize capital gains (or losses) by selling properties that have appreciated
(or depreciated) in value. Mortgage REITs can make construction,
development or long term mortgage loans and are sensitive to the credit quality
of the borrower. Mortgage REITs derive their income from interest
payments on such loans. Hybrid REITs combine the characteristics of
both equity and mortgage REITs, generally by holding both ownership interests
and mortgage interests in real estate. The value of securities issued
by REITs are affected by tax and regulatory requirements and by perceptions
of
management skill. They also are subject to heavy cash flow
dependency, defaults by borrowers or tenants, self- liquidation and the
possibility of failing to qualify for REIT status under the Code or to maintain
exemption from the Investment Company Act.
Other
Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage
loans
on real property, including CMO residuals. Other mortgage-related
securities may be equity or debt securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks, partnerships,
trusts and special purpose entities of the foregoing.
Brady
Bonds
The
Trust’s emerging market debt securities may include emerging market governmental
debt obligations commonly referred to as Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans
to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the “Brady Plan”). Brady Plan debt
restructurings have been implemented in a number of countries, including:
Argentina, Bolivia, Brazil, Bulgaria, Costa Rica, the Dominican Republic,
Ecuador, Jordan, Mexico, Niger, Nigeria, Panama, Peru, the Philippines, Poland,
Uruguay and Venezuela.
Supranational
Organization Obligations
The
Trust may purchase debt securities of supranational organizations such as
the
World Bank, which are chartered to promote economic
development.
Restricted
and Illiquid Securities
The
Trust may not be able to readily dispose of illiquid securities at prices
that
approximate those at which the Trust could sell such securities if they were
more widely traded and, as a result of such illiquidity, the Trust may have
to
sell other investments or engage in borrowing transactions if necessary to
raise
cash to meet its obligations.
The
Trust may purchase certain securities eligible for resale to qualified
institutional buyers as contemplated by Rule 144A under the Securities Act
(“Rule 144A Securities”). Rule 144A provides an exemption from the
registration requirements of the Securities Act for the resale of certain
restricted securities to certain qualified institutional buyers. One
effect of Rule 144A is that certain restricted securities may be considered
liquid, though no assurance can be given that a liquid market for Rule 144A
Securities will develop or be maintained. However, where a
substantial market of qualified institutional buyers has developed for certain
unregistered securities purchased by the Trust pursuant to Rule 144A under
the
Securities Act, the Trust intends to treat such securities as liquid securities
in accordance with procedures approved by the Trust’s board of
trustees. Because it is not possible to predict with assurance how
the market for Rule 144A Securities will develop, the Trust’s board of trustees
has directed BlackRock to monitor carefully the Trust’s investments in such
securities with particular regard to trading activity, availability of reliable
price information and other relevant information. To the extent that,
for a period of time, qualified institutional buyers cease purchasing restricted
securities pursuant to Rule 144A, the Trust’s investing in such securities may
have the effect of increasing the level of illiquidity in its investment
portfolio during such period.
Rights
Offerings and Warrants to Purchase
The
Trust may participate in rights offerings and may purchase warrants, which
are
privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. Subscription rights normally have
a short life span to expiration. The purchase of rights or warrants
involves the risk that the Trust could lose the purchase value of a right
or
warrant if the right to subscribe to additional shares is not exercised prior
to
the rights’ and warrants’ expiration. Also, the purchase of rights
and/or warrants involves the risk that the effective price paid for the right
and/or warrant added to the subscription price of the related security may
exceed the value of the subscribed security’s market price such as when there is
no movement in the level of the underlying security.
Equity
Securities
While
the Trust will primarily invest in common stocks, it may also invest in other
equity securities, including preferred stocks, convertible securities, warrants,
depository receipts, ETFs and equity interests in REITs.
Preferred
Stock. Preferred stock has a preference over common stock in
liquidation (and generally dividends as well) but is subordinated to the
liabilities of the issuer in all respects. As a general rule, the market
value
of preferred stock with a fixed dividend rate and no conversion element varies
inversely with interest rates and perceived credit risk, while the market
price
of convertible preferred stock generally also reflects some element of
conversion value. Because preferred stock is junior to debt securities and
other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics. Unlike interest
payments on debt securities, preferred stock dividends are payable only if
declared by the issuer’s board of directors. Preferred stock also may be subject
to optional or mandatory redemption provisions.
Convertible
Securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged
for a
prescribed amount of common stock or other equity security of the same or
a
different issuer within a particular period of time at a specified price
or
formula. A convertible security entitles the holder to receive interest paid
or
accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible income
securities in that they ordinarily provide a stable stream of income with
generally higher yields than those of common stocks of the same or similar
issuers, but lower yields than comparable nonconvertible securities. The
value
of a convertible security is influenced by changes in interest rates, with
investment value declining as interest rates increase and increasing as interest
rates decline. The credit standing
of
the issuer and other factors also may have an effect on the convertible
security’s investment value. Convertible securities rank senior to common stock
in a corporation’s capital structure but are usually subordinated to comparable
nonconvertible securities. Convertible securities may be subject to redemption
at the option of the issuer at a price established in the convertible security’s
governing instrument.
Warrants. Warrants
are privileges issued by corporations enabling the owners to subscribe to
and
purchase a specified number of shares of the corporation at a specified price
during a specified period of time. Subscription rights normally have a short
life span to expiration. The purchase of warrants involves the risk that
the
Trust could lose the purchase value of a right or warrant if the right to
subscribe to additional shares is not exercised prior to the warrants’
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security’s market price such as
when there is no movement in the level of the underlying security.
Depository
Receipts. The Trust may invest in both sponsored and unsponsored
American Depository Receipts (“ADRs”), European Depository Receipts (“EDRs”),
Global Depository Receipts (“GDRs”) and other similar global instruments. ADRs
typically are issued by a U.S. bank or trust company and evidence ownership
of
underlying securities issued by a non-U.S. corporation. EDRs, which are
sometimes referred to as Continental Depository Receipts, are receipts issued
in
Europe, typically by non-U.S. banks and trust companies, that evidence ownership
of either non-U.S. or domestic underlying securities. GDRs are depository
receipts structured like global debt issues to facilitate trading on an
international basis. Unsponsored ADR, EDR and GDR programs are organized
independently and without the cooperation of the issuer of the underlying
securities. As a result, available information concerning the issuer may
not be
as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored
ADRs, EDRs and GDRs may be more volatile than if such instruments were sponsored
by the issuer. Investments in ADRs, EDRs and GDRs present additional investment
considerations of non-U.S. securities.
ETFs. The
Trust may invest in ETFs, which are investment companies that aim to track
or
replicate a desired index, such as a sector, market or global segment. ETFs
are
passively managed and their shares are traded on a national exchange or The
NASDAQ Stock Market, Inc. (“NASDAQ”). ETFs do not sell individual shares
directly to investors and only issue their shares in large blocks known as
“creation units.” The investor purchasing a creation unit may sell the
individual shares on a secondary market. Therefore, the liquidity of ETFs
depends on the adequacy of the secondary market. There can be no assurance
that
an ETF’s investment objective will be achieved, as ETFs based on an index may
not replicate and maintain exactly the composition and relative weightings
of
securities in the index. ETFs are subject to the risks of investing in the
underlying securities. The Trust, as a holder of the securities of the ETF,
will
bear its pro rata portion of the ETF’s expenses, including advisory fees. These
expenses are in addition to the direct expenses of the Trust’s own
operations.
REITs. In
pursuing its investment strategy, the Trust may invest in equity interests
in
REITs. REITs possess certain risks which differ from an investment in common
stocks. REITs are financial vehicles that pool investor’s capital to purchase or
finance real estate. REITs may concentrate their investments in specific
geographic areas or in specific property types, i.e., hotels, shopping
malls, residential complexes and office buildings. The market value of REIT
shares and the ability of REITs to distribute income may be adversely affected
by several factors, including rising interest rates, changes in the national,
state and local economic climate and real estate conditions, perceptions
of
prospective tenants of the safety, convenience and attractiveness of the
properties, the ability of the owners to provide adequate management,
maintenance and insurance, the cost of complying with the Americans with
Disabilities Act, increased competition from new properties, the impact of
present or future environmental legislation and compliance with environmental
laws, changes in real estate taxes and other operating expenses, adverse
changes
in governmental rules and fiscal policies, adverse changes in zoning laws
and
other factors beyond the control of the issuers of the REITs. In addition,
distributions received by the Trust from REITs may consist of dividends,
capital
gains and/or return of capital. As REITs generally pay a higher rate of
dividends (on a pre-tax basis) than operating companies, to the extent
application of the Trust’s investment strategy results in the Trust investing in
REIT shares, the percentage of the Trust’s dividend income received from REIT
shares will likely exceed the percentage of the Trust’s portfolio which is
comprised of REIT shares. Generally, dividends received by the Trust from
REIT
shares and distributed to the Trust’s shareholders will not constitute
“qualified dividend income” eligible for the reduced tax rate applicable to
qualified dividend income; therefore, the tax rate applicable to that portion
of
the dividend income attributable to REIT shares held by the Trust that
shareholders of the
Trust receive will be taxed at a higher rate than dividends eligible for
the
reduced tax rate applicable to qualified dividend income.
Short-Term
Debt Securities
For
temporary defensive proposes or to keep cash on hand, the Trust may invest
up to
100% of its Managed Assets in cash equivalents and short-term debt
securities. Short-term debt investments are defined to include,
without limitation, the following:
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U.S.
Government securities, including bills, notes and bonds differing
as to
maturity and rates of interest that are either issued or guaranteed
by the
U.S. Treasury or by U.S. Government agencies or
instrumentalities. U.S. Government securities include
securities issued by (a) the Federal Housing Administration, Farmers
Home
Administration, Export-Import Bank of the United States, Small
Business
Administration, and GNMA, whose securities are supported by the
full faith
and credit of the United States; (b) the Federal Home Loan Banks,
Federal
Intermediate Credit Banks, and Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from
the
U.S. Treasury; (c) the FNMA, whose securities are supported by
the
discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and (d) the Student
Loan
Marketing Association, whose securities are supported only by its
credit. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities,
no assurance can be given that it always will do so since it is not
so obligated by law. The U.S. Government, its agencies and
instrumentalities do not guarantee the market value of their
securities. Consequently, the value of such securities may
fluctuate.
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Certificates
of deposit issued against funds deposited in a bank or a savings
and loan
association. Such certificates are for a definite period of
time, earn a specified rate of return, and are normally
negotiable. The issuer of a certificate of deposit agrees to
pay the amount deposited plus interest to the bearer of the certificate
on
the date specified thereon. Certificates of deposit purchased
by the Trust may not be fully insured by the Federal Deposit Insurance
Corporation.
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Repurchase
agreements, which involve purchases of debt securities. At the
time the Trust purchases securities pursuant to a repurchase agreement,
it
simultaneously agrees to resell and redeliver such securities to
the
seller, who also simultaneously agrees to buy back the securities
at a
fixed price and time. This assures a predetermined yield for
the Trust during its holding period, since the resale price is
always
greater than the purchase price and reflects an agreed-upon market
rate. Such actions afford an opportunity for the Trust to
invest temporarily available cash. The Trust may enter into
repurchase agreements only with respect to obligations of the U.S.
Government, its agencies or instrumentalities; certificates of
deposit; or
bankers’ acceptances in which the Trust may invest. Repurchase
agreements may be considered loans to the seller, collateralized
by the
underlying securities. The risk to the Trust is limited to the
ability of the seller to pay the agreed-upon sum on the repurchase
date;
in the event of default, the repurchase agreement provides that
the Trust
is entitled to sell the underlying collateral. If the value of
the collateral declines after the agreement is entered into, and
if the
seller defaults under a repurchase agreement when the value of
the
underlying collateral is less than the repurchase price, the Trust
could
incur a loss of both principal and interest. BlackRock monitors
the value of the collateral at the time the action is entered into
and at
all times during the term of the repurchase
agreement. BlackRock does so in an effort to determine that the
value of the collateral always equals or exceeds the agreed-upon
repurchase price to be paid to the Trust. If the seller were to
be subject to a federal bankruptcy proceeding, the ability of the
Trust to liquidate the collateral could be delayed or impaired
because of
certain provisions of the bankruptcy
laws.
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Commercial
paper, which consists of short-term unsecured promissory notes,
including
variable rate master demand notes issued by corporations to finance
their
current operations.
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Master
demand notes are direct lending arrangements between the Trust and a
corporation. There is no secondary market for such
notes. However, they are redeemable by the Trust at any
time. BlackRock will consider the financial condition of the
corporation (e.g., earning power, cash flow and other liquidity ratios) and
will
continuously monitor the corporation’s ability to meet all of its financial
obligations, because the Trust’s liquidity might be impaired if the corporation
were unable to pay principal and interest on demand. Investments in
commercial paper will be limited to commercial paper rated in the highest
categories by a major rating agency and which mature within one year of the
date
of purchase or carry a variable or floating rate of interest.
OTHER
INVESTMENT POLICIES AND TECHNIQUES
Strategic
Transactions and Risk Management
Consistent
with its investment objectives and policies set forth herein, the Trust may
also
enter into certain duration and risk management transactions. In
particular, the Trust may purchase and sell futures contracts, exchange listed
and over-the-counter put and call options on securities, equity and other
indices and futures contracts, forward foreign currency contracts, and may
enter
into various interest rate transactions (collectively, “Strategic
Transactions”). Strategic Transactions may be used to attempt to
protect against possible changes in the market value of the Trust’s portfolio
resulting from fluctuations in the securities markets and changes in interest
rates, to protect the Trust’s unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes
and to establish a position in the securities markets as a temporary substitute
for purchasing particular securities. Any or all of these Strategic
Transactions may be used at any time. There is no particular strategy
that requires use of one technique rather than another. Use of any
Strategic Transaction is a function of market conditions. The ability
of the Trust to use them successfully will depend on BlackRock’s ability to
predict pertinent market movements as well as sufficient correlation among
the
instruments, which cannot be assured. The Strategic Transactions that
the Trust may use are described below. Although the Trust recognizes
it is not likely that it will use certain of these strategies in light of
its
investment policies, it nevertheless describes them here because the Trust
may
seek to use these strategies in certain circumstances.
Futures
Contracts and Options on Futures Contracts. In connection with
its duration and other risk management strategies, the Trust may also enter
into
contracts for the purchase or sale for future delivery (“futures contracts”) of
securities, aggregates of securities or indices or prices thereof, other
financial indices and U.S. government debt securities or options on the
above. The Trust will engage in such transactions only for bona fide
duration, risk management and other portfolio management purposes.
Forward
Foreign Currency Contracts. The Trust may enter into forward
currency contracts to purchase or sell foreign currencies for a fixed amount
of
U.S. dollars or another foreign currency. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future
date,
which may be any fixed number of days (term) from the date of the forward
currency contract agreed upon by the parties, at a price set at the time
the
forward currency contract is entered into. Forward currency contracts
are traded directly between currency traders (usually large commercial banks)
and their customers. The Trust may purchase a forward currency
contract to lock in the U.S. dollar price of a security denominated in a
foreign
currency that the Trust intends to acquire. The Trust may sell a
forward currency contract to lock in the U.S. dollar equivalent of the proceeds
from the anticipated sale of a security or a dividend or interest payment
denominated in a foreign currency. The Trust may also use forward
currency contracts to shift the Trust’s exposure to foreign currency exchange
rate changes from one currency to another. For example, if the Trust
owns securities denominated in a foreign currency and BlackRock believes
that
currency will decline relative to another currency, the Trust might enter
into a
forward currency contract to sell the appropriate amount of the first foreign
currency with payment to be made in the second currency. The Trust
may also purchase forward currency contracts to enhance income when BlackRock
anticipates that the foreign currency will appreciate in value but securities
denominated in that currency do not present attractive investment
opportunities. The Trust may also use forward currency contracts to
hedge against a decline in the value of existing investments denominated
in a
foreign currency. Such a hedge would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security
values
caused by other factors. The Trust could also
hedge
the position by entering into a forward currency contract to sell another
currency expected to perform similarly to the currency in which the Trust’s
existing investments are denominated. This type of hedge could offer
advantages in terms of cost, yield or efficiency, but may not hedge currency
exposure as effectively as a simple hedge into U.S. dollars. This
type of hedge may result in losses if the currency used to hedge does not
perform similarly to the currency in which the hedged securities are
denominated. The Trust may also use forward currency contracts in one
currency or a basket of currencies to attempt to hedge against fluctuations
in
the value of securities denominated in a different currency if BlackRock
anticipates that there will be a correlation between the two
currencies. The cost to the Trust of engaging in forward currency
contracts varies with factors such as the currency involved, the length of
the
contract period and the market conditions then prevailing. Because
forward currency contracts are usually entered into on a principal basis,
no
fees or commissions are involved. When the Trust enters into a
forward currency contract, it relies on the counterparty to make or take
delivery of the underlying currency at the maturity of the
contract. Failure by the counterparty to do so would result in the
loss of some or all of any expected benefit of the
transaction. Secondary markets generally do not exist for forward
currency contracts, with the result that closing transactions generally can
be
made for forward currency contracts only by negotiating directly with the
counterparty. Thus, there can be no assurance that the Trust will in
fact be able to close out a forward currency contract at a favorable price
prior
to maturity. In addition, in the event of insolvency of the
counterparty, the Trust might be unable to close out a forward currency
contract. In either event, the Trust would continue to be subject to
market risk with respect to the position, and would continue to be required
to
maintain a position in securities denominated in the foreign currency or
to
maintain cash or liquid assets in a segregated account. The precise
matching of forward currency contract amounts and the value of the securities
involved generally will not be possible because the value of such securities,
measured in the foreign currency, will change after the forward currency
contract has been established. Thus, the Trust might need to purchase
or sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The
projection of short term currency market movements is extremely difficult,
and
the successful execution of a short term hedging strategy is highly
uncertain.
Calls
on Securities, Indices and Futures Contracts. In order to
enhance income or reduce fluctuations on net asset value, the Trust may sell
or
purchase call options (“calls”) on securities and indices based upon the prices
of futures contracts and debt securities that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets. A call
option gives the purchaser of the option the right to buy, and obligates
the
seller to sell, the underlying security, futures contract or index at the
exercise price at any time or at a specified time during the option
period. All such calls sold by the Trust must be “covered” as long as
the call is outstanding (i.e., the Trust must own the instrument
subject to the call or other securities or assets acceptable for applicable
segregation and coverage requirements). A call sold by the Trust
exposes the Trust during the term of the option to possible loss of opportunity
to realize appreciation in the market price of the underlying security, index
or
futures contract and may require the Trust to hold an instrument which it
might
otherwise have sold. The purchase of a call gives the Trust the right
to buy a security, futures contract or index at a fixed price. Calls
on futures on securities must also be covered by assets or instruments
acceptable under applicable segregation and coverage requirements.
Puts
on Securities, Indices and Futures Contracts. As with calls, the
Trust may purchase put options (“puts”) that relate to securities (whether or
not it holds such securities in its portfolio), indices or futures
contracts. For the same purposes, the Trust may also sell puts on
securities, indices or futures contracts on such securities if the Trust’s
contingent obligations on such puts are secured by segregated assets consisting
of cash or liquid debt securities having a value not less than the exercise
price. The Trust will not sell puts if, as a result, more than 50% of
the Trust’s total assets would be required to cover its potential obligations
under its hedging and other investment transactions. In selling puts,
there is a risk that the Trust may be required to buy the underlying security
at
a price higher than the current market price.
Interest
Rate Transactions. Among the Strategic Transactions that the
Trust may enter into are interest rate swaps and the purchase or sale of
interest rate caps and floors. The Trust expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio as a duration management technique or to protect
against any increase in the price of securities the Trust anticipates purchasing
at a later date. The Trust intends to use these transactions for
duration and risk management purposes and not as a speculative
investment. The Trust will not sell interest rate caps or floors that
it does not own. Interest rate swaps involve the exchange by the
Trust with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount
of
principal. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a notional principal amount from
the
party selling such interest rate cap. The purchase of an interest
rate floor entitles the purchaser, to the extent that a specified index falls
below a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate
floor.
The
Trust may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending on whether it is managing
its
assets or liabilities, and will usually enter into interest rate swaps on
a net
basis, i.e., the two payment streams are netted out, with the Trust
receiving or paying, as the case may be, only the net amount of the two payments
on the payment dates. In as much as these hedging transactions are
incurred into for good faith hedging purposes. BlackRock and the
Trust believe such obligations do not constitute senior securities, and,
accordingly will not treat them as being subject to its borrowing
restrictions. The Trust will accrue the net amount of the excess, if
any, of the Trust’s obligations over its entitlements with respect to each
interest rate swap on a daily basis and will designate on its books and records
with a custodian an amount of cash or liquid high grade securities having
an
aggregate net asset value at all times at least equal to the accrued
excess. The Trust will not enter into any interest rate swap, cap or
floor transaction unless the unsecured senior debt or the claims-paying ability
of the other party thereto is rated in the highest rating category of at
least
one nationally recognized statistical rating organization at the time of
entering into such transaction. If there is a default by the other
party to such a transaction, the Trust will have contractual remedies pursuant
to the agreements related to the transaction. The swap market has
grown substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. Caps and floors are more recent innovations for
which standardized documentation has not yet been developed and, accordingly,
they are less liquid than swaps.
Credit
Derivatives. The Trust may engage in credit derivative
transactions. There are two broad categories of credit derivatives:
default price risk derivatives and market spread derivatives. Default
price risk derivatives are linked to the price of reference securities or
loans
after a default by the issuer or borrower, respectively. Market
spread derivatives are based on the risk that changes in market factors,
such as
credit spreads, can cause a decline in the value of a security, loan or
index. There are three basic transactional forms for credit
derivatives: swaps, options and structured instruments. The use of
credit derivatives is a highly specialized activity which involves strategies
and risks different from those associated with ordinary portfolio security
transactions. If BlackRock is incorrect in its forecasts of default
risks, market spreads or other applicable factors, the investment performance
of
the Trust would diminish compared with what it would have been if these
techniques were not used. Moreover, even if BlackRock is correct in
its forecasts, there is a risk that a credit derivative position may correlate
imperfectly with the price of the asset or liability being
protected. There is no limit on the amount of credit derivative
transactions that may be entered into by the Trust. The Trust’s risk
of loss in a credit derivative transaction varies with the form of the
transaction. For example, if the Trust purchases a default option on
a security, and if no default occurs with respect to the security, the Trust’s
loss is limited to the premium it paid for the default option. In
contrast, if there is a default by the grantor of a default option, the Trust’s
loss will include both the premium that it paid for the option and the decline
in value of the underlying security that the default option
protected.
Appendix
A contains further information about the characteristics, risks and possible
benefits of Strategic Transactions and the Trust’s other policies and
limitations (which are not fundamental policies) relating to investment in
futures contracts and options. The principal risks relating to the
use of futures contracts and other Strategic Transactions are: (a) less than
perfect correlation between the prices of the instrument and the market value
of
the securities in the Trust’s portfolio; (b) possible lack of a liquid secondary
market for closing out a position in such instruments; (c) losses resulting
from
interest rate or other market movements not anticipated by BlackRock; and
(d)
the obligation to meet additional variation margin or other payment
requirements, all of which could result in the Trust being in a worse position
than if such techniques had not been used.
Certain
provisions of the Code may restrict or affect the ability of the Trust to
engage
in Strategic Transactions. See “Tax Matters.”
When-Issued
and Forward Commitment Securities
The
Trust may purchase securities on a “when-issued” basis and may purchase or sell
securities on a “forward commitment” basis in order to acquire the security or
to hedge against anticipated changes in interest rates and
prices. When such transactions are negotiated, the price, which is
generally expressed in yield terms, is fixed at the time the commitment is
made,
but delivery and payment for the securities take place at a later
date. When-issued securities and forward commitments may be sold
prior to the settlement date, but the Trust will enter into when-issued and
forward commitments only with the intention of actually receiving or delivering
the securities, as the case may be (provided that dollar roll transactions
will
not be considered forward commitment transactions if they are entered into
on
the basis of regular way settlement). If the Trust disposes of the
right to acquire a when-issued security prior to its acquisition or disposes
of
its right to deliver or receive against a forward commitment, it might incur
a
gain or loss. At the time the Trust enters into a transaction on a
when-issued or forward commitment basis, it will designate on its books and
records cash or liquid debt securities equal to at least the value of the
when-issued or forward commitment securities. The value of these
assets will be monitored daily to ensure that their marked to market value
will
at all times equal or exceed the corresponding obligations of the
Trust. There is always a risk that the securities may not be
delivered and that the Trust may incur a loss. Settlements in the
ordinary course, which may take substantially more than five business days,
are
not treated by the Trust as when-issued or forward commitment transactions
and
accordingly are not subject to the foregoing restrictions.
Securities
purchased on a forward commitment or when-issued basis are subject to changes
in
value (generally changing in the same way, i.e., appreciating when
interest rates decline and depreciating when interest rates rise) based upon
the
public’s perception of the creditworthiness of the issuer and changes, actual or
anticipated, in the level of interest rates. Securities purchased
with a forward commitment or when-issued basis may expose the Trust to risks
because they may experience such fluctuations prior to their actual
delivery. Purchasing securities on a when-issued basis can involve
the additional risks that the yield available in the market when the delivery
takes place actually may be higher than that obtained in the transaction
itself. Purchasing securities on a forward commitment or when-issued
basis when the Trust is fully invested may result in greater potential
fluctuation in the value of the Trust’s net assets and its net asset value per
share.
Reverse
Repurchase Agreements
The
Trust may enter into reverse repurchase agreements with respect to its portfolio
investments subject to the investment restrictions set forth
herein. Reverse repurchase agreements involve the sale of securities
held by the Trust with an agreement by the Trust to repurchase the securities
at
an agreed upon price, date and interest payment. At the time the
Trust enters into a reverse repurchase agreement, it may designate on its
books
and records liquid instruments having a value not less than the repurchase
price
(including accrued interest). If the Trust establishes and maintains
such a segregated account, a reverse repurchase agreement will not be considered
a borrowing by the Trust; however, under certain circumstances in which the
Trust does not establish and maintain such a segregated account, such reverse
repurchase agreement will be considered a borrowing for the purpose of the
Trust’s limitation on borrowings. The use by the Trust of reverse
repurchase agreements involves many of the same risks of leverage since the
proceeds derived from such reverse repurchase agreements may be invested
in
additional securities. Reverse repurchase agreements involve the risk
that the market value of the securities acquired in connection with the reverse
repurchase agreement may decline below the price of the securities the Trust
has
sold but is obligated to repurchase. Also, reverse repurchase
agreements involve the risk that the market value of the securities retained
in
lieu of sale by the Trust in connection with the reverse repurchase agreement
may decline in price.
If
the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Trust’s
obligation to repurchase the securities, and the Trust’s use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Trust would bear the risk of loss to the extent
that the proceeds of the reverse repurchase agreement are less than the value
of
the securities subject to such agreement.
Dollar
Roll Transactions
To
take advantage of attractive opportunities in the bond market and to enhance
current income, the Trust may enter into dollar roll transactions. A
dollar roll transaction involves a sale by the Trust of a mortgage-backed
or
other
security concurrently with an agreement by the Trust to repurchase a similar
security at a later date at an agreed upon price. The securities that
are repurchased will bear the same interest rate and stated maturity as those
sold, but pools of mortgages collateralizing those securities may have different
prepayment histories than those sold. During the period between the
sale and repurchase, the Trust will not be entitled to receive interest and
principal payments on the securities sold. Proceeds of the sale will
be invested in additional instruments for the Trust, and the income from
these
investments will generate income for the Trust. 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 Trust compared
with
what the performance would have been without the use of dollar
rolls. At the time the Trust enters into a dollar roll transaction,
it will place in a segregated account maintained with its custodian cash,
U.S.
Government securities or other liquid securities having a value equal to
the
repurchase price (including accrued interest) and will subsequently monitor
the
account to ensure that its value is maintained. The Trust’s dollar
rolls, together with its reverse repurchase agreements, the issuance of
preferred shares and other borrowings, will not exceed, in the aggregate,
38% of
the value of its total managed assets.
Dollar
roll transactions involve the risk that the market value of the securities
the
Trust is required to purchase may decline below the agreed upon repurchase
price
of those securities. The Trusts right to purchase or repurchase
securities may be restricted. Successful use of mortgage dollar rolls
may depend upon the investment manager’s ability to correctly predict interest
rates and prepayments. There is no assurance that dollar rolls
can be successfully employed.
Repurchase
Agreements
As
temporary investments, the Trust may invest in repurchase
agreements. A repurchase agreement is a contractual agreement whereby
the seller of securities agrees to repurchase the same security at a specified
price on a future date agreed upon by the parties. The agreed-upon
repurchase price determines the yield during the Trust’s holding
period. Repurchase agreements are considered to be loans
collateralized by the underlying security that is the subject of the repurchase
contract. The Trust will only enter into repurchase agreements with
registered securities dealers or domestic banks that, in the opinion of
BlackRock, present minimal credit risk. The risk to the Trust is
limited to the ability of the issuer to pay the agreed-upon repurchase price
on
the delivery date; however, although the value of the underlying collateral
at
the time the transaction is entered into always equals or exceeds the
agreed-upon repurchase price, if the value of the collateral declines there
is a
risk of loss of both principal and interest. In the event of default,
the collateral may be sold but the Trust might incur a loss if the value
of the
collateral declines, and might incur disposition costs or experience delays
in
connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Trust may be delayed or
limited. BlackRock will monitor the value of the collateral at the
time the transaction is entered into and at all times subsequent during the
term
of the repurchase agreement in an effort to determine that such value always
equals or exceeds the agreed-upon repurchase price. In the event the
value of the collateral declines below the repurchase price, BlackRock will
demand additional collateral from the issuer to increase the value of the
collateral to at least that of the repurchase price, including
interest.
Short
Sales
The
Trust may make short sales of securities. A short sale is a
transaction in which the Trust sells a security it does not own in anticipation
that the market price of that security will decline. The Trust may
make short sales to hedge positions, for risk management, in order to maintain
portfolio flexibility or to enhance income or gain.
When
the Trust makes a short sale, it must 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 Trust may have to pay a fee to borrow particular securities
and is often obligated to pay over any payments received on such borrowed
securities.
The
Trust’s obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. Government
securities or other liquid securities. The Trust will also be
required to designate on its books and records similar collateral with its
custodian to the extent, if any, necessary so that the
aggregate
collateral value is at all times at least equal to the current market value
of
the security sold short. Depending on arrangements made with the
broker-dealer from which it borrowed the security regarding payment over
of any
payments received by the Trust on such security, the Trust may not receive
any
payments (including interest) on its collateral deposited with such
broker-dealer.
If
the price of the security sold short increases between the time of the short
sale and the time the Trust replaces the borrowed security, the Trust will
incur
a loss; conversely, if the price declines, the Trust will realize a
gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. Although the Trust’s gain is
limited to the price at which it sold the security short, its potential loss
is
theoretically unlimited.
The
Trust will not make a short sale if, after giving effect to such sale, the
market value of all securities sold short exceeds 25% of the value of its
total
assets or the Trust’s aggregate short sales of a particular class of securities
exceeds 25% of the outstanding securities of that class. The Trust
may also make short sales “against the box” without respect to such
limitations. In this type of short sale, at the time of the sale, the
Trust owns or has the immediate and unconditional right to acquire at no
additional cost the identical security.
Securities
Lending
The
Trust may lend its portfolio securities to banks or dealers which meet the
creditworthiness standards established by the board of trustees of the Trust
(“Qualified Institutions”). By lending its portfolio securities, the
Trust attempts to increase its income through the receipt of interest on
the
loan. Any gain or loss in the market price of the securities loaned
that may occur during the term of the loan will be for the account of the
Trust. The Trust may lend its portfolio securities so long as the
terms and the structure of such loans are not inconsistent with requirements
of
the Investment Company Act, which currently require that (i) the borrower
pledge
and maintain with the Trust collateral consisting of cash, a letter of credit
issued by a domestic U.S. bank, or securities issued or guaranteed by the
U.S.
government having a value at all times not less than 100% of the value of
the
securities loaned, (ii) the borrower add to such collateral whenever the
price
of the securities loaned rises (i.e., the value of the loan is “marked
to the market” on a daily basis), (iii) the loan be made subject to termination
by the Trust at any time and (iv) the Trust receive reasonable interest on
the
loan (which may include the Trust’s investing any cash collateral in interest
bearing short term investments), any distributions on the loaned securities
and
any increase in their market value. The Trust will not lend portfolio
securities if, as a result, the aggregate of such loans exceeds 331/3% of the
value of
the Trust’s total assets (including such loans). Loan arrangements
made by the Trust will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which rules presently
require the borrower, after notice, to redeliver the securities within the
normal settlement time of five business days. All relevant facts and
circumstances, including the creditworthiness of the Qualified Institution,
will
be monitored by BlackRock, and will be considered in making decisions with
respect to lending securities, subject to review by the Trust’s board of
trustees.
The
Trust may lend its portfolio securities to banks or dealers which meet the
creditworthiness standards established by the board of trustees of the Trust,
which allows the Trust the opportunity to earn additional
income. Although the Trust will require the borrower of the
securities to post collateral for the loan and the terms of the loan will
require that the Trust be able to reacquire the loaned securities if certain
events occur, the Trust is still subject to the risk that the borrower of
the
securities may default, which could result in the Trust losing money and
a
decline in the Trust’s net asset value. Any loss in the market price
of securities loaned by the Trust that occurs during the term of the loan
would
be borne by the Trust and would adversely affect the Trust’s
performance. Also, there may be delays in recovery, or no recovery,
of securities loaned or even a loss of rights in the collateral should the
borrower of the securities fail financially while the loan is
outstanding. These risks may be greater for Non-U.S.
Securities.
The
Trust may pay reasonable negotiated fees in connection with loaned securities,
so long as such fees are set forth in a written contract and approved by
the
Trust’s board of trustees. In addition, voting rights may pass with
the loaned securities, but if a material event were to occur affecting such
a
loan, the loan must be called and the securities voted.
MANAGEMENT
OF THE TRUST
Investment
Management Agreement
The
investment management agreement between the Trust and BlackRock Advisors
was
approved by the Trust’s board of trustees at an “in person” meeting of the board
of trustees held
on ,
2007, including a majority of the trustees who are not parties to the agreement
or “interested persons” of any such party (as such term is defined in the
Investment Company Act). The agreement was approved by the sole common
shareholder of the Trust as
of ,
2007. The agreement provides for the Trust to pay a management fee at
an annual rate equal to % of the average daily value of
the Trust’s net assets. The agreement will continue in
effect for a period of two years from its effective date, and if not sooner
terminated, will continue in effect for successive periods of 12 months
thereafter, provided that each continuance is specifically approved at least
annually by both (1) the vote of a majority of the Trust’s board of trustees or
the vote of a majority of the securities of the Trust at the time outstanding
and entitled to vote (as such term is defined in the Investment Company Act)
and
(2) by the vote of a majority of the trustees who are not parties to the
investment management agreement or interested persons (as such term is defined
in the Investment Company Act) of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The agreement may
be terminated as a whole at any time by the Trust, without the payment of
any
penalty, upon the vote of a majority of the Trust’s board of trustees or a
majority of the outstanding voting securities of the Trust or by BlackRock
Advisors, on 60 days’ written notice by either party to the other which can be
waived by the non-terminating party. The agreement will terminate
automatically in the event of its assignment (as such term is defined in
the
Investment Company Act and the rules thereunder).
The
investment management agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, BlackRock Advisors is not liable to the Trust or
any of
the Trust’s shareholders for any act or omission by BlackRock Advisors in the
supervision or management of its respective investment activities or for
any
loss sustained by the Trust or the Trust’s shareholders and provides for
indemnification by the Trust of BlackRock Advisors, its directors, officers,
employees, agents and control persons for liabilities incurred by them in
connection with their services to the Trust, subject to certain limitations
and
conditions.
BlackRock
Advisors will devote such time and effort to the business of the Trust as
is
reasonably necessary to perform its duties to the Trust. However, the
services of BlackRock Advisors are not exclusive, and BlackRock Advisors
provides similar services to other investment companies and other clients
and
may engage in other activities.
Sub-Investment
Advisory Agreement
Pursuant
to a sub-investment advisory agreement, BlackRock Advisors has appointed
BlackRock Financial Management (the “Sub-Advisor”) to perform the day-to-day
investment management of the Trust. The sub-investment advisory
agreement was approved by the Trust’s board of trustees at an “in person”
meeting held on , 2007, including
a majority of the Trustees who are not parties to the agreements or interested
persons of any such party (as such term is defined in the Investment Company
Act). The agreement was approved by the sole common shareholder of
the Trust
on ,
2007. The agreement will continue in effect for a period of two years
from its effective date, and if not sooner terminated, will continue in effect
for successive periods of 12 months thereafter, provided that each continuance
is specifically approved at least annually by both (1) the vote of a majority
of
the Trust’s board of trustees or the vote of a majority of the outstanding
voting securities of the Trust at the time outstanding and entitled to vote
(as
defined in the Investment Company Act) and (2) by the vote of a majority
of the
trustees who are not parties to such agreement or interested persons (as
such
term is defined in the Investment Company Act) of any such party, cast in
person
at a meeting called for the purpose of voting on such approval. The
agreement may be terminated as a whole at any time by the Trust or by BlackRock
Advisors without the payment of any penalty, upon the vote of a majority
of the
Trust’s board of trustees or a majority of the outstanding voting securities of
the Trusts, or the Sub-Advisor, on 60 days’ written notice by any party to the
other (which may be waived by the non-terminating party). The agreement will
also terminate automatically in the event of its assignment (as such term
is
defined in the Investment Company Act and the rules
thereunder).
Pursuant
to the sub-investment advisory agreement, BlackRock Advisors will pay a
sub-advisory fee to the Sub-Advisor equal
to % of the management
fee. In addition, with the approval of the board of trustees,
including a majority of the independent trustees, a pro rata portion of the
salaries, bonuses, health insurance, retirement benefits and similar employment
costs for the time spent on Trust operations (other than the provision of
services required under the investment management agreement) of all personnel
employed by BlackRock Advisors who devote substantial time to Trust operations
may be reimbursed, at cost, to BlackRock Advisors by the
Trust. BlackRock Advisors currently anticipates that it may be
reimbursed for employees who provide pricing, secondary market support and
compliance services to the Trust, subject to the approval of the board of
trustees, including a majority of the independent trustees.
The
sub-investment advisory agreement provides that, in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Trust will indemnify the Sub-Advisor, its directors,
officers, employees, agents, associates and control persons for liabilities
incurred by them in connection with their services to the Trust, subject
to
certain limitations.
The
Sub-Advisor will devote such time and effort to the business of the Trust
as is
reasonably necessary to perform their duties to the Trust. However,
the services of the Sub-Advisor are not exclusive, and the Sub-Advisor provides
similar services to other investment companies and other clients and may
engage
in other activities.
Matters
Considered by the Board
A
discussion regarding the basis for the approval of the investment management
and
sub-investment advisory agreements by the Board will be available in the
Trust’s
report to shareholders for the period ending, 2008.
Trustees
and Officers
The
officers of the Trust manage its day-to-day operations. The officers
are directly responsible to the Trust’s board of trustees which sets broad
policies for the Trust and chooses its officers. Below is a list of the trustees
and officers of the Trust and their present positions and principal occupations
during the past five years. The business address of the Trust,
BlackRock Advisors, the Sub-Advisor and their board members and officers
is 100
Bellevue Parkway, Wilmington, Delaware 19809, unless specified otherwise
below.
The
trustees listed below are either trustees or directors of other closed-end
funds
in which BlackRock Advisors acts as investment advisor.
Name,
Address, Age
and
Position(s)
Held
With
Registrant
|
|
Term
of
Office
and
Length
of
Time
Served
|
|
Principal
Occupation
During
the Past Five Years and
Other
Affiliations
|
|
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Trustee*
|
|
Other
Directorships
Held
by Trustee
|
|
INDEPENDENT
TRUSTEES:
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
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(1)
|
Estimates
the total compensation to be earned by that person during the calendar
year ending December 31, 2007 from the 60 closed-end funds advised
by the
Advisor (the “Fund Complex”).
|
The
Trust shall pay a pro rata portion (based on relative net assets) of the
following trustee fees paid by the Fund Complex: (i)
$ per
annum for each independent trustee as a retainer and (ii)
$ per
day for each independent trustee for each special meeting of each board in
the
Fund Complex (i.e., any meeting, whether telephonic or in person, other
than one of the six regularly scheduled meetings of each board per year)
attended. Each independent trustee shall also be entitled to reimbursement
for
all of his or her out-of-pocket expenses in attending each meeting of the
board
of trustees of the Trust and any committee
thereof. will
receive an additional
$ per
annum from the Fund Complex for acting as the lead trustee for each board
of
trustees/directors in the Fund Complex plus an additional
$ per
annum for his service as chairman of the Audit
Committee. and will
receive an additional
$ per
annum from the Fund Complex for their service on the Audit Committee of the
Fund
Complex. This additional compensation
to , and will
be allocated among the funds/trusts in the Fund Complex based on their relative
net assets. Certain of the above fees paid to the independent
trustees will be subject to mandatory deferrals pursuant to the Fund Complex’s
deferred compensation plan. The independent trustees have agreed that at
least
$ of
their
$ retainer
will be mandatorily deferred pursuant to the Fund Complex’s deferred
compensation plan. Also, members of the Audit Committee of the Fund Complex
will
be required to defer
$ of
the per annum fee they will receive for their services on the Audit Committee
pursuant to the Fund Complex’s deferred compensation plan. Under the deferred
compensation plan, deferred amounts earn a return for the independent trustees
as though equivalent dollar amounts had been invested in common shares of
certain other funds/trusts in the Fund Complex selected by the independent
trustees. This has approximately the same economic effect for the independent
trustees as if they had invested the deferred amounts in such other
funds/trusts. The deferred compensation plan is not funded and obligations
thereunder represent general unsecured claims against the general assets
of a
fund/trust. A fund/trust may, however, elect to invest in common shares of
those
funds/trusts selected by the independent trustee in order to match its deferred
compensation obligations.
The
board of trustees of the Trust currently has five committees: an Executive
Committee, an Audit Committee, a Governance Committee, a Compliance Committee
and a Portfolio Review Committee.
The
Executive Committee consists
of and and
acts in accordance with the powers permitted to such a committee under the
Agreement and Declaration of Trust and the By-Laws of the Trust. The Executive
Committee, subject to the Trust’s Agreement and Declaration of Trust, By-Laws
and applicable law, acts on behalf of the full board of trustees in the
intervals between meetings of the board.
The
Audit Committee consists
of , and . The
Audit Committee acts according to the Audit Committee
charter. has
been appointed as Chairman of the Audit Committee. The Audit Committee is
responsible for reviewing and evaluating issues related to the accounting
and
financial reporting policies of the Trust, overseeing the quality and
objectivity of the Trust’s financial statements and the audit thereof and acting
as a liaison between the board of trustees and the Trust’s independent
registered public accounting firm. The board of trustees of the Trust
has determined that the Trust has two audit committee financial experts serving
on its Audit
Committee, and ,
each of whom is independent for the purpose of the definition of audit committee
financial expert as applicable to the Trust.
The
Governance Committee consists of all of the independent trustees. The
Governance Committee acts in accordance with the Governance Committee
charter. has
been appointed as Chairman of the Governance Committee. The
Governance Committee performs those functions enumerated in the Governance
Committee charter including, but not limited to, making nominations for the
appointment or election of independent trustees including shareholder nominees,
reviewing independent trustee compensation, retirement policies and personnel
training policies and administrating the provisions of the Code of Ethics
applicable to the independent trustees.
The
Governance Committee will consider trustee candidates recommended by
shareholders. In considering candidates submitted by shareholders,
the Governance Committee will take into consideration the needs of the Board
and
the qualifications of the candidate. The Governance Committee may
also take into consideration the number of shares held by the recommending
shareholder and the length of time that such shares have been
held. To have a candidate considered by the Governance Committee, a
shareholder must submit the recommendation in writing and must
include:
|
|
·
|
The
name of the shareholder and evidence of the person’s ownership of shares
of the Trust, including the number of shares owned and the length
of time
of ownership; and
|
|
|
·
|
The
name of the candidate, the candidate’s resume or a listing of his or her
qualifications to be a trustee of the Trust and the person’s consent to be
named as a trustee if selected by the Governance Committee and
nominated
by the Board.
|
The
shareholder recommendation and information described above must be sent to
the
Corporate Secretary, c/o BlackRock, P.O. Box 4546, New York, New York
10163.
The
Compliance Committee consists of all of the independent trustees. The
Compliance Committee acts according to the Compliance Committee
charter. has
been appointed as Chairman of the Compliance Committee. The
Compliance Committee performs those functions enumerated in the Compliance
Committee charter, including, but not limited to, supporting the independent
trustees in acting independently of BlackRock Advisors in pursuing the best
interests of the Trust and its shareholders, receiving information on and,
where
appropriate, recommending policies concerning the Trust’s compliance with
applicable law, and receiving reports from and making certain recommendations
in
respect of the Trust’s Chief Compliance Officer.
The
Portfolio Review Committee consists of all of the Trustees. The Portfolio
Review
Committee acts in accordance with the Portfolio Review Committee charter.
The
Portfolio Review Committee performs those functions enumerated in the Portfolio
Review Committee charter, including, but not limited to, supporting the
independent trustees in acting independently of BlackRock in pursuing the
best
interests of the Trust and its shareholders, developing an understanding
of and
reviewing the investment objective, policies and practices of the Trust,
and
reviewing with respect to the Trust: (a) whether the Trust has complied with
its
investment policies and restrictions as reflected in its prospectus and
Statement of Additional Information, (b) appropriate benchmarks and competitive
universes, (c) investment performance, (d) unusual or exceptional investment
matters, and (e) other matters bearing on the Trust’s investment
results.
As
the Trust is a closed-end investment company with no prior investment
operations, no meetings of the above committees have been held in the current
fiscal year, provided that the Governance Committee has acted by written
consent
to form the Audit Committee which, in turn, met in connection with the
organization of the Trust to select the Trust’s independent registered public
accounting firm.
Prior
to this offering, all of the outstanding shares of the Trust were owned by
an
affiliate of BlackRock Advisors.
Proxy
Voting Policies
The
board of trustees of the Trust has delegated the voting of proxies for Trust
securities to BlackRock pursuant to BlackRock’s proxy voting guidelines. Under
these guidelines, BlackRock will vote proxies related to Trust securities
in the
best interests of the Trust and its shareholders. A copy of BlackRock’s proxy
voting policy is attached as Appendix B to this Statement of Additional
Information.
Codes
of Ethics
The
Trust, the Advisor and the Sub-Advisor have adopted codes of ethics under
Rule
17j-1 of the Investment Company Act. These codes permit personnel subject
to the
codes to invest in securities, including securities that may be purchased
or
held by the Trust. These codes can be reviewed and copied at the Securities
and
Exchange Commission’s Public Reference Room in Washington, D.C. Information on
the operation of the Public Reference Room may be obtained by calling the
Securities and Exchange Commission at (202) 551-8090. These codes of ethics
are
available on the EDGAR Database on the Securities and Exchange Commission’s web
site (http://www.sec.gov), and copies of these codes may be obtained, after
paying a duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the Securities and Exchange Commission’s
Public Reference Section, Washington, D.C. 20549-0102.
Investment
Advisor and Sub-Advisor
BlackRock
Advisors acts as the Trust’s investment advisor and BlackRock Financial
Management, Inc. acts as the Trust’s investment
sub-advisor. BlackRock Advisors, located at 100 Bellevue Parkway,
Wilmington, Delaware 19809, and BlackRock Financial Management, Inc., located
at
40 East 52nd Street, New York, New York 10022, are wholly owned subsidiaries
of
BlackRock, Inc. (“BlackRock”). BlackRock is one of the world’s
largest publicly traded investment management firms. As of June 30,
2007, BlackRock’s assets under management were $1.230 trillion. The
firm manages assets on behalf of institutions and individuals worldwide through
a variety of equity, fixed income, cash management and alternative investment
products. In addition, a growing number of institutional investors
use BlackRock Solutions® investment system, risk management and financial
advisory services.
The
BlackRock organization has over 18 years of experience managing closed-end
products and, as of June 30, 2007, advised a closed-end family of 105 active
funds with approximately $45.7 billion in assets. BlackRock Advisors
and its affiliated entities had $490 billion in fixed income assets under
management as of June 30, 2007, including $12 billion in assets across 23
fixed
income closed-end funds. Headquartered in New York City, the firm has
over 4,700 employees in 18 countries and a major presence in key global markets,
including the United States, Europe, Asia, Australia and the Middle
East.
Portfolio
Managers
As
of ,
2007, managed
or was a member of the management team for the following client
accounts:
| |
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|
|
|
|
Number
of
Accounts
Subject
to a
Performance
Fee
|
|
Assets
Subject
to a
Performance
Fee
|
|
Registered
Investment Companies
|
|
|
|
|
|
|
|
|
Pooled
Investment Vehicles Other Than Registered
Investment
Companies
|
|
|
|
|
|
|
|
|
|
Other
Accounts
|
|
|
|
|
|
|
|
|
As
of ,
2007, managed
or was a member of the management team for the following client
accounts:
| |
|
|
|
|
|
Number
of
Accounts
Subject
to a
Performance
Fee
|
|
Assets
Subject
to a
Performance
Fee
|
|
Registered
Investment Companies
|
|
|
|
|
|
|
|
|
|
Pooled
Investment Vehicles Other Than Registered
Investment
Companies
|
|
|
|
|
|
|
|
|
|
Other
Accounts
|
|
|
|
|
|
|
|
|
BlackRock
Compliance
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 Trust, and BlackRock
may, consistent with applicable law, make investment recommendations to other
clients or accounts (including accounts that 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 Trust. 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
Trust. Actions with respect to securities of the same kind may be the
same as or different from the action which BlackRock, or any of its affiliates,
or any officer, director, stockholder, employee or any member of their families
may take 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
Trust.
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.
BlackRock
Portfolio Manager Compensation—Fixed Income Portfolio
Managers
To
be filed by amendment.
Securities
Ownership of Portfolio Managers
The
Trust is a newly-organized investment company. Accordingly, as of the date
of
this Statement of Additional Information, none of the portfolio managers
beneficially owns any securities issued by the Trust.
PORTFOLIO
TRANSACTIONS AND BROKERAGE
The
Advisors are responsible for decisions to buy and sell securities for the
Trust,
the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions. The Trust will
generally purchase securities on a stock exchange effected through brokers
who
charge a commission for their services. The Trust may also invest in
securities that are traded principally in the over-the-counter
market. In the over-the-counter market, securities are generally
traded on a “net” basis with dealers acting as principal for their own accounts
without a stated commission, although the price of such securities usually
includes a mark-up to the dealer. Securities purchased in
underwritten offerings generally include in the price a fixed amount of
compensation for the manager(s), underwriter(s) and dealer(s). The
Trust may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid.
Payments
of commissions to brokers who are affiliated persons of the Trust (or affiliated
persons of such persons) will be made in accordance with Rule 17e-1 under
the
Investment Company Act. Commissions paid on such transactions would
be commensurate with the rate of commissions paid on similar transactions
to
brokers that are not so affiliated.
The
Advisor and the Sub-Advisor may, consistent with the interests of the Trust,
select brokers on the basis of the research, statistical and pricing services
they provide to the Trust and their other clients. Such research, statistical
and/or pricing services must provide lawful and appropriate assistance to
the
Advisor’s or Sub-Advisor’s investment decision making process in order for such
research, statistical and/or pricing services to be considered by the Advisor
or
Sub-Advisor in selecting a broker. These research services may include
information on securities markets, the economy, individual companies, pricing
information, research products and services and such other services as may
be
permitted from time to time by Section 28(e) of the Securities Exchange Act
of
1934, as amended (the “Exchange Act”). Information and research received from
such brokers will be in addition to, and not in lieu of, the services required
to be performed by the Advisor and Sub-Advisor under their respective contracts.
A commission paid to such brokers may be higher than that which another
qualified broker would have charged for effecting the same transaction, provided
that the Advisor or Sub-Advisor determine in good faith that such commission
is
reasonable in terms either of the transaction or the overall responsibility
of
the Advisor or Sub-Advisor to the Trust and its other clients and that the
total
commissions paid by the Trust will be reasonable in relation to the benefits
to
the Trust over the long-term. The advisory fees that the Trust pays to the
Advisor will not be reduced as a consequence of the Advisor’s or Sub-Advisor’s
receipt of brokerage and research services. To the extent that portfolio
transactions are used to obtain such services, the brokerage commissions
paid by
the Trust will exceed those that might otherwise be paid by an amount that
cannot be presently determined. Such services generally would be useful and
of
value to the Advisor or Sub-Advisor in serving one or more of their other
clients and, conversely, such services obtained by the placement of brokerage
business of other clients generally would be useful to the Advisor or
Sub-Advisor in carrying out their obligations to the Trust. While such services
are not expected to reduce the expenses of the Advisor or Sub-Advisor, the
Advisor and Sub-Advisor would, through use of the services, avoid the additional
expenses that would be incurred if they should attempt to develop comparable
information through their own staffs. Commission rates for brokerage
transactions on foreign stock exchanges are generally fixed.
One
or more of the other investment companies or accounts that the Advisor and/or
the Sub-Advisor manage may own from time to time some of the same investments
as
the Trust. Investment decisions for the Trust are made independently from
those
of such other investment companies or accounts; however, from time to time,
the
same investment decision may be made for more than one company or account.
When
two or more companies or accounts seek to purchase or sell the same securities,
the securities actually purchased or sold will be allocated among the companies
and accounts on a good faith equitable basis, usually on a pro rata basis,
by
the Advisor and/or the Sub-Advisor in their discretion in accordance with
the
accounts’ various investment objectives. Such allocations are based upon the
written procedures of the Advisor and/or Sub-Advisor, which have been reviewed
and approved by the board of trustees. In some cases, this system may adversely
affect the price or size of the position obtainable for the Trust. In other
cases, however, the ability of the Trust to participate in volume transactions
may produce better execution for the Trust. It is the opinion of the Trust’s
board of trustees that this advantage, when combined with the other benefits
available due to the Advisor’s or the Sub-Advisor’s organization, outweighs any
disadvantages that may be said to exist from exposure to simultaneous
transactions.
The
Advisor and its affiliates manage investments for clients from offices located
around the world. As a result, purchases and sales of securities may be executed
through different trading desks or on different exchanges or markets through
out
the day, resulting in transactions in the same security being effected at
different prices over a 24-hour period.
It
is not the Trust’s policy to engage in transactions with the objective of
seeking profits from short-term trading. However, the annual portfolio turnover
rate of the Trust may be greater than 100%. Because it is difficult to predict
accurately portfolio turnover rates, actual turnover may be higher or lower.
Higher portfolio turnover results in increased Trust costs, including brokerage
commissions, dealer mark-ups and other transaction costs on the sale of
securities and on the reinvestment in other securities.
DESCRIPTION
OF SHARES
Common
Shares
The
Trust intends to hold annual meetings of shareholders so long as the common
shares are listed on a national securities exchange and such meetings are
required as a condition to such listing. All common shares are equal
as to dividends, assets and voting privileges and have no conversion, preemptive
or other subscription rights. The Trust will send annual and
semi-annual reports, including financial statements, to all holders of its
shares. The prospectus contains a detailed discussion of the common
shares.
Preferred
Shares
The
Agreement and Declaration of Trust provides that the Trust’s board of trustees
may authorize and issue preferred shares with rights as determined by the
board
of trustees, by action of the board of trustees without the approval of the
holders of the common shares. Holders of common shares have no
preemptive right to purchase any preferred shares that might be
issued. Whenever preferred shares are outstanding, the holders of
common shares will not be entitled to receive any distributions from the
Trust
unless all accrued dividends on preferred shares have been paid, unless asset
coverage (as defined in the Investment Company Act) with respect to preferred
shares would be at least 200% after giving effect to the distributions and
unless certain other requirements imposed by any rating agencies rating the
preferred shares have been met. The prospectus contains a
discussion of the preferred shares it is currently anticipated the Trust
may
issue.
Other
Shares
The
board of trustees (subject to applicable law and the Trust’s Agreement and
Declaration of Trust) may authorize an offering, without the approval of
the
holders of either common shares or preferred shares, of other classes of
shares,
or other classes or series of shares, as they determine to be necessary,
desirable or appropriate, having such terms, rights, preferences, privileges,
limitations and restrictions as the board of trustees see fit. The
Trust currently does not expect to issue any other classes of shares, or
series
of shares, except for the common shares and the preferred shares.
REPURCHASE
OF COMMON SHARES
The
Trust is a closed-end management investment company and as such its shareholders
will not have the right to cause the Trust to redeem their
shares. Instead, the Trust’s common shares will trade in the open
market at a price that will be a function of several factors, including dividend
levels (which are in turn affected by expenses), net asset value, call
protection, dividend stability, relative demand for and supply of such shares
in
the market, general market and economic conditions and other
factors. Because shares of a closed-end investment company may
frequently trade at prices lower than net asset value, the Trust’s board of
trustees may consider action that might be taken to reduce or eliminate any
material discount from net asset value in respect of common shares, which
may
include the repurchase of such shares in the open market or in private
transactions, the making of a tender offer for such shares, or the conversion
of
the Trust to an open-end investment company. The board of trustees
may decide not to take any of these actions. In addition, there can
be no assurance that share repurchases or tender offers, if undertaken, will
reduce market discount.
Notwithstanding
the foregoing, at any time when the Trust’s preferred shares are outstanding,
the Trust may not purchase, redeem or otherwise acquire any of its common
shares
unless (1) all accrued preferred shares dividends have been paid and (2)
at the
time of such purchase, redemption or acquisition, the net asset value of
the
Trust’s portfolio (determined after deducting the acquisition price of the
common shares) is at least 200% of the liquidation value of the outstanding
preferred shares (expected to equal the original purchase price per share
plus
any accrued and unpaid dividends thereon). Any service fees incurred
in connection with any tender offer made by the Trust will be borne by the
Trust
and will not reduce the stated consideration to be paid to tendering
shareholders.
Subject
to its investment restrictions, the Trust may borrow to finance the repurchase
of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the
Trust
in anticipation of share repurchases or tenders will reduce the Trust’s net
income. Any share repurchase, tender offer or borrowing that might be
approved by the Trust’s board of trustees would have to comply with the Exchange
Act, the Investment Company Act and the rules and regulations
thereunder.
Although
the decision to take action in response to a discount from net asset value
will
be made by the board of trustees at the time it considers such issue, it
is the
board’s present policy, which may be changed by the board of trustees, not to
authorize repurchases of common shares or a tender offer for such shares
if: (1)
such transactions, if consummated, would (a) result in the de-listing of
the
common shares from the New York Stock Exchange, or (b) impair the Trust’s status
as a regulated investment company under the Code (which would make the Trust
a
taxable entity, causing the Trust’s income to be taxed at the corporate level in
addition to the taxation of shareholders who receive dividends from the Trust),
or as a registered closed-end investment company under the Investment Company
Act; (2) the Trust would not be able to liquidate portfolio securities in
an
orderly manner and consistent with the Trust’s investment objectives and
policies in order to repurchase shares; or (3) there is, in the board’s
judgment, any (a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting
the
Trust, (b) general suspension of or limitation on prices for trading securities
on the New York Stock Exchange, (c) declaration of a banking moratorium by
Federal or state authorities or any suspension of payment by United States
or
New York banks, (d) material limitation affecting the Trust or the issuers
of
its portfolio securities by Federal or state authorities on the extension
of
credit by lending institutions or on the exchange of foreign currency, (e)
commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States or (f) other
event
or condition which would have a material adverse effect (including any adverse
tax effect) on the Trust or its shareholders if shares were
repurchased. The board of trustees may in the future modify these
conditions in light of experience.
The
repurchase by the Trust of its shares at prices below net asset value will
result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share
repurchases or tender offers at or below net asset value will result in the
Trust’s shares trading at a price equal to their net asset
value. Nevertheless, the fact that the Trust’s shares may be the
subject of repurchase or tender offers from time to time, or that the Trust
may
be converted to an open-end investment company, may reduce any spread between
market price and net asset value that might otherwise exist.
In
addition, a purchase by the Trust of its common shares will decrease the
Trust’s
total assets which would likely have the effect of increasing the Trust’s
expense ratio. Any purchase by the Trust of its common shares at a
time when preferred shares are outstanding will increase the leverage applicable
to the outstanding common shares then remaining.
Before
deciding whether to take any action if the common shares trade below net
asset
value, the Trust’s board of trustees would likely consider all relevant factors,
including the extent and duration of the discount, the liquidity of the Trust’s
portfolio, the impact of any action that might be taken on the Trust or its
shareholders and market considerations. Based on these
considerations, even if the Trust’s shares should trade at a discount, the board
of trustees may determine that, in the interest of the Trust and its
shareholders, no action should be taken.
TAX
MATTERS
The
following discussion is a brief summary of certain U.S. federal income tax
considerations affecting the Trust and its shareholders. The discussion reflects
applicable tax laws of the United States as of the date of this Statement
of
Additional Information, which tax laws may be changed or subject to new
interpretations by the courts
or
the Internal Revenue Service (the “IRS”) retroactively or prospectively. This
discussion assumes that the Trust’s shareholders hold their common shares as
capital assets for U.S. federal income tax purposes (generally, assets held
for
investment). No attempt is made to present a detailed explanation of all
U.S.
federal income tax concerns affecting the Trust and its shareholders (including
shareholders owning a large position in the Trust), and the discussions set
forth here and in the prospectus do not constitute tax advice. Investors
are
urged to consult their own tax advisors with any specific questions relating
to
federal, state, local and foreign taxes.
Taxation
of the Trust
The
Trust intends to elect and to qualify for special tax treatment afforded
to a
regulated investment company under Subchapter M of the Code. As long as it
so
qualifies, in any taxable year in which it meets the distribution requirements
described below, the Trust (but not its shareholders) will not be subject
to
U.S. federal income tax to the extent that it distributes its net investment
income and net realized capital gains.
In
order to qualify to be taxed as a regulated investment company, the Trust
must,
among other things: (i) derive in each taxable year at least 90% of its gross
income from (a) dividends, interest (including tax-exempt interest), payments
with respect to certain securities loans, and gains from the sale or other
disposition of stock, securities, or foreign currencies, or other income
(including but not limited to gain from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities
or
currencies and (b) net income derived from interests in certain publicly
traded
partnerships that are treated as partnerships for U.S. federal income tax
purposes and that derive less than 90% of their gross income from the items
described in (a) above (each a “Qualified Publicly Traded Partnership”); and
(ii) diversify its holdings so that, at the end of each quarter of each taxable
year (a) at least 50% of the value of the Trust’s total assets is represented by
cash and cash items, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of
the
value of the Trust’s total assets and not more than 10% of the outstanding
voting securities of such issuer and (b) not more than 25% of the value of
the
Trust’s total assets is invested in the securities of (I) any one issuer (other
than U.S. Government securities and the securities of other regulated investment
companies), (II) any two or more issuers that the Trust controls and that
are
determined to be engaged in the same business or similar or related trades
or
businesses or (III) any one or more Qualified Publicly Traded
Partnerships.
As
a regulated investment company, the Trust generally is not subject to U.S.
federal income tax on income and gains that it distributes each taxable year
to
its shareholders, provided that in such taxable year it distributes at least
90%
of the sum of (i) its investment company taxable income (which includes,
among
other items, dividends, interest, the excess of any net short-term capital
gain
over net long-term capital loss and other taxable income, other than net
capital
gain (as defined below), reduced by deductible expenses) determined without
regard to the deduction for dividends and distributions paid and (ii) its
net
tax-exempt interest income (the excess of its gross tax-exempt interest income
over certain disallowed deductions). The Trust intends to distribute annually
all or substantially all of such income.
The
Trust may retain for investment its net capital gain (which consists of the
excess of its net long-term capital gain over its net short-term capital
loss).
However, if the Trust retains any net capital gain or any investment company
taxable income, it will be subject to a tax of 35% of such amount. If the
Trust
retains any net capital gain, it expects to designate the retained amount
as
undistributed capital gains in a notice to its shareholders, each of whom,
if
subject to U.S. federal income tax on long-term capital gains, (i) will be
required to include in income for U.S. federal income tax purposes its share
of
such undistributed long-term capital gain, (ii) will be entitled to credit
its
proportionate share of the tax paid by the Trust against their U.S. federal
income tax liability, if any, and to claim refunds to the extent that the
credit
exceeds such liability and (iii) will increase its tax basis in its common
shares for the Trust by an amount equal to 65% of the amount of undistributed
capital gain included in such shareholder’s gross income.
Amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% U.S. federal excise
tax at the Trust level. To avoid the excise tax, the Trust must distribute
during each calendar year an amount at least equal to the sum of (i) 98%
of its
ordinary income (not taking into account any capital gains or losses) for
the
calendar year, (ii) 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for a one-year period generally ending
on
October 31 of the calendar
year
(unless an election is made to use the Trust’s fiscal year), and (iii) certain
undistributed amounts from previous years on which the Trust paid no U.S.
federal income tax. While the Trust intends to distribute any income and
capital
gain in the manner necessary to minimize imposition of the 4% federal excise
tax, there can be no assurance that sufficient amounts of the Trust’s taxable
income and capital gains will be distributed to avoid entirely the imposition
of
the tax. In that event, the Trust will be liable for the tax only on the
amount
by which it does not meet the foregoing distribution requirement.
Dividends
and distributions will be treated as paid during the calendar year if they
are
paid during the calendar year or declared by the Trust in October, November
or
December of the year, payable to shareholders of record on a date during
such a
month and paid by the Trust during January of the following year. Any such
dividend or distribution paid during January of the following year will be
deemed to be received by the Trust’s shareholders on December 31 of the year the
dividend or distribution was declared, rather than when the dividend or
distribution is actually received.
If
the Trust were unable to satisfy the 90% distribution requirement or otherwise
were to fail to qualify as a regulated investment company in any year, it
would
be taxed in the same manner as an ordinary corporation and distributions
to the
Trust’s shareholders would not be deductible by the Trust in computing its
taxable income. In such case, distributions generally would be eligible (i)
for
treatment as qualified dividend income in the case of individual shareholders
and (ii) for the dividends received deduction in the case of corporate
shareholders. To qualify again to be taxed as a regulated investment company
in
a subsequent year, the Trust would be required to distribute to its shareholders
its earnings and profits attributable to non-regulated investment company
years
reduced by an interest charge on 50% of such earnings and profits payable
by the
Trust to the IRS. In addition, if the Trust failed to qualify as a regulated
investment company for a period greater than two taxable years, then the
Trust
would be required to elect to recognize and pay tax on any net built-in gain
(the excess of aggregate gain, including items of income, over aggregate
loss
that would have been realized if the Trust had been liquidated) or,
alternatively, be subject to taxation on such built-in gain recognized for
a
period of ten years, in order to qualify as a regulated investment company
in a
subsequent year.
The
Trust intends to utilize leverage through borrowings, and thus may be restricted
by loan covenants with respect to the declaration and payment of dividends
in
certain circumstances. Limits on the Trust’s payment of dividends may
prevent the Trust from satisfying the 90% distribution requirement and may
therefore jeopardize the Trust’s qualification for taxation as a regulated
investment company and/or may subject the Trust to the nondeductible 4% federal
excise tax. The Trust will endeavor to avoid restrictions on its ability
to make
dividend payments.
Gain
or loss on the sales of securities by the Trust will generally be long-term
capital gain or loss if the securities have been held by the Trust for more
than
one year. Gain or loss on the sale of securities held for one year or less
will
be short-term capital gain or loss.
Investments
of the Trust in securities issued at a discount or providing for deferred
interest or payment of interest in kind are subject to special tax rules
that
will affect the amount, timing and character of distributions to shareholders.
For example, with respect to securities issued at a discount, the Trust
generally will be required to accrue daily as income a portion of the discount
and to distribute such income each year to maintain its qualification as
a
regulated investment company and to avoid U.S. federal income and excise
taxes.
To generate sufficient cash to make distributions necessary to satisfy the
90%
distribution requirement and to avoid U.S. federal income and excise taxes,
the
Trust may have to dispose of securities that it would otherwise have continued
to hold.
The
Trust’s investment in so-called “section 1256 contracts,” such as regulated
futures contracts, certain foreign currency contracts, options on most stock
indices and any listed non-equity options, are subject to special tax rules.
Any
such section 1256 contracts held by the Trust at the end of its taxable year
are
required to be marked to their market value, and any unrealized gain or loss
on
those positions will be included in the Trust’s income as if each position had
been sold for its fair market value at the end of the taxable year. The
resulting gain or loss will be combined with any gain or loss realized by
the
Trust from positions in section 1256 contracts closed during the taxable
year.
Provided such positions are held as capital assets and are not part of a
“hedging transaction” nor part of a “straddle,” 60% of the resulting net gain or
loss will be treated as long-term capital gain or loss, and 40% of such
net gain or loss will be treated as short-term capital gain or loss, regardless
of the period of time the positions were actually held by the
Trust.
Certain
of the Trust’s investment practices are subject to special and complex U.S.
federal income tax provisions that may, among other things, (i) disallow,
suspend or otherwise limit the allowance of certain losses or deductions,
including the dividends received deduction, (ii) convert lower taxed long-term
capital gains and qualified dividend income into higher taxed short-term
capital
gains or ordinary income, (iii) convert ordinary loss or a deduction into
capital loss (the deductibility of which is more limited), (iv) cause the
Trust
to recognize income or gain without a corresponding receipt of cash, (v)
adversely affect the time as to when a purchase or sale of stock or securities
is deemed to occur, (vi) adversely alter the characterization of certain
complex
financial transactions and (vii) produce income that will not qualify as
good
income for purposes of the 90% annual gross income requirement described
above.
The Trust will monitor its transactions and may make certain tax elections
and
may be required to borrow money or dispose of securities to mitigate the
effect
of these rules and prevent disqualification of the Trust as a regulated
investment company.
Because
the Trust may invest in foreign securities, its income from such securities
may
be subject to non-U.S. taxes. The Trust will not be eligible to elect
to “pass-through” to shareholders of the Trust the ability to use the foreign
tax deduction or foreign tax credit for foreign taxes paid with respect to
qualifying taxes.
The
Trust may acquire Senior Loans of borrowers that are experiencing, or are
more
likely to experience, financial difficulty, including Senior Loans of borrowers
that have filed for bankruptcy protection. Investments in Senior Loans that
are
at risk of or in default may present special tax issues for the Trust. Federal
income tax rules are not entirely clear about issues such as when the Trust
may
cease to accrue interest, original issue discount or market discount, when
and
to what extent deductions may be taken for bad debts or worthless securities,
how payments received on obligations in default should be allocated between
principal and interest and whether exchanges of debt obligations in a bankruptcy
or workout context are taxable. These and other issues will be addressed
by the
Trust, in the event that they arise with respect to Senior Loans it owns,
in
order to seek to ensure that it distributes sufficient income to preserve
its
status as a regulated investment company and does not become subject to U.S.
federal income or excise tax.
Taxation
of Shareholders
Distributions
paid by the Trust from its investment company taxable income, which includes
the
excess of net short-term capital gains over net long-term capital losses
(together referred to hereinafter as “ordinary income dividends”), are generally
taxable to you as ordinary income to the extent of the Trust’s earnings and
profits. Such distributions (if designated by the Trust) may, however, qualify
(provided holding periods and other requirements are met) (i) for the dividends
received deduction in the case of corporate shareholders to the extent that
the
Trust’s income consists of dividend income from United States corporations, and
(ii) for taxable years beginning on or before December 31, 2010, as “qualified
dividend income” eligible for the reduced maximum U.S. federal tax rate to
individuals of generally 15% (5% for individuals in lower tax brackets) to
the
extent that the Trust receives qualified dividend income. Qualified dividend
income is, in general, dividend income from taxable domestic corporations
and
certain foreign corporations (e.g., generally, foreign corporations incorporated
in a possession of the United States or in certain countries with a qualified
comprehensive tax treaty with the United States, or whose stock with respect
to
which such dividend is paid is readily tradable on an established securities
market in the United States). Because the Trust intends to invest
primarily in debt securities, ordinary income dividends paid by the Trust
generally will not be eligible for the reduced rates applicable to “qualified
dividend income” and will not be eligible for the corporate dividends received
deduction. There can be no assurance as to what portion of the
Trust’s distributions will qualify for the dividends received deduction or
constitute qualified dividend income.
A
dividend (whether paid in cash or reinvested in additional Trust shares)
will
not be treated as qualified dividend income (whether received by the Trust
or
paid by the Trust to a shareholder) if (1) the dividend is received with
respect
to any share held for fewer than 61 days during the 121-day period beginning
on
the date which is 60 days before the date on which such share becomes
ex-dividend (91 days during the associated 181-day period for certain preferred
shares) with respect to such dividend, (2) to the extent that the Trust or
shareholder is under an obligation (whether pursuant to a short sale or
otherwise) to make related payments with respect to positions in substantially
similar or related property, or (3) if the shareholder elects to have the
dividend treated as investment income for purposes of the limitation on
deductibility of investment interest.
Distributions
made from net capital gain, which is the excess of net long-term capital
gains
over net short-term capital losses (“capital gain dividends”), including capital
gain dividends credited to a shareholder but retained by the Trust, are taxable
to shareholders as long-term capital gains if they have been properly designated
by the Trust, regardless of the length of time the shareholder has owned
common
shares of the Trust. The maximum U.S. federal income tax rate on net long-term
capital gain of individuals is generally 15% (5% for individuals in lower
brackets) for such gain realized in taxable years beginning on or before
December 31, 2010. For non-corporate taxpayers, investment company taxable
income (other than qualified dividend income) will currently be taxed at
a
maximum rate of 35%, while net capital gain generally will be taxed at a
maximum
U.S. federal income tax rate of 15%. For corporate taxpayers, both investment
company taxable income and net capital gain are taxed at a maximum U.S. federal
income tax rate of 35%.
If,
for any calendar year, the Trust’s total distributions exceed both current
earnings and profits and accumulated earnings and profits, the excess will
generally be treated as a tax-free return of capital up to the amount of
a
shareholder’s tax basis in the common shares. The amount treated as a tax-free
return of capital will reduce a shareholder’s tax basis in the common shares,
thereby increasing such shareholder’s potential gain or reducing his or her
potential loss on the sale of the common shares. Any amounts distributed
to a
shareholder in excess of his or her tax basis in the common shares will be
taxable to the shareholder as capital gain (assuming the common shares are
held
as a capital asset).
Generally,
not later than 60 days after the close of its taxable year, the Trust will
provide its shareholders with a written notice designating the amount of
any
ordinary income dividends or capital gain dividends and other
distributions.
The
sale or other disposition of common shares of the Trust will generally result
in
capital gain or loss to shareholders. Generally, a shareholder’s gain or loss
will be long-term gain or loss, if the shares have been held for more than
one
year. Any loss upon the sale or exchange of Trust common shares held for
six
months or less will be treated as long-term capital loss to the extent of
any
capital gain dividends received (including amounts credited as an undistributed
capital gain) by the shareholder. Any loss a shareholder realizes on a sale
or
exchange of common shares of the Trust will be disallowed if the shareholder
acquires other common shares of the Trust (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning
30 days
before and ending 30 days after the shareholder’s sale or exchange of the common
shares. In such case, the basis of the common shares acquired will be adjusted
to reflect the disallowed loss. Present law taxes both long-term and short-term
capital gains of corporations at the rates applicable to ordinary
income.
Shareholders
may be entitled to offset their capital gain distributions (but not
distributions eligible for qualified dividend income treatment) with capital
loss. There are a number of statutory provisions affecting when capital loss
may
be offset against capital gain, and limiting the use of loss from certain
investments and activities. Accordingly, shareholders with capital loss are
urged to consult their tax advisers.
An
investor should be aware that if Trust common shares are purchased shortly
before the record date for any taxable distribution (including a capital
gain
dividend), the purchase price likely will reflect the value of the distribution
and the investor then would receive a taxable distribution likely to reduce
the
trading value of such Trust common shares, in effect resulting in a taxable
return of some of the purchase price.
Certain
types of income received by the Trust from real estate investment trusts
(“REITs”), real estate mortgage investment conduits (“REMICs”), taxable mortgage
pools or other investments may cause the Trust to designate some or all of
its
distributions as “excess inclusion income.” To Trust shareholders, such excess
inclusion income will (i) constitute “unrelated business taxable income”
(“UBTI”) for those shareholders who would otherwise be tax-exempt, such as
individual retirement accounts, 401(k) accounts, Keogh plans, pension plans
and
certain charitable entities, (ii) not be offset against net operating losses
for
tax purposes, (iii) not be eligible for reduced U.S. withholding for non-U.S.
shareholders even from tax treaty countries and (iv) cause the Trust to be
subject to tax if certain “disqualified organizations,” as defined by the Code
(such as certain governments or governmental agencies and charitable remainder
trusts), are Trust shareholders.
Dividends
are taxable to shareholders even though they are reinvested in additional
shares
of the Trust.
Ordinary
income distributions and capital gain distributions also may be subject to
state
and local taxes. Shareholders are urged to consult their own tax advisers
regarding specific questions about U.S. federal (including the application
of
the alternative minimum tax rules), state, local and foreign tax consequences
to
them of investing in the Trust.
A
shareholder that is a nonresident alien individual or a foreign corporation
(a
“foreign investor”) generally will be subject to U.S. federal withholding tax at
the rate of 30% (or possibly a lower rate provided by an applicable tax treaty)
on ordinary income dividends (except as discussed below). Different tax
consequences may result if the foreign investor is engaged in a trade or
business in the United States or, in the case of an individual, is present
in
the United States for 183 days or more during a taxable year and certain
other
conditions are met. Foreign investors should consult their tax advisors
regarding the tax consequences of investing in the Trust’s common
shares.
In
general, U.S. federal withholding tax will not apply to any gain or income
realized by a foreign investor in respect of any distributions of net capital
gain or upon the sale or other disposition of common shares of the
Trust.
For
taxable years of the Trust beginning before January 1, 2008, properly designated
dividends are generally exempt from U.S. federal withholding tax where they
(i)
are paid in respect of the Trust’s “qualified net interest income” (generally,
the Trust’s U.S.-source interest income, other than certain contingent interest
and interest from obligations of a corporation or partnership in which the
Trust
is at least a 10% shareholder, reduced by expenses that are allocable to
such
income) or (ii) are paid in respect of the Trust’s “qualified short-term capital
gains” (generally, the excess of the Trust’s net short-term capital gain over
the Trust’s long-term capital loss for such taxable year). Depending on its
circumstances, however, the Trust may designate all, some or none of its
potentially eligible dividends as such qualified net interest income or as
qualified short-term capital gains, and/or treat such dividends, in whole
or in
part, as ineligible for this exemption from withholding. In order to qualify
for
this exemption from withholding, a foreign investor will need to comply with
applicable certification requirements relating to its non-U.S. status
(including, in general, furnishing an IRS Form W-8BEN or substitute Form).
In
the case of common shares held through an intermediary, the intermediary
may
withhold even if the Trust designates the payment as qualified net interest
income or qualified short-term capital gain. Foreign investors should contact
their intermediaries with respect to the application of these rules to their
accounts. There can be no assurance as to what portion of the Trust’s
distributions will qualify for favorable treatment as qualified net interest
income or qualified short-term capital gains.
Backup
Withholding
The
Trust is required in certain circumstances to withhold, for U.S. federal
backup
withholding purposes, on taxable dividends or distributions and certain other
payments paid to non-corporate holders of the Trust’s common shares who do not
furnish the Trust with their correct taxpayer identification number (in the
case
of individuals, their social security number) and certain certifications,
or who
are otherwise subject to backup withholding. Backup withholding is not an
additional tax. Any amounts withheld from payments made to a shareholder
may be
refunded or credited against such shareholder’s U.S. federal income tax
liability, if any, provided that the required information is furnished to
the
IRS.
The
foregoing is a general summary of the provisions of the Code and the Treasury
regulations in effect as they directly govern the taxation of the Trust and
its
shareholders. These provisions are subject to change by legislative or
administrative action, and any such change may be retroactive. Ordinary income
and capital gain dividends may also be subject to state and local taxes.
Shareholders are urged to consult their tax advisors regarding specific
questions as to U.S. federal, state, local and foreign income or other
taxes.
EXPERTS
The
Statement of Assets and Liabilities of the Trust as
of ,
2007 appearing in this Statement of Additional Information and related
Statements of Operations and Changes in Net Assets for the period
from ,
2007 (date of inception)
to ,
2007 have been audited
by , an
independent registered public accounting firm, as set forth in their report
thereon appearing elsewhere herein, and is included in reliance upon such
report
given upon the authority of such firm as experts in accounting and
auditing. ,
located
at ,
provides accounting and auditing services to the Trust.
ADDITIONAL
INFORMATION
A
Registration Statement on Form N-2, including amendments thereto, relating
to
the shares offered hereby, has been filed by the Trust with the Securities
and
Exchange Commission, Washington, D.C. The prospectus and this
Statement of Additional Information do not contain all of the information
set
forth in the Registration Statement, such as the exhibits and schedules
thereto. For further information with respect to the Trust and the
shares offered hereby, reference is made to the Registration
Statement. Statements contained in the prospectus and this Statement
of Additional Information as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is
made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects
by
such reference. A copy of the Registration Statement may be inspected
without charge at the Securities and Exchange Commission’s principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from
the
Securities and Exchange Commission upon the payment of certain fees prescribed
by the Securities and Exchange Commission.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
be filed by amendment.
FINANCIAL
STATEMENTS
To
be filed by amendment.
APPENDIX
A
RATINGS
OF INVESTMENTS
To
be filed by amendment.
APPENDIX
B
GENERAL
CHARACTERISTICS AND RISKS OF STRATEGIC TRANSACTIONS
In
order to manage the risk of its securities portfolio, or to enhance income
or
gain as described in the prospectus, the Trust will engage in Strategic
Transactions. The Trust will engage in such activities in the
Advisor’s or Sub-Advisor’s discretion, and may not necessarily be engaging in
such activities when movements in interest rates that could affect the value
of
the assets of the Trust occur. The Trust’s ability to pursue certain
of these strategies may be limited by applicable regulations of the
CFTC. Certain Strategic Transactions may give rise to taxable
income.
Futures
Contracts and Related Options
Characteristics. The
Trust may sell financial futures contracts or purchase put and call options
on
such futures as an offset against anticipated market movements. The
sale of a futures contract creates an obligation by the Trust, as seller,
to
deliver the specific type of financial instrument called for in the contract
at
a specified future time for a specified price. Options on futures contracts
are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract (a long position if the option is a call and
a
short position if the option is a put).
Margin
Requirements. At the time a futures contract is purchased or
sold, the Trust must allocate cash or securities as a deposit payment (“initial
margin”). It is expected that the initial margin that the Trust will pay may
range from approximately 1% to approximately 5% of the value of the securities
or commodities underlying the contract. In certain circumstances, however,
such
as periods of high volatility, the Trust may be required by an exchange to
increase the level of its initial margin payment. Additionally, initial margin
requirements may be increased generally in the future by regulatory
action. An outstanding futures contract is valued daily and the
payment in case of “variation margin” may be required, a process known as
“marking to the market.” Transactions in listed options and futures are usually
settled by entering into an offsetting transaction, and are subject to the
risk
that the position may not be able to be closed if no offsetting transaction
can
be arranged.
Limitations
on Use of Futures and Options on Futures. The Trust’s use of
futures and options on futures will in all cases be consistent with applicable
regulatory requirements and in particular the rules and regulations of the
CFTC.
The Trust currently may enter into such transactions without limit for bona
fide
strategic purposes, including risk management and duration management and
other
portfolio strategies. The Trust may also engage in transactions in futures
contracts or related options for non-strategic purposes to enhance income
or
gain provided that the Trust will not enter into a futures contract or related
option (except for closing transactions) for purposes other than bona fide
strategic purposes, or risk management including duration management if,
immediately thereafter, the sum of the amount of its initial deposits and
premiums on open contracts and options would exceed 5% of the Trust’s
liquidation value, i.e., net assets (taken at current value); provided,
however, that in the case of an option that is in-the-money at the time of
the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The above policies are non-fundamental and may be changed by
the
Trust’s board of trustees at any time. Also, when required, an account of cash
equivalents designated on the books and records will be maintained and marked
to
market on a daily basis in an amount equal to the market value of the
contract.
Segregation
and Cover Requirements. Futures contracts, interest rate swaps,
caps, floors and collars, short sales, reverse repurchase agreements and
dollar
rolls, and listed or OTC options on securities, indices and futures contracts
sold by the Trust are generally subject to segregation and coverage requirements
of either the CFTC or the SEC, with the result that, if the Trust does not
hold
the security or futures contract underlying the instrument, the Trust will
be
required to designate on its books and records an ongoing basis, cash, U.S.
government securities, or other liquid high grade debt obligations in an
amount
at least equal to the Trust’s obligations with respect to such
instruments.
Such
amounts fluctuate as the obligations increase or decrease. The
segregation requirement can result in the Trust maintaining securities positions
it would otherwise liquidate, segregating assets at a time when it might
be
disadvantageous to do so or otherwise restrict portfolio
management.
Strategic
Transactions Present Certain Risks. With respect to Strategic
Transactions and risk management, the variable degree of correlation between
price movements of strategic instruments and price movements in the
position
being offset create the possibility that losses using the strategy may be
greater than gains in the value of the Trust’s position. The same is true for
such instruments entered into for income or gain. In addition, certain
instruments and markets may not be liquid in all circumstances. As a
result, in volatile markets, the Trust may not be able to close out a
transaction without incurring losses substantially greater than the initial
deposit. Although the contemplated use of these instruments predominantly
for
Strategic Transactions should tend to minimize the risk of loss due to a
decline
in the value of the position, at the same time they tend to limit any potential
gain which might result from an increase in the value of such
position. The ability of the Trust to successfully utilize Strategic
Transactions will depend on the Advisor’s and the Sub-Advisor’s ability to
predict pertinent market movements and sufficient correlations, which cannot
be
assured. Finally, the daily deposit requirements in futures contracts
that the Trust has sold create an ongoing greater potential financial risk
than
do options transactions, where the exposure is limited to the cost of the
initial premium. Losses due to the use of Strategic Transactions will
reduce net asset value.
Regulatory
Considerations. The Trust has claimed an exclusion from the term
“commodity pool operator” under the Commodity Exchange Act and, therefore, is
not subject to registration or regulation as a commodity pool operator under
the
Commodity Exchange Act.
APPENDIX
C
PROXY
VOTING POLICIES AND PROCEDURES
These
Proxy Voting Policies and Procedures (“Policy”) for BlackRock Advisors, LLC and
its affiliated U.S. registered investment advisers(1) (“BlackRock”) reflect our
duty as a fiduciary under the Investment Advisers Act of 1940 (the “Advisers
Act”) to vote proxies in the best interests of our clients. BlackRock serves
as
the investment manager for investment companies, other commingled investment
vehicles and/or separate accounts of institutional and other
clients. The right to vote proxies for securities held in such
accounts belongs to BlackRock’s clients. Certain clients of BlackRock have
retained the right to vote such proxies in general or in specific
circumstances.(2) Other clients, however, have delegated to BlackRock the
right
to vote proxies for securities held in their accounts as part of BlackRock’s
authority to manage, acquire and dispose of account assets.
When
BlackRock votes proxies for a client that has delegated to BlackRock proxy
voting authority, BlackRock acts as the client’s agent. Under the
Advisers Act, an investment adviser is a fiduciary that owes each of its
clients
a duty of care and loyalty with respect to all services the adviser undertakes
on the client’s behalf, including proxy voting. BlackRock is
therefore subject to a fiduciary duty to vote proxies in a manner BlackRock
believes is consistent with the client’s best interests,(3) whether or not the
client’s proxy voting is subject to the fiduciary standards of the Employee
Retirement Income Security Act of 1974 (“ERISA”).(4) When voting
proxies for client accounts (including investment companies), BlackRock’s
primary objective is to make voting decisions solely in the best interests
of
clients and ERISA clients’ plan beneficiaries and participants. In fulfilling
its obligations to clients, BlackRock will seek to act in a manner that it
believes is most likely to enhance the economic value of the underlying
securities held in client accounts.(5) It is imperative that
BlackRock considers the interests of its clients, and not the interests of
BlackRock, when voting proxies and that real (or perceived) material conflicts
that may arise between BlackRock’s interest and those of BlackRock’s clients are
properly addressed and resolved.
Advisers
Act Rule 206(4)-6 was adopted by the SEC in 2003 and requires, among other
things, that an investment adviser that exercises voting authority over clients’
proxy voting adopt policies and procedures reasonably designed to ensure
that
the adviser votes proxies in the best interests of clients, discloses to
its
clients information about those policies and procedures and also discloses
to
clients how they may obtain information on how the adviser has voted their
proxies.
(1) The
Policy does not apply to BlackRock Asset Management U.K. Limited and BlackRock
Investment Managers International Limited, which are U.S. registered investment
advisers based in the United Kingdom.
(2) In
certain situations, a client may direct BlackRock to vote in accordance with
the
client’s proxy voting policies. In these situations, BlackRock will
seek to comply with such policies to the extent it would not be inconsistent
with other BlackRock legal responsibilities.
(3) Letter
from Harvey L. Pitt, Chairman, SEC, to John P.M. Higgins, President, Ram
Trust
Services (February 12, 2002) (Section 206 of the Investment Advisers Act
imposes
a fiduciary responsibility to vote proxies fairly and in the best interests
of
clients); SEC Release No. IA-2106 (February 3, 2003).
(4) DOL
Interpretative Bulletin of Sections 402, 403 and 404 of ERISA at 29 C.F.R.
2509.94-2.
(5) Other
considerations, such as social, labor, environmental or other policies, may
be
of interest to particular clients. While BlackRock is cognizant of
the importance of such considerations, when voting proxies it will generally
take such matters into account only to the extent that they have a direct
bearing on the economic value of the underlying securities. To the extent
that a
BlackRock client desires to pursue a particular social, labor, environmental
or
other agenda through the proxy votes made for its securities held through
BlackRock as investment adviser, BlackRock encourages the client to consider
retaining direct proxy voting authority or to appoint independently a special
proxy voting fiduciary other than BlackRock.
In
light of such fiduciary duties, the requirements of Rule 206(4)-6, and given
the
complexity of the issues that may be raised in connection with proxy votes,
BlackRock has adopted these policies and procedures. BlackRock’s Equity
Investment Policy Oversight Committee, or a sub-committee thereof (the
“Committee”), addresses proxy voting issues on behalf of BlackRock and its
clients.(6) The Committee is comprised of senior members
of BlackRock’s Portfolio Management Group and advised by BlackRock’s Legal and
Compliance Department.
I. Scope
of Committee Responsibilities
The
Committee shall have the responsibility for determining how to address proxy
votes made on behalf of all BlackRock clients, except for clients who have
retained the right to vote their own proxies, either generally or on any
specific matter. In so doing, the Committee shall seek to ensure that
proxy votes are made in the best interests of clients, and that proxy votes
are
determined in a manner free from unwarranted or inappropriate influences.
The
Committee shall also oversee the overall administration of proxy voting for
BlackRock accounts.(7)
The
Committee shall establish BlackRock’s proxy voting guidelines, with such advice,
participation and research as the Committee deems appropriate from portfolio
managers, proxy voting services or other knowledgeable interested
parties. As it is anticipated that there will not necessarily be a
“right” way to vote proxies on any given issue applicable to all facts and
circumstances, the Committee shall also be responsible for determining how
the
proxy voting guidelines will be applied to specific proxy votes, in light
of
each issuer’s unique structure, management, strategic options and, in certain
circumstances, probable economic and other anticipated consequences of
alternative actions. In so doing, the Committee may determine to vote a
particular proxy in a manner contrary to its generally stated
guidelines.
The
Committee may determine that the subject matter of certain proxy issues are
not
suitable for general voting guidelines and requires a case-by-case
determination, in which case the Committee may elect not to adopt a specific
voting guideline applicable to such issues. BlackRock believes that
certain proxy voting issues—such as approval of mergers and other significant
corporate transactions—require investment analysis akin to investment decisions,
and are therefore not suitable for general guidelines. The Committee
may elect to adopt a common BlackRock position on certain proxy votes that
are
akin to investment decisions, or determine to permit portfolio managers to
make
individual decisions on how best to maximize economic value for the accounts
for
which they are responsible (similar to normal buy/sell investment decisions
made
by such portfolio managers).(8)
While
it is expected that BlackRock, as a fiduciary, will generally seek to vote
proxies over which BlackRock exercises voting authority in a uniform manner
for
all BlackRock clients, the Committee, in conjunction with the portfolio manager
of an account, may determine that the specific circumstances of such account
require that such account’s proxies be voted differently due to such account’s
investment objective or other factors that differentiate it from other accounts.
In addition, on proxy votes that are akin to investment decisions, BlackRock
believes portfolio managers may from time to time legitimately reach differing
but equally valid views, as fiduciaries for BlackRock’s clients, on how best to
maximize economic value in respect of a particular investment.
(6) Subject
to the Proxy Voting Policies of Merrill Lynch Bank & Trust Company FSB, the
Committee may also function jointly as the Proxy Voting Committee for Merrill
Lynch Bank & Trust Company FSB trust accounts managed by personnel dually
employed by BlackRock.
(7) The
Committee may delegate day-to-day administrative responsibilities to other
BlackRock personnel and/or outside service providers, as
appropriate.
(8) The
Committee will normally defer to portfolio managers on proxy votes that are
akin
to investment decisions except for proxy votes that involve a material
conflict of interest, in which case it will determine, in its discretion,
the
appropriate voting process so as to address such conflict.
The
Committee will also be responsible for ensuring the maintenance of records
of
each proxy vote, as required by Advisers Act Rule 204-2.(9)
(9) The
Committee may delegate the actual maintenance of such records to an outside
service provider. Currently, the Committee has delegated the maintenance
of such
records to Institutional Shareholder Services.
All
records will be maintained in accordance with applicable law. Except
as may be required by applicable legal requirements, or as otherwise set
forth
herein, the Committee’s determinations and records shall be treated as
proprietary, nonpublic and confidential.
The
Committee shall be assisted by other BlackRock personnel, as may be appropriate.
In particular, the Committee has delegated to the BlackRock Operations
Department responsibility for monitoring corporate actions and ensuring that
proxy votes are submitted in a timely fashion. The Operations
Department shall ensure that proxy voting issues are promptly brought to
the
Committee’s attention and that the Committee’s proxy voting decisions are
appropriately disseminated and implemented.
To
assist BlackRock in voting proxies, the Committee may retain the services
of a
firm providing such services. BlackRock has currently retained Institutional
Shareholder Services (“ISS”) in that role. ISS is an independent adviser that
specializes in providing a variety of fiduciary level proxy related services
to
institutional investment managers, plan sponsors, custodians, consultants,
and
other institutional investors. The services provided to BlackRock may include,
but are not limited to, in-depth research, voting recommendations (which
the
Committee is not obligated to follow), vote execution, and
recordkeeping.
II. Special
Circumstances
Routine
Consents. BlackRock may be asked from time to time to
consent to an amendment to, or grant a waiver under, a loan agreement,
partnership agreement, indenture or other governing document of a specific
financial instrument held by BlackRock clients. BlackRock will
generally treat such requests for consents not as “proxies” subject to these
Proxy Voting Policies and Procedures but as investment matters to be dealt
with
by the responsible BlackRock investment professionals would, provided that
such
consents (i) do not relate to the election of a board of directors or
appointment of auditors of a public company, and (ii) either (A) would not
otherwise materially affect the structure, management or control of a public
company, or (B) relate to a company in which BlackRock clients hold only
interests in bank loans or debt securities and are consistent with customary
standards and practices for such instruments.
Securities
on Loan. Registered investment companies that are
advised by BlackRock as well as certain of our advisory clients may participate
in securities lending programs. Under most securities lending arrangements,
securities on loan may not be voted by the lender (unless the loan is recalled).
BlackRock believes that each client has the right to determine whether
participating in a securities lending program enhances returns, to contract
with
the securities lending agent of its choice and to structure a securities
lending
program, through its lending agent, that balances any tension between loaning
and voting securities in a matter that satisfies such client. If client has
decided to participate in a securities lending program, BlackRock will therefore
defer to the client’s determination and not attempt to seek recalls solely for
the purpose of voting routine proxies as this could impact the returns received
from securities lending and make the client a less desirable lender in a
marketplace. Where a client retains a lending agent that is unaffiliated
with
BlackRock, BlackRock will generally not seek to vote proxies relating to
securities on loan because BlackRock does not have a contractual right to
recall
such loaned securities for the purpose of voting proxies. Where BlackRock
or an
affiliate acts as the lending agent, BlackRock will also generally not seek
to
recall loaned securities for proxy voting purposes, unless the portfolio
manager
responsible for the account or the Committee determines that voting the proxy
is
in the client’s best interest and requests that the security be
recalled.
Voting
Proxies for Non-US Companies. While the proxy voting
process is well established in the United States, voting proxies of non-US
companies frequently involves logistical issues which can affect BlackRock’s
ability to vote such proxies, as well as the desirability of voting such
proxies. These issues include (but are not limited to): (i) untimely
notice of shareholder meetings, (ii) restrictions on a foreigner’s ability to
exercise votes, (iii) requirements to vote proxies in person, (iv)
“shareblocking” (requirements that investors who exercise their voting rights
surrender the right to dispose of their holdings for some specified period
in
proximity to the shareholder meeting), (v) potential difficulties in translating
the proxy, and (vi) requirements to provide local agents with unrestricted
powers of attorney to facilitate voting instructions.
As
a consequence, BlackRock votes proxies of non-US companies only on a
“best-efforts” basis. In addition, the Committee may determine that it is
generally in the best interests of BlackRock clients not to vote proxies
of
companies in certain countries if the Committee determines that the costs
(including but not limited to opportunity costs associated with shareblocking
constraints) associated with exercising a vote generally are expected to
outweigh the benefit the client will derive by voting on the issuer’s
proposal. If the Committee so determines in the case of a particular
country, the Committee (upon advice from BlackRock portfolio managers) may
override such determination with respect to a particular issuer’s shareholder
meeting if the Committee believes the benefits of seeking to exercise a vote
at
such meeting outweighs the costs, in which case BlackRock will seek to vote
on a
best-efforts basis.
Securities
Sold After Record Date. With respect to votes in
connection with securities held on a particular record date but sold from
a
client account prior to the holding of the related meeting, BlackRock may
take
no action on proposals to be voted on in such meeting.
Conflicts
of Interest. From time to time, BlackRock may be
required to vote proxies in respect of an issuer that is an affiliate of
BlackRock (a “BlackRock Affiliate”), or a money management or other client of
BlackRock (a “BlackRock Client”).(10)
(10) Such
issuers may include investment companies for which BlackRock provides investment
advisory, administrative and/or other services.
In
such event, provided that the Committee is aware of the real or potential
conflict, the following procedures apply:
|
|
·
|
The
Committee intends to adhere to the voting guidelines set forth
herein for
all proxy issues including matters involving BlackRock Affiliates
and
BlackRock Clients. The Committee may, in its discretion for the
purposes
of ensuring that an independent determination is reached, retain
an
independent fiduciary to advise the Committee on how to vote or
to cast
votes on behalf of BlackRock’s clients;
and
|
|
|
·
|
if
the Committee determines not to retain an independent fiduciary,
or does
not desire to follow the advice of such independent fiduciary,
the
Committee shall determine how to vote the proxy after consulting
with the
BlackRock Legal and Compliance Department and concluding that the
vote
cast is in the client’s best interest notwithstanding the
conflict.
|
III. Voting
Guidelines
The
Committee has determined that it is appropriate and in the best interests
of
BlackRock’s clients to adopt the following voting guidelines, which represent
the Committee’s usual voting position on certain recurring proxy issues that are
not expected to involve unusual circumstances. With respect to any particular
proxy issue, however, the Committee may elect to vote differently than a
voting
guideline if the Committee determines that doing so is, in the Committee’s
judgment, in the best interest of its clients. The guidelines may be reviewed
at
any time upon the request of any Committee member and may be amended or deleted
upon the vote of a majority of voting Committee members present at a Committee
meeting for which there is a quorum.
A. Boards
of Directors
These
proposals concern those issues submitted to shareholders relating to the
composition of the Board of Directors of companies other than investment
companies. As a general matter, the Committee believes that a
company’s Board of Directors (rather than shareholders) is most likely to have
access to important, nonpublic information regarding a company’s business and
prospects, and is therefore best-positioned to set corporate policy and oversee
management. The Committee therefore believes that the foundation of good
corporate governance is the election of qualified, independent corporate
directors who are likely to diligently represent the interests of shareholders
and oversee management of the corporation in a manner that will seek to maximize
shareholder value over time. In individual cases, the Committee may look
at a
Director nominee’s history of representing shareholder interests as a director
of other companies, or other factors to the extent the Committee deems
relevant.
The
Committee’s general policy is to vote:
|
#
|
VOTE
and DESCRIPTION
|
|
A.1
|
FOR
nominees for director of United States companies in uncontested
elections,
except for nominees who
|
| |
•
|
have
missed at least two meetings and, as a result, attended less than
75% of
meetings of the Board of Directors and its committees the previous
year,
unless the nominee missed the meeting(s) due to illness or company
business
|
| |
•
|
voted
to implement or renew a “dead hand” poison pill
|
| |
•
|
ignored
a shareholder proposal that was approved by either a majority of
the
shares outstanding in any year or by the majority of votes cast
for two
consecutive years
|
| |
•
|
failed
to act on takeover offers where the majority of the shareholders
have
tendered their shares
|
| |
•
|
are
corporate insiders who serve on the audit, compensation or nominating
committees or on a full Board that does not have such committees
composed
exclusively of independent directors
|
| |
•
|
on
a case by case basis, have served as directors of other companies
with
allegedly poor corporate governance
|
| |
•
|
sit
on more than six boards of public companies
|
|
A.2
|
FOR
nominees for directors of non U.S. companies in uncontested elections,
except for nominees from whom the Committee determines to
withhold votes due to the nominees’ poor records of representing
shareholder interests, on a case by case basis
|
|
A.3
|
FOR
proposals to declassify Boards of Directors, except where there
exists a
legitimate purpose for classifying boards
|
|
A.4
|
AGAINST
proposals to classify Boards of Directors, except where there exists
a
legitimate purpose for classifying boards
|
|
A.5
|
AGAINST
proposals supporting cumulative voting
|
|
A.6
|
FOR
proposals eliminating cumulative voting
|
|
A.7
|
FOR
proposals supporting confidential voting
|
|
A.8
|
FOR
proposals seeking election of supervisory board members
|
|
A.9
|
AGAINST
shareholder proposals seeking additional representation of women
and/or
minorities generally (i.e., not specific individuals) to a Board
of
Directors
|
|
A.10
|
AGAINST
shareholder proposals for term limits for directors
|
|
A.11
|
FOR
shareholder proposals to establish a mandatory retirement age for
directors who attain the age of 72 or older
|
|
A.12
|
AGAINST
shareholder proposals requiring directors to own a minimum amount
of
company stock
|
|
A.13
|
FOR
proposals requiring a majority of independent directors on a Board
of
Directors
|
|
A.14
|
FOR
proposals to allow a Board of Directors to delegate powers to a
committee
or committees
|
|
A.15
|
FOR
proposals to require audit, compensation and/or nominating committees
of a
Board of Directors to consist exclusively of independent
directors
|
|
A.16
|
AGAINST
shareholder proposals seeking to prohibit a single person from
occupying
the roles of chairman and chief executive officer
|
|
A.17
|
FOR
proposals to elect account inspectors
|
|
A.18
|
FOR
proposals to fix the membership of a Board of Directors at a specified
size
|
|
A.19
|
FOR
proposals permitting shareholder ability to nominate directors
directly
|
|
A.20
|
AGAINST
proposals to eliminate shareholder ability to nominate directors
directly
|
|
A.21
|
FOR
proposals permitting shareholder ability to remove directors
directly
|
|
A.22
|
AGAINST
proposals to eliminate shareholder ability to remove directors
directly
|
B. Auditors
These
proposals concern those issues submitted to shareholders related to the
selection of auditors. As a general matter, the Committee believes that
corporate auditors have a responsibility to represent the interests of
shareholders and provide an independent view on the propriety of financial
reporting decisions of corporate management. While the Committee will
generally defer to a corporation’s choice of auditor, in individual cases, the
Committee may look at an auditors’ history of representing shareholder interests
as auditor of other companies, to the extent the Committee deems
relevant.
The
Committee’s general policy is to vote:
|
B.1
|
FOR
approval of independent auditors, except for
|
| |
•
|
auditors
that have a financial interest in, or material association with,
the
company they are auditing, and are therefore believed by the Committee
not
to be independent
|
| |
•
|
auditors
who have rendered an opinion to any company which in the Committee’s
opinion is either not consistent with best accounting practices
or not
indicative of the company’s financial situation
|
| |
•
|
on
a case by case basis, auditors who in the Committee’s opinion provide a
significant amount of non audit services to the company
|
|
B.2
|
FOR
proposals seeking authorization to fix the remuneration of
auditors
|
|
B.3
|
FOR
approving internal statutory auditors
|
|
B.4
|
FOR
proposals for audit firm rotation, except for proposals that
would require rotation after a period of less than 5
years
|
C. Compensation
and Benefits
These
proposals concern those issues submitted to shareholders related to management
compensation and employee benefits. As a general matter, the
Committee favors disclosure of a company’s compensation and benefit policies and
opposes excessive compensation, but believes that compensation matters are
normally best determined by a corporation’s board of directors, rather than
shareholders. Proposals to “micro manage” a company’s compensation practices or
to set arbitrary restrictions on compensation or benefits will therefore
generally not be supported.
The
Committee’s general policy is to vote:
|
C.1
|
IN
ACCORDANCE WITH THE RECOMMENDATION OF ISS on compensation plans
if the ISS
recommendation is based solely on whether or not the company’s
plan satisfies the allowable cap as calculated by ISS. If the
recommendation of ISS is based on factors other than whether the
plan
satisfies the allowable cap the Committee will analyze the particular
proposed plan. This policy applies to amendments of plans as well
as to
initial approvals.
|
|
C.2
|
FOR
proposals to eliminate retirement benefits for outside
directors
|
|
C.3
|
AGAINST
proposals to establish retirement benefits for outside
directors
|
|
C.4
|
FOR
proposals approving the remuneration of directors or of supervisory
board
members
|
|
C.5
|
AGAINST
proposals to reprice stock options
|
|
C.6
|
FOR
proposals to approve employee stock purchase plans that apply to
all
employees. This policy applies to proposals to amend ESPPs if the
plan as
amended applies to all employees.
|
|
C.7
|
FOR
proposals to pay retirement bonuses to directors of Japanese companies
unless the directors have served less than three years
|
|
C.8
|
AGAINST
proposals seeking to pay outside directors only in
stock
|
|
C.9
|
FOR
proposals seeking further disclosure of executive pay or requiring
companies to report on their supplemental executive retirement
benefits
|
|
C.10
|
AGAINST
proposals to ban all future stock or stock option grants to
executives
|
|
C.11
|
AGAINST
option plans or grants that apply to directors or employees of
“related
companies” without adequate disclosure of the corporate relationship and
justification of the option policy
|
|
C.12
|
FOR
proposals to exclude pension plan income in the calculation of
earnings
used in determining executive
bonuses/compensation
|
D. Capital
Structure
These
proposals relate to various requests, principally from management, for approval
of amendments that would alter the capital structure of a company, such as
an
increase in authorized shares. As a general matter, the Committee will support
requests that it believes enhance the rights of common shareholders and oppose
requests that appear to be unreasonably dilutive.
The
Committee’s general policy is to vote:
|
D.1
|
AGAINST
proposals seeking authorization to issue shares without preemptive
rights
except for issuances up to 10% of a non US company’s total outstanding
capital
|
|
D.2
|
FOR
management proposals seeking preemptive rights or seeking authorization
to
issue shares with preemptive rights
|
|
D.3
|
FOR
management proposals approving share repurchase
programs
|
|
D.4
|
FOR
management proposals to split a company’s stock
|
|
D.5
|
FOR
management proposals to denominate or authorize denomination of
securities
or other obligations or assets in Euros
|
|
D.6
|
FOR
proposals requiring a company to expense stock options (unless
the company
has already publicly committed to do so by a certain
date).
|
E. Corporate
Charter and By-Laws
These
proposals relate to various requests for approval of amendments to a
corporation’s charter or by-laws, principally for the purpose of adopting or
redeeming “poison pills”. As a general matter, the Committee opposes poison pill
provisions.
The
Committee’s general policy is to vote:
|
E.1
|
AGAINST
proposals seeking to adopt a poison pill
|
|
E.2
|
FOR
proposals seeking to redeem a poison pill
|
|
E.3
|
FOR
proposals seeking to have poison pills submitted to shareholders
for
ratification
|
|
E.4
|
FOR
management proposals to change the company’s
name
|
F. Corporate
Meetings
These
are routine proposals relating to various requests regarding the formalities
of
corporate meetings.
The
Committee’s general policy is to vote:
|
F.1
|
AGAINST
proposals that seek authority to act on “any other business that may
arise”
|
|
F.2
|
FOR
proposals designating two shareholders to keep minutes of the
meeting
|
|
F.3
|
FOR
proposals concerning accepting or approving financial statements
and
statutory reports
|
|
F.4
|
FOR
proposals approving the discharge of management and the supervisory
board
|
|
F.5
|
FOR
proposals approving the allocation of income and the
dividend
|
|
F.6
|
FOR
proposals seeking authorization to file required documents/other
formalities
|
|
F.7
|
FOR
proposals to authorize the corporate board to ratify and execute
approved
resolutions
|
|
F.8
|
FOR
proposals appointing inspectors of elections
|
|
F.9
|
FOR
proposals electing a chair of the meeting
|
|
F.10
|
FOR
proposals to permit “virtual” shareholder meetings over the
Internet
|
|
F.11
|
AGAINST
proposals to require rotating sites for shareholder
meetings
|
G. Investment
Companies
These
proposals relate to proxy issues that are associated solely with holdings
of
shares of investment companies, including, but not limited to, investment
companies for which BlackRock provides investment advisory, administrative
and/or other services. As with other types of companies, the Committee believes
that a fund’s Board of Directors (rather than its shareholders) is
best-positioned to set fund policy and oversee management. However, the
Committee opposes granting Boards of Directors authority over certain matters,
such as changes to a fund’s investment objective, that the Investment Company
Act of 1940 envisions will be approved directly by shareholders.
The
Committee’s general policy is to vote:
|
G.1
|
FOR
nominees for director of mutual funds in uncontested elections,
exceptfor nominees who
|
| |
•
|
have
missed at least two meetings and, as a result, attended less than
75% of
meetings of the Board of Directors and its committees the previous
year,
unless the nominee missed the meeting due to illness or fund
business
|
| |
•
|
ignore
a shareholder proposal that was approved by either a majority of
the
shares outstanding in any year or by the majority of votes cast
for two
consecutive years
|
| |
•
|
are
interested directors who serve on the audit or nominating committees
or on
a full Board that does not have such committees composed exclusively
of
independent directors
|
| |
•
|
on
a case by case basis, have served as directors of companies with
allegedly
poor corporate governance
|
|
G.2
|
FOR
the establishment of new series or classes of shares
|
|
G.3
|
AGAINST
proposals to change a fund’s investment objective to
nonfundamental
|
|
G.4
|
FOR
proposals to establish a master feeder structure or authorizing
the Board
to approve a master feeder structure without a further shareholder
vote
|
|
G.5
|
AGAINST
a shareholder proposal for the establishment of a director ownership
requirement
|
|
G.6
|
FOR
classified boards of closed end investment
companies
|
H. Environmental
and Social Issues
These
are shareholder proposals to limit corporate conduct in some manner that
relates
to the shareholder’s environmental or social concerns. The Committee generally
believes that annual shareholder meetings are inappropriate forums for the
discussion of larger social issues, and opposes shareholder
resolutions
“micromanaging”
corporate conduct or requesting release of information that would not help
a
shareholder evaluate an investment in the corporation as an economic matter.
While the Committee is generally supportive of proposals to require corporate
disclosure of matters that seem relevant and material to the economic interests
of shareholders, the Committee is generally not supportive of proposals to
require disclosure of corporate matters for other purposes.
The
Committee’s general policy is to vote:
|
H.1
|
AGAINST
proposals seeking to have companies adopt international codes of
conduct
|
|
H.2
|
AGAINST
proposals seeking to have companies provide non required reports
on:
|
| |
•
|
environmental
liabilities;
|
| |
•
|
bank
lending policies;
|
| |
•
|
corporate
political contributions or activities;
|
| |
•
|
alcohol
advertising and efforts to discourage drinking by
minors;
|
| |
•
|
costs
and risk of doing business in any individual country;
|
| |
•
|
involvement
in nuclear defense systems
|
|
H.3
|
AGAINST
proposals requesting reports on Maquiladora operations or on CERES
principles
|
|
H.4
|
AGAINST
proposals seeking implementation of the CERES
principles
|
Notice
to Clients
BlackRock
will make records of any proxy vote it has made on behalf of a client available
to such client upon request.(11) BlackRock will use its best efforts to treat
proxy votes of clients as confidential, except as it may decide to best serve
its clients’ interests or as may be necessary to effect such votes or as may be
required by law.
BlackRock
encourage clients with an interest in particular proxy voting issues to make
their views known to BlackRock, provided that, in the absence of specific
written direction from a client on how to vote that client’s proxies, BlackRock
reserves the right to vote any proxy in a manner it deems in the best interests
of its clients, as it determines in its sole discretion.
These
policies are as of the date indicated on the cover hereof. The Committee
may
subsequently amend these policies at any time, without notice.
(11) Such
request may be made to the client’s portfolio or relationship manager or
addressed in writing to Secretary, BlackRock Equity Investment Policy Oversight
Committee, Legal and Compliance Department, BlackRock Inc., 40 East 52nd
Street,
New York, New York 10022.
PART
C
OTHER
INFORMATION
Item
25. Financial Statements and Exhibits
|
(1)
|
|
Financial
Statements
|
|
|
| |
|
Part
A—None.
|
|
|
| |
|
Part
B—Statement of Assets and Liabilities.(2)
|
|
|
| |
|
|
|
|
|
(2)
|
|
Exhibits
|
|
|
|
(a)
|
|
Amended
and Restated Agreement and Declaration of Trust.(1)
|
|
|
|
(b)
|
|
Amended
and Restated By-Laws.(1)
|
|
|
|
(c)
|
|
Inapplicable.
|
|
|
|
(d)
|
|
Form
of Specimen Certificate.(2)
|
|
|
|
(e)
|
|
Form
of Dividend Reinvestment Plan.(2)
|
|
|
|
(f)
|
|
Inapplicable.
|
|
|
|
(g)
|
(1)
|
Form
of Investment Management Agreement.(2)
|
|
|
| |
(2)
|
Form
of Sub-Investment Advisory Agreement.(2)
|
|
|
|
(h)
|
|
Form
of Underwriting Agreement.(2)
|
|
|
|
(i)
|
|
Form
of the BlackRock Closed End Funds Amended and Restated Deferred
Compensation Plan.(2)
|
|
|
|
(j)
|
|
Form
of Custody Agreement.(2)
|
|
|
|
(k)
|
(1)
|
Form
of Stock Transfer Agency Agreement.(2)
|
|
|
| |
(2)
|
Form
of Fund Accounting Agreement.(2)
|
|
|
|
(l)
|
|
Opinion
and Consent of Counsel to the Trust.(2)
|
|
|
|
(m)
|
|
Inapplicable.
|
|
|
|
(n)
|
|
Independent
Registered Public Accounting Firm Consent.(2)
|
|
|
|
(o)
|
|
Inapplicable.
|
|
|
|
(p)
|
|
Subscription
Agreement.(2)
|
|
|
|
(q)
|
|
Inapplicable.
|
|
|
|
(r)
|
(1)
|
Code
of Ethics of the Trust.(2)
|
|
|
| |
(2)
|
Code
of Ethics of the Advisor and Sub-Advisor.(2)
|
|
|
|
(s)
|
|
Power
of Attorney.(2)
|
|
|